Owning a home is a dream for many people, but only 65.8% of U.S. residents owned their home in 2020. No matter how close or where you are on your home buying journey there are financial and life circumstances that should figure into the process. Home-buying can be a complex process filled with jargon and unexpected challenges. As you talk to family members and friends about how to buy a house and their own successes and stumbling blocks, keep these key points in mind.
Prepare and think long term
The more you can plan and save in advance, the more options you'll have for the home you are able to buy. If you can, create a line item in your monthly budget dedicated to saving for a down payment. Then prioritize debt repayment so you have fewer financial obligations and a good credit score, which could save you thousands of dollars over time, once you decide to buy a home.
How much will your down and monthly payments be?
As you add to the down payment savings you've started, keep the 20% guideline in mind. That's the total down payment toward your purchase price that enables you to get a mortgage without the monthly expense of private mortgage insurance (PMI).
As you determine how much to save for a down payment, consider what price point you can afford for your house. Mortgage lenders may use the 28/36 rule. This rule states that 28% of your gross monthly income should be the maximum spent on total housing expenses and that not more than 36% should be spent on total debt (housing, car loans, etc.). Another commonly used and more conservative guideline recommends that your house payment should not be more than 25% of your take-home income.
And don't forget that owning a home includes other costs, such as homeowners insurance, property taxes, maintenance, repair and upgrades you might make to a home.
Are you pre-approved for a mortgage?
The pre-approval process includes running a credit check, a review of your income and employment history, debt-to-income ratio and your liabilities and assets. The outcome of this information will determine whether or not the buyer is pre-approved.
Getting pre-approved might not be a bad idea since it could help the home buying process move along much faster. Being pre-approved shows sellers that you are a serious buyer and could give you an advantage over other buyers. Most pre-approval letters are valid for 60 to 90 days.
Do your research
In 2020, over 5 million existing homes were sold according to the National Association of Realtors. To find the perfect home for you, consider what's most important for your lifestyle, then prioritize your list of requirements. For example, you might want a certain number of bedrooms, desire a shorter commute or need space for a dog.
It can be helpful during this research phase to get pre-approved for a mortgage and to find a real estate agent. You also may want to attend a few open houses to get an idea of what you like and don't like.
As you look at homes, consider their resilience against the weather. FLASH.org has compiled a Buyer's Guide to Resilient Homes brochure that helps you think through some potential scenarios. There are even checklists to help you through the process.
Buying a house
There are some general steps involved when buying a home. Steps house hunters typically take include:
Like with most big life decisions, it's easier both financially and emotionally if you prepare beforehand. Even if you don't expect to buy for a few years, now is the time to get your budget and credit in good shape. You can request a free copy of your credit report from all three bureaus once a year, so try to take advantage of this offering to check for inaccuracies. When you are ready to buy, a good credit score could save you thousands of dollars over time.
2. House hunting
Think you might be ready to start house hunting? Here are a few tips for your hunt:
- Choose your desired location,
- Browse what is on the market,
- Determine "nice-to-haves" and "non-negotiables" for your home,
- Go to open houses,
- If already approved by a mortgage lender, keep your pre-approval letter handy to present to sellers,
- Get recommendations from friends and family of trusted real estate professionals or mortgage lenders that have a history of providing a great experience, and
- Get a real estate professional to help you with your house search.
Obtaining a real estate agent or professional shouldn't cost you, the buyer, unless you engage an exclusive buyer's agent. Agents are usually compensated from the commission that is paid by the seller. A real estate agent or professional saves you time and helps by:
- Gathering information about the neighborhood that might not be easily available to the public,
- Executing the steps to the home buying process, and
- Providing negotiation skills when it's time to make an offer.
3. Buying a home
Once you find a home that you are interested in and an offer and acceptance has been done, you'll likely then enter into a phase called "attorney review." During this stage, a few things happen:
- A professional inspection is usually conducted,
- An appraisal of the property takes place, and
- Your lender double-checks your information.
Your real estate professional can help you with this whole process in detail. Here's an overview of the steps you go through with a lender.
4. Preparation for the closing
Unfortunately, there is likely some waiting time before you "close" and are ready to move in. This can be a good time to slow down and make sure you're ready for all the costs that come with the closing (no, unfortunately it's not just the down payment). Here is a list of items typically included in closing costs. Be sure to ask your lender for definitions and clarity if you see something you don't understand.
5. Post purchase
Once everything is finalized and you move in, there still may be things you want to do such as home improvements or do it yourself projects. You will also want to make sure you keep certain post-closing documents. This will also be a good time to consult your budget, set some goals and create a home inventory. A home inventory is an excellent way to help make home insurance coverage decisions and expedite insurance claims process after theft, damage or loss.
Are you selling and buying a home at the same time?
When you are selling your home and buying another, there are some things to consider:
- Understand contingencies. You may put in an offer on a new home and include contingencies on that offer. For example, a contingency might be that you must sell your existing home within a certain time frame.
- Understand the financial impact. Using the financial guidelines you used for the purchase of your first home, be sure to buy what you can afford and what will work with your life and financial goals. For example, are you planning on having children or making other larger purchases? Those are costs that will increase your monthly outlay of cash in the future.
When buying a home, having a home buying checklist is helpful. Also, be sure to educate yourself on common home buying mistakes and know how to avoid them. Be sure to verify your homeowner insurance needs by contacting a State Farm® agent.