Are you ready to buy a home? Are you trying to decide if now is the time? I have compiled a list to help you determine whether or not you’re ready to buy.
My husband and I just bought our first home. It was a crazy experience and there is so much we didn’t know going into the process. Now, having gone through the home-buying process, I feel like I can give some advice. I recommend going through all of these steps to determine if you are ready to buy a home. I think once you’ve completed these steps you’ll be more prepared and you’ll know if you are ready to move forward and start the home-buying process.
Get on the same page
If you are buying a home by yourself then you would skip this step. This step applies to anyone who is buying a home with a co-buyer. It doesn’t have to be your spouse. If you’re buying a home with a parent, friend, sibling or anyone for that matter you will need to make sure you’re on the same page. Make sure that you both understand that all financial information is shared during the home-buying process. Your credit score, debt and income will all be revealed during this process. If you are not willing to share this information or if you have debt that the other person does not know about, now is the time to share it.
Sit down with your co-buyer and make sure that you’re both willing to share all financial information with each other. Once that is out of the way, you can start to discuss the areas you might like to live in and the type of home you’re looking for. This does not need to be exact at this point. Sometimes the type of home you want can change depending on your budget but it is nice to start having these conversations with your co-buyer early on in the process.
Review your budget
If you don’t have a monthly budget, make one! I highly recommend doing this even if you’re not buying a home but especially if you are planning on buying one. This might sound crazy but I recommend going through your bank statements for the last 3 months line by line. It’s amazing how many extra charges you’ll find and how many monthly potentially unused subscriptions you may have. Get the bank statements out, get the credit card statements out and make a budget. Going through 3 months of statements will help give an average of what you actually spend in a month.
Remember!!! Owning a home comes with a lot of costs, not just mortgage. You have to pay for mortgage, property taxes, insurance, utilities, maintenance & repairs. You may also have HOA fees and/or Mello Roos.
Review your credit score
This is so important. You have to have a good credit score to buy a house. It doesn’t have to be great but the higher the score the better your interest rate will be and that makes a huge difference overall. I was told by my mortgage broker that it is much harder to finance a mortgage if your score is under 680 but he has seen scores as low as 640 get approved.
Make sure that your co-buyer also knows your score. When you buy a home with someone else the lender will take the lowest credit score and use that for the loan application; at least that’s how it was for my husband and I here in southern CA. So, for example, Mr. Smith has a credit score of 685 and Mrs. Smith has a credit score of 775. For the loan application they will only use Mr. Smith’s score of 685. To review your credit score for free check out Credit Karma.
Review your debt
You CAN buy a house with debt. You do not have to be completely debt free to purchase a home. What matters is your debt to income ratio. The bank will add up all of your minimum monthly debt payments (mortgage, student loans, credit cards, car payments) and divide that by your gross income to determine your debt-to-income ratio (it will be given as a percentage). I was told by my mortgage broker that you’ll want to keep your debt-to-income ratio under 40%. Keep in mind that this only includes debt. Things like groceries, phone bill and utilities are not included in this calculation. If you need help with your debt-to-income ratio try using a debt to income ratio calculator like this one.
Review your savings
When you buy a home you will need to have some money saved. Most home loans require a down payment, which is anywhere from 3%-20% of the purchase price. Depending on the purchase price a down payment can be very expensive. It is important to know that the down payment is not the only upfront cost of buying a home. You will also have to pay closing costs up front as well which range from 3%-5% of the purchase price. In addition to those costs you will have to pay for a home inspection, an appraisal and possible application fees.
There is also furniture, appliances, possible repairs or renovations and any other small necessities to consider. To be frank, it takes quite a bit of money upfront to purchase a home. I don’t say that to scare anyone. I just want you to be prepared and know what you’re getting into. Surprises are fun on your birthday, not when you’re buying a home.
Other steps to determine if you are ready to buy a home…
Look at the market
At this point it’s still early on and you haven’t officially started the home-buying process yet but it is a good idea to start looking at real estate apps. You won’t know how much home you qualify for yet but at least you can get an idea of what homes are selling for in your area. If homes are selling for $500K then you know that a down payment of 10% will be $50k and closing costs will be about $15k-$25k. You can also start looking into average costs of HOA or mello roos in your area. The app I really like using is Redfin. I find it easy to navigate.
Research home buying requirements in your area
I bought my home in southern CA so some of the information I give may not apply where you live. Be sure to look into what it takes to buy a home in your area, what paperwork/ documents you will need and if there are any first time home buyer programs that you qualify for. First time home buyers can get federal assistance (FHA loans) or local assistance from their city or state (in the form of down payment assistance or closing cost assistance). There are a ton of programs out there to help first-time home-buyers so I highly recommend researching these programs or meeting with a mortgage broker who works with these programs. Mortgage brokers are willing to meet with you because they want your business so try making an appointment to information and ask questions
Do you foresee any major life changes in the next 6 months?
Buying a home is a long process. From the time you get pre-approved to the time you have your house keys it can be several months. You’ll want to consider any major life changes that may interrupt or stop the process all together. For example, you have to have a work history in the same job, or the same field, for at least 2 years. So if you’re considering changing jobs you may want to wait, especially if it’s in a completely different field from your current job. Also consider any maternity leave or leave of absence that may occur as these may alter your home-buying timeline.
Prepare yourself mentally
Getting ready to buy a home is really fun but it’s also very stressful. For most of us it is the biggest purchase we will ever make. My husband and I almost lost our home about 5 times before we actually closed escrow. I’m not joking. It was 2 months on an emotional roller coaster, back and forth with the mortgage broker and the underwriter and by the end I was exhausted.
The process is not perfect. You may get outbid for a home, the underwriter can find something unsatisfactory with your financial history or the seller can back out for whatever reason. There are so many things that can go wrong and there are so many people involved in the process that lack of communication is almost inevitable. But, I will say that it is worth it. All the stress and tears are totally worth seeing a piece of property put in your name.
You are ready to buy a home. Go get pre-approved!
If you’ve made it through this list and you feel confident going forward then do it! Getting pre-approved is the first step in the home-buying process. I highly recommend getting a few pre-approvals so you can compare interest rates and maximum purchase price. Good luck and happy house hunting!
Tips for when you are ready to buy a home:
-Get advice from multiple real estate agents and mortgage brokers. Also, talk to friends or family who recently purchased a home and ask lots of questions
-Consider waiting to tell friends and family that you have started this process. It’s so exciting and you’ll wanna share it with everyone but keep in mind that if something doesn’t go your way you may have to explain that to everyone you’ve already told. This is just something to consider.
One last note- IT’S OK TO WALK AWAY. If at any time during this process it doesn’t feel right or you’re concerned that you may not be able to afford it, it’s okay to take a step back or to walk away completely. Don’t worry about what others might say. This is one of the biggest decisions in your life and it needs to feel right for you.