The first thing most home shoppers do when they are getting ready to buy is to consult a mortgage professional to determine how much of a housing payment they qualify for based on income, down payment, and credit rating.
Once you find out what you CAN do, there’s another conversation you need to have about what you SHOULD do before you make your final decision. Here’s a quick rundown on a six-step process to a successful start to buying a home:
- Pre-qualify (what you CAN do)
- Create a Household Budget
- Establish Payment Range (what you SHOULD do)
- Convert Payment Range to Property Price Range
- Determine Area and Home Features
- Contact an Agent that works the search area
Pre-Qualify
Lenders provide this free service as a way to develop a relationship with a potential home buyer. Lending guidelines are very complex and there are many special programs that could impact your decisions, so use a reputable, seasoned professional. Your agent is the best source for lender referrals as they’ve already done the legwork for you.
Two kinds of pre-qualification:
Pre-qualification – This is a telephone conversation that will help determine if a loan approval will be likely. You will discuss all of the material aspects of your finances including income, debts, credit issues, cash on deposit and in investment accounts, etc. No credit report is pulled at this time. If it appears that you will qualify for a housing payment sufficient to warrant a home purchase, you will want to apply for a pre-approval before working with an agent.
Pre-approval – Most lenders will ask you to apply online as the mortgage process is mostly paperless and the online document portals are much more secure than email for transmitting personal documents. Once you’ve completed the application, the loan officer will call to review the information to assure it is complete and accurate. Then a credit report will be issued and the loan will be underwritten using an online service to determine your exact purchase ability.
Most real estate agents require a pre-approval letter before showing properties to a buyer. There is usually no cost for this.
Create a Budget
If you’re buying for the first time, it’s a good idea to draw up a budget so you’ll know how much of a payment can truly afford. Buying a home is a long-term commitment and you should go into it with a good grasp on your personal finances. Download a simple budget here.
Establish a Payment Range
There’s no perfect home, and you’ll be making some compromises as you narrow down your options.You will probably look across a certain price range, having better luck the higher in price you go. It’s this way for everyone – we all want a little more than we can afford, maybe because we are striving for the best thing that’s within reach. Be aware of this and be ready to compromise to avoid a short honeymoon and hard landing. I suggest that my buyers start shopping at the low end of their “Conservative / Risky” payment range.
It helps to know that every $10,000 in purchase price equates to about $65/mo in the housing payment.
Convert Payment Range to Property Price Range
This is a simple math calculation for an experienced loan officer. It includes homeowner’s insurance and property tax estimates, as well as some knowledge about the kind of loan involved so be sure to get some help with this. Once you have the correlating Property Prices to your Conservative/Risky Payment Ranges, you’ll be able to think more clearly and make better decisions. It also helps to have a written plan that can be used to keep you from falling into a sales trap or making a rash emotional decision.
Determine Area and Home Features
The internet is no substitute for a buyer’s agent, but it can help you get an idea of the kind of home you want and in what general area you want to live. Once you know these two things, you can hire a buyer’s agent to help you. The same warning applies to agents as to mortgage lenders: Work with a reputable, full time professional! Everyone knows at least one real estate agent – you want to work with someone who is knowledgeable about the local market and able to represent your best interests throughout the transaction!
Hire your Agent
There are many ways to find good agents in your local market. Be prepared to interview a few before making a decision. Look to your agent for information about properties, local schools and shopping, commute times, neighborhood amenities, etc. Then you can count on them to help you make tough decisions, negotiate a good deal, help you with paperwork and building inspections, and deal with the seller and their agent directly.
Summary
Being able to afford a home goes beyond having the necessary income to qualify for the housing payment. There are costs to owning a home that you don’t have if you’re renting, and if you’re like most, you’ll invest in some upgrades to add your personal touch to your living space. You must also be ready to pay for any maintenance that naturally occurs over time. If you’ve owned a home before, you know about setting some money aside every month for repairs to the HVAC, plumbing, exterior and interior surfaces, driveway, etc. If you are buying for the first time, you should speak to your agent about the potential maintenance issues of every home you consider, and also look into a special kind of home warranty that helps when things break.