Before you start looking for a house, you need to have a prequalification letter in hand. This letter is basically proof that a lender will loan you a certain amount of money. This is your ticket to putting an offer on a house. People with excellent credit scores, can have their pick of lenders and the most competitive rates. If your score is somewhere in the middle, you might have to spend more time shopping around to get the lowest rate.
There are rules lenders follow to determine what you can borrow, such as the 28/36 rule, which says that a homeowner should spend no more than 28 percent of their gross monthly income on housing expenses, and no more than 36 percent on overall debt. But buying a home also comes with significant upfront costs, such as the down payment and closing costs, so you’ll want to make sure you have savings left for emergencies and other unexpected expenses after you close on your new home.
Because while house hunting for the first time can be exciting, tales of regretful home-buying mistakes and the not-so-distant housing market meltdown have also given it a bad rap for being a stressful and confusing process. It doesn't have to be—that's why we created this handy nine-step checklist, which helps explain how to prepare to buy a house—and help safeguard your finances in the process.
After your offer has been accepted, splurge for a home inspection. Spending even $500 can educate you about the house and help you decide if you really want to pay for necessary repairs. You can also leverage your offer depending on the results of the inspection report and make the seller financially responsible for all or some of the repairs. For more on what to look for, see 10 Reasons You Shouldn't Skip a Home Inspection.
In a competitive real estate market with limited inventory, it’s likely you’ll bid on houses that get multiple offers. When you find a home you love, it’s tempting to make a high-priced offer that’s sure to win. But don’t let your emotions take over. Shopping below your preapproval amount creates some wiggle room for bidding. Stick to your budget to avoid a mortgage payment you can’t afford.
In addition to saving for a down payment, you’ll need to budget for the money required to close your mortgage, which can be significant. Closing costs generally run between 2% and 5% of your loan amount. You can shop around and compare prices for certain closing expenses, such as homeowners insurance, home inspections and title searches. You can also defray costs by asking the seller to pay for a portion of your closing costs or negotiating your real estate agent's commission. Calculate your expected closing costs to help you set your budget.
Real estate agents are important partners when you’re buying or selling a home. Real estate agents can provide you with helpful information on homes and neighborhoods that isn’t easily accessible to the public. Their knowledge of the home buying process, negotiating skills, and familiarity with the area you want to live in can be extremely valuable. And best of all, it doesn’t cost you anything to use an agent – they’re compensated from the commission paid by the seller of the house.