Making the leap from renter to buyer?
Here’s a step-by-step guide to help you get ready to make a winning offer on the home of your dreams.
Step 1: Make sure you’re (really) ready
Homeownership is a big commitment. Before you leap, make sure you can answer “yes” to the following questions:
- Is your job stable?
- Do you see yourself living in this town for the next five to 10 years?
- Are you prepared for the extra work that comes with homeownership? (Think repairs and maintenance, yardwork, pest control, and attending homeowners’ association meetings.)
Step 2: Create a list of “musts”
Home buying is like dating: If you expect absolute perfection, you’ll be disappointed. It’s important to know which issues you’re willing to compromise on and which are deal breakers.
Maybe you’re willing to buy a fixer-upper if it’s in a great location. Maybe square footage matters most to you, and location is secondary. Maybe you’re willing to buy a home that requires a major makeover as long as the “bones” underneath are solid.
Step 3: Figure out what you can afford
Your mortgage payments aren’t the only cost you’ll need to consider.
First, you’ll need a down payment. Ideally, you’ll want to put down at least 20% of a home’s purchase price to avoid paying private mortgage insurance (PMI), an additional charge that is tacked on to your mortgage payment.
You’ll also want to make sure you’re financially secure enough to handle any maintenance or repair costs that can (and will) crop up. If the plumbing bursts or the roof needs replacing in a few years, do you have enough of an emergency fund on hand to cover it?
As a rule of thumb, you should set aside 1% of the purchase price of the home each year in your “house emergency fund.” That’s $83 per month for every $100,000 of home value.
Step 4: Gather documents
The loan approval process is a test of how much paperwork you’re willing to endure. Set aside a weekend to organize your files.
Collect your proof of employment, such as pay stubs and copies of your W-2 forms from the past two years (or 1040 tax returns if you’re self-employed). Print out bank and investment account statements from the past 30 days, canceled checks from the past 12 months (showing that you’ve paid rent on time), and your landlord’s contact information from the past two years.
Step 5: Get prequalified or preapproved
You don’t want to lose out on your dream home because you haven’t gotten preapproved for a mortgage. (It happens.)
Before you visit any houses, gather your documents and get prequalified for a loan. The prequalification process is relatively quick and easy — you’ll simply provide information about your income and debts. Many sellers won’t even consider a bid unless you’re prequalified for a loan.
For extra credit, take the next step and obtain a preapproval letter. This step is more time-intensive and requires a thorough credit and background check, but it can make you a stronger candidate in a seller’s eyes.
Step 6: Assemble your support team
You’re new to the home-buying game, so you’ll need the right people on your side to help you navigate it. Find a real estate agent you trust and communicate well with, and don’t hesitate to enlist a friend or family member for a second opinion.
Now that you’ve taken the first steps, you’re ready to begin the house hunt! What’s number one on your wish list? Share in the comments!