home buying

5 Things To Do Before You Buy A Home

As a young professional, one of your biggest decisions is whether you should buy a home or keep renting. After thoroughly considering the pros and cons of buying a residential home, you might have decided that buying a house is the ideal choice for you. Before you start the home-buying process, here are 5 things you must do before you purchase a home:  

1.Get an official copy of your credit report. Your credit report plays a big role in whether you can purchase a home. It determines the interest rate on your mortgage and can even be used to estimate how much money the bank will loan you to buy a home. Your job as a [future] homeowner is to get an official copy of your credit report from all 3 of the major companies that compute it (Experian, TransUnion and Equifax). You need to make sure there aren’t any false charges, incorrect debt amounts, or fraudulent claims on your credit report that are negatively impacting your credit score. Once you see your actual credit score, you’ll be able to estimate the interest rate on the mortgage and determine your monthly payments on different loan amounts.

2. Learn some basics about the local housing market. You will have a better chance of finding your ideal home if you gather some preliminary information about the housing market first. Go onto real estate websites like Zillow.com and get an idea of housing prices in your desired area. Look at recent selling prices, especially in certain desirable neighborhoods. You should also search for new developments and the construction of new homes.  Your real estate agent may have a few places in mind, but it is helpful if you have an idea of the housing market for yourself, doing so will give you a more realistic idea of what’s available within your price range and desired area.

3. Get prequalified for a mortgage. Unlike a pre-approval, a pre-qualification is a non-binding estimate from the bank of how much money they will lend you to purchase a home. This is important because unless you have $250,000 sitting in a bank, you are going to need a loan to buy a house. Getting an idea of how much money you have access to will determine the size and location of the houses you consider buying. It will also help guide your real estate agent since it gives them a more accurate budget to use during the search.

Keep in mind that the amount you are prequalified for is not guaranteed. The bank could decide to give you slightly more or slightly less a few weeks later. If you’d like a binding amount, you can get “pre-approved” for a mortgage. Pre-approval is different from pre-qualification because it is a guarantee from the bank that they will loan you a set amount of money at a set interest rate. The loan amount and rate are usually “locked-in” for around 60 days.  

4. Determine your estimated costs. Just because a bank is willing to lend you a large amount of money, doesn’t necessarily mean you should take all that money. You need to come up with a preliminary mortgage amount and determine what your monthly payments would be, factoring in the average interest rate. You should also determine the difference between what you [and your partner] pay now in rent and what you [and your partner’s] homeownership costs would be. You can do this by using a mortgage calculator.

Simply enter the loan amount you will need, the interest rate estimate from the bank, and the term length (15, 20, 25, or 30-year mortgage). Doing this will allow you to see your monthly mortgage payment. Then, you’ll want to add an additional 40% to that number (so multiply your monthly mortgage payment by 1.40) to account for property taxes, homeowners’ insurance, and repairs to get an estimate of what your total monthly homeownership costs would be. If that number is higher than you [and your partner] can afford, then reset the mortgage calculator and type in a lower loan amount. Using this tool will give you a better idea of your true price range, which is oftentimes lower than the amount the bank may have given you during the pre-qualification.   


5. Write down the highest amount you are willing to spend. Shopping for homes can be a stressful process. You may fall in love with one home only to find out later it’s out of your budget. You may also find yourself in a bidding war with another buyer or with a seller who refuses to negotiate the price. Both of these situations can tempt you to pay more than you can afford for a home. In order to prevent this from happening, be diligent. Come up with a price range and write down the highest amount you are willing to spend.

Although you may have gotten prequalified for a certain loan from the bank, it’s important to come up with your own price range, within reason. Be certain that the real estate agent does not show you houses above that price. This may seem a bit obvious, but real estate agents show potential buyers houses out of their ideal price range more often than you think because the agents are paid on commission. The more expensive the home the more money they make in return. Some agents may also want to see you happy in a really nice home, but the money they make as commission is a very powerful incentive. Write down your set price and stick to it.

To summarize, there are 5 things you should do before you buy a home. Follow the steps above as you start the home-buying process.

Money Tips You Didn’t Learn In College

Money Tips You Didn’t Learn In College

Be strategic about using credit cards. While having access to credit cards can provide added “protection” during emergencies, it also can be quite dangerous. I don’t know about you, but knowing I can use a credit card to pay for almost anything I want tests my self-control in ways I could have never imagined.