Buying a home may be the biggest purchase of your life, and it's not one you want to rush.
Before getting serious about a property, there are certain key things to make sure you've done. Here are six of them, according to real estate experts.
One of the biggest mistakes first-time home-buyers make is buying more than they can afford. To avoid falling into that trap, real estate mogul Barbara Corcoran and other money experts recommend spending no more than about 30% of your take home pay on housing.
Keep in mind that this 30% encompasses more than just the sticker price of the home: It should include all related costs, like mortgage interest, taxes, insurance, maintenance and any renovations you might want to make.
Another popular guideline is the "28/36 rule," which says that you should spend no more than 28% of your gross monthly income on housing costs and no more than 36% on total debt, which includes housing and other debt like student loans or car loans.
Mortgage lenders use this rule to assess your borrowing capacity. If your debt-to-income ratio exceeds these limits, you may have to pay a higher interest rate or you might not be able to get a loan at all.
"The biggest mistake that first time homeowners make is they forget that they need closing costs — not just the down payment of say 10% or 20%," says Corcoran.
Closing costs vary depending on where you live and the type of loan you choose, but you can expect them to add an additional 2-7% of the total cost of the home onto the final price, Realtor.com notes in its 2019 "Essential First-Time Home Buyer's Book." That means, if you're buying something for $250,000, you'll owe anywhere between $5,000 and $17,500 in fees. For the median U.S. home, these expenses exceed $13,000.
The types of fees you can expect at closing include recurring costs like property taxes, homeowners insurance, prepaid loan interest and title insurance, as well as one-time costs like an inspection fee, application fee, appraisal fee and the fee you get charged for pulling your credit score.
To get a better idea of exactly what your costs will add up to, use a closing-cost calculator.
Technically, you don't always have to put money down when financing a home today, and how much you decide to put down is highly personal. But the smaller the down payment, the larger the mortgage loan and the more you may have to pay in interest.
Many experts agree that 20% is a good amount to put down: If you go lower than that, you likely have to pay for private mortgage insurance. That's a safety net for the bank in case you fail to make your payments and can cost between 1-2% of the amount of your loan.
Before buying a home, you want to know where you're at financially, which means checking your credit score.
"This is the number that mortgage lenders will look at to determine whether you are 'creditworthy,' and thus dictates whether you'll qualify for a home loan, and the rates you will get," Realtor.com writes.
Generally speaking, the higher your credit score, the lower the interest rate on your mortgage — and a lower interest rate can mean significantly lower monthly payments.
"Major lenders often require a minimum credit score of at least 620, if not more," Realtor.com notes. So, if your score isn't there yet, consider taking some time to improve it before home shopping.
A pre-approval analyzes your creditworthiness, tells you how much you can borrow from your lender and, ultimately, can make the difference between winning a bid or not.
"In hot markets, mortgage pre-approval is almost required for a seller to take your offer seriously," says Realtor.com. "That's because it spells out exactly how much a lender has agreed to loan you, thus assuring the seller that you're both willing and able."
Note that getting pre-qualified for a mortgage is slightly different and a less in-depth process. For pre-qualification, "you provide a mortgage lender with information — about your income, assets, debts and credit — but you don't need to produce any paperwork to back it up," Realtor.com explains. And while it gives you an idea of what you can afford, "it's by no means a guarantee that you'll actually get approved for the loan when you go to buy a home."
Pre-approval is typically free, Realtor.com notes. You can expect the process to take one to three days.
"You're not just buying the property you're looking at," says Realtor.com. "You're also buying into the whole neighborhood. That's why you have to be certain that it has the vibe and amenities you want."
Given that experts suggest you should only buy if you plan to stay in that home for several years, think about your must-haves now and in the near future: Do you need a garage? Do you want to be in a specific school district? You may also want to consider how close you are to amenities like public transportation, grocery stores and a hospital.
And to really get to know the area, experts suggest walking or driving around when it's dark out, too, and not just when it's light.
After all, the neighborhood could have a completely different feel at night, real estate mogul Sidney Torres points out: "Are there really big street lights that create this light pollution that creates a weird feel for the house in the neighborhood? Is there suspicious activity in the evening that you might run across that you don't see during the day?"
"It doesn't hurt to spend 48 to 72 hours there before you actually commit to buying it," he adds.
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