Making the decision to purchase a home and actually going through the process are two very different things. Plenty have had the passing thought of, “I hope to own a home one day.” But if you’re ready to commit to the hunt and eventual success, it can be daunting to get started. There are literally millions of homes in the U.S.; how are you possibly supposed to know where to start looking?
Well, put simply, you start exactly where you are.
No matter what sort of home you’re looking to buy or when you want to purchase, you’re going to need to assess your situation and make sure you’re set for success when you do find the home of your dreams. Here are three things to accomplish before you begin searching for a home, so you’re as informed and prepared as possible.
Check your Finances
The first is to evaluate and familiarize yourself with your financial situation. While a mortgage will finance a majority of your home, you’re still going to need pay for several items upfront throughout this process. The main expenses that will come up are the down payment, the earnest money deposit, and the closing costs.
A down payment will typically range from 5 to 20 percent of the overall cost of the home, and is paid to the lender to show you’re committed to the home-buying process and repaying your mortgage. Keep in mind the more you put toward a down payment, the less your monthly payments will be; plus, you increase your chances of not needing private mortgage insurance, which is usually required for homes that are 80 percent or more financed.
The earnest deposit – a good faith payment toward the overall cost of the home – will be held in escrow by an unbiased third party after you have signed a contract with the seller, but before the home is officially yours. This is usually between 1 and 5 percent of the home cost.
Finally, know that down the line – just before you begin occupying your home – there will be closing costs. Lender and title costs, prepaid expenses that need to be reimbursed, and more may be due upon the closing of the sale. It’s best if you have funds set aside for these as you begin the home search, or know for certain that you’ll accrue them throughout the process.
In addition to money in the bank, you’ll want to know what your credit report looks like, as you don’t want to be caught by any unpleasant surprises. Acquire your credit score from the three major companies – Experian, Equifax, and TransUnion – and take a close look at what is outlined. Are there any errors you need to correct? Do you need to spend some time improving your credit score before getting prequalified for a mortgage? Both lenders and builders will want to know your credit is in good standing, so save some trouble down the line by knowing where you stand.
Learn the Mortgage Process
The next big step is to familiarize yourself with the mortgage application and approval process. While it might not feel like a huge decision, you should only get preapproved for a mortgage if you’re ready for all of the responsibility. This is a 15- to 30-year debt commitment (fewer years is better!) and that you should not take lightly.
If you decide to move forward with the process, you’ll need to do some research before meeting with a lender. Consider different lenders and decide which will work best for you – compare annual percentage rates, origination fees, terms – and before meeting with the loan officer, gather all of the information you’ll need to communicate your financial situation, such as:
- Proof of Income
- Evidence of Employment
- Credit Score
- Debt-to-Income Ratio
Collect these documents and go over them, ensuring you understand what information you’re being asked to share and why. Decide if you want to be preapproved or prequalified for a mortgage at this point, and consider the benefits of both.
A prequalification, in which you share financial information with the lender but they do not take steps to verify what you’re telling them, is a good first step to understanding what sort of loan you might receive and how much you can afford in monthly payments. Obviously, you’ll want to share accurate information with the loan officer, but know that whatever they say for a prequalification is not set in stone.
In order to know exactly what how much you are qualified to receive from a lender, you’ll need to complete the preapproval process. Instead of taking your finances on your word, the lender will perform a thorough inquiry into your financially history to ensure the numbers line up.
Conduct a Self Assessment
The final step? Take a breather and check in with yourself. Are you still on board with purchasing a home? Have you had time to talk things through with your family and friends, to get additional insight and make sure everyone is on the same page? Have you been honest with yourself about your financial situation?
Keep in mind that, at this point, you shouldn’t have signed any contracts, so you’re completely free to walk away; but you’ll feel better if you begin the process with a strong conviction.
Begin the Search
If everything above is in order, then it’s time to begin the fun part! Take some time to determine what your new home will look like by asking yourself these questions:
- How many floors do I want my home to be?
- How many bedrooms and bathrooms do we need? How much square footage is manageable?
- Will I need flex or bonus rooms?
- Do we want all of the bedrooms in one area, or spread throughout the house?
- Do I want an open floor plan? A library? A formal dining room?
- How much front and backyard space will we need?
Be sure to also organize the features, so if you have to choose one over the other, you’re not forced to make a quick decision. You can also group your responses into Must Haves, Wants, and Don’t Want categories. This will prepare you for filtering searches online or meeting with an agent.
Speaking of, you’re definitely want to head online to look at current listings. Visit multiple listing websites such as NewHomeSource to see listings based region, and get a sense of the local markets. Is your budget lining up with the homes you’re seeing, or do you need to reassess? At this point, you’re going to want to begin visiting and touring neighborhoods and homes at your own pace (but we have a handy guide to help you plan out your visits, too).
The important thing to remember throughout this process is to be communicative and go at your own pace. You deserve to find a home you love at a manageable price for you and your family. Inform yourself of the options, ask questions when needed, and be prepared for the emotional process of it all. But with some research and perseverance, you’re bound to find the perfect new home for you and your family.