1. Assess your home-buying readiness2. Prepare your finances3. Determine what you can afford4. Get pre-approved5. Explore the mortgage types available to you6. Decide on the kind of home you want7. Determine your home buying strategy8. Find your home9. Make an offer10. Conduct a home inspection11. Order a home appraisal12. Sign the paperwork and close the deal
Buying a home is exciting. You’re taking real steps toward creating a better life for yourself. Way to go! In order to minimize the stress (and maximize the excitement), below are some of the most important steps to buying a house.
1. Assess your home-buying readiness
Before you start browsing the internet for your dream home, it’s important to assess if you’re truly ready to buy. Ask yourself the following questions:
- Do I see myself in my current location for at least the next five years?
- Do I really know where I want to live and what I want, in terms of type of home, neighborhood, and commute?
- Is my job situation stable and secure?
- Do I have enough money to make a down payment?
- Do I make enough money to comfortably afford a mortgage payment plus additional home maintenance expenses?
If the answer to all of the above is yes, then the timing is right.
2. Prep your finances
A home is often the most expensive purchase in an adult’s lifetime. To prepare for talking with a lender or mortgage broker, use the following tips:
- Gather income information, including recent pay stubs and W2’s.
- Check your credit score. Your bank or other services may offer this for free. Your credit score will affect what types of loans and terms are available to you.
- Consider paying off as much debt as you comfortably can to improve your debt-to-income ratio, a factor many lenders use in determining how much money to loan you.
5. Explore the mortgage rates and types available to you.
Many buyers aim for the predictability of a fixed rate mortgage. With this type of loan, the interest rate remains the same for the life of the loan. (Ex: 4% interest for 30 years.) Others look into variable rate loans, which may initially have lower rates, but can increase suddenly and cause payment shock. Loans also fall into two general types:
The standard type of loan that most borrowers opt for.
- Pros: Can be used to buy several different property types (including a second home or rental property), no additional monthly mortgage insurance payment with a down payment of at least 20 percent.
- Con: To qualify, buyers generally must have higher credit scores, lower debt-to-income ratios, and larger down payments.
There are three types: a Federal Housing Administration loan for first-time buyers, a VA loan for veterans and active armed service members, and USDA loans for rural home buyers. These loans are backed by the government, which usually allows lenders to provide lower interest rates to those who qualify.
- Pro: Buyers with lower down payments and lower credit scores may qualify for a mortgage.
- Con: Can only be used for specified property types, and you’ll generally pay private mortgage insurance each month.
For more information on mortgage options, please check out the comprehensive home loans guide of the Consumer Financial Protection Bureau.
6. Decide on the kind of home
Finally, the fun part. With the pre-qualification and financial grunt work complete, you can focus on that future home of yours. But first, you’ll need to get a very clear idea of the type of home you want:
- A single family, condo, or townhome?
- How many bedrooms and bathrooms?
- What part of town?
- Large lawn or little maintenance?
- Do you need good schools for the kids?
- Would you be okay with a fixer upper or older home that needs a lot of maintenance?
Once you have a rough idea of the home you want, you’ll be prepared to put together a home buying strategy.
Quick Tips for Improving Your Credit Score
If you’re not happy with your current credit score and wish to improve it before setting out to buy a home, there are a few options you can consider. Just remember, fixing your credit score takes time and commitment.
Make your credit card payments. It’s important to make your minimum credit card payments on time each month. Setting up payment reminders or automatic payments can help keep you on track here.
Reduce your debt. Strive to pay down existing debts if you can. Many lenders look for a debt-to-income ratio to be below the 30 percent mark, meaning you’re not spending more than a third of your income servicing debt each month.
Review your credit report. Look this over diligently. Sometimes people find inaccurate information or missing information on their credit report history. If possible, dispute any misinformation on your report.
Once you’ve set out on the journey of purchasing a home, it’s important to get organized and collect all the information you can to assess your financial health first. Turbo offers a free credit score check that will help you determine where you stand in front of lenders. If your credit score isn’t where it needs to be, take a step back and consider making a plan to improve the number before applying for a home mortgage.
Sources: The Lenders Network | Bankrate | Smartasset | Student Loan Hero
From the maker of TurboTax, meet Turbo: the financial health profile that shows where you truly stand – beyond the credit score.