Qualifying for a mortgage, hiring a real estate agent, and finding the perfect house are just a few of the things to consider when buying a home. Buying a home is one of the biggest purchases most people make in a lifetime, and it's important not to make any costly buying mistakes that could haunt you for years. Here's ten things potential home buyers should think about before making a home purchase.
10. Clean Credit Report?
Your credit history—whether excellent, fair or bad—plays a significant part in helping or hindering you from achieving your dreams of buying a house. For instance, did you know the track record of your payment history and your revolving credit balance affect over half of your possible FICO score? This two items alone account for about 65 percent of your credit score.
While a bad credit report may not keep you from purchasing a home, getting a mortgage will be tougher, and you will probably end up paying higher costs for interest rates and other related expenses.
Fixing your credit is priority one if your credit reports are not good, and you can repair your credit score by diligent effort. First, get a copy of your credit report and check it for any errors or omissions. Send letters to creditors and ask for deletion letters when you need to have incorrect information removed.
Contact your creditors and ask them to give you specific instructions—in writing—detailing the steps you need to take to clean up your credit. Follow these instructions carefully and document your results in writing to all three credit reporting agencies.
Next, remove any inactive accounts and pay down your credit balances. Don't apply for any new accounts or lines of credits as the resulting credit check could lower your credit scores even more. As your credit history information is updated, you should see your credit scores begin to rise.
9. How to Save For a House Down Payment
Most lenders need a 10 to 20 percent down payment on a home mortgage, which means on the purchase of a $100,000 house, the worst case scenario is you'll need a $20,000 down payment. If you don't happen to have $20,000 stashed in your bank account, where will you get the money?
Here's three tips for creative ways to come up with your house down payment:
- Set up an automatic, monthly deposit to a dedicated down payment account. It's easier to save money before you actually have it "in your hand," so make sure the down payment money comes out first.
- Open or add to an individual retirement account (IRA). While you'll want to check with your tax preparer for advice on the latest tax rules, typically first-time homebuyers can withdraw up to $10,000 from an IRA without incurring penalties.
- Pack your lunch. While this sounds almost counterintuitive, you'll be surprised at how much money you can save by taking a brown bag lunch to work and buying your own beverages and snacks instead of plunking money into a vending machine or driving through the take-out window at a popular fast food restaurant. The secret to this method is to immediately deposit the monies saved into that dedicated account for your house down payment, and then watch the money grow.
8. How's Your Debt to Income Ratio (DTI)?
Your goal is to have a front-end DTI ratio of 28 percent and a back-end DTI ratio of 36 percent. Front-end ratios use the anticipated monthly mortgage payment and what lenders refer to as PITI: principal, interest, taxes and insurance. Front-end ratios are determined by dividing the monthly housing expenses by your monthly income.
Back-end ratio reflects your debt burden; find this ratio by dividing monthly income by the amount of your monthly debt.
7. The Location and Community
While the property location within a neighbor or its proximity to amenities such as shopping, recreation, schools and places of worship are extremely important to most potential home owners, it's easy to become too fixated on that element.
It's just as critical to assess where the house is located in relation to the surrounding area. Consider questions such as:
- How's the traffic flow and noise level?
- What is the condition of the overall neighborhood - is it in decline or building up?
- While the neighborhood may seem nice, what about that sewage treatment plant located three miles away?
Be sure to drive around the neighborhood and adjacent areas, and visit at various times of day and night to get the best feel for the area.
6. Check Out the Neighbors
Talk to the neighbors to learn more about the community. Do Mr. and Mrs. X like to throw wild parties and crank the music up really loud? Are most of the neighbors fellow home owners or do they rent? Do the local schools have good reputations? The more you know about your potential new friends and neighbors, the better your decision-making ability.
5. What to Look for in a Home Inspection
A home inspector analyzes the home's electrical, mechanical, and structural soundness. The goal is to find any major flaws in any or all of these systems. Currently, many home owners are having their homes pre-inspected to give them a competitive edge in the housing market, but if this hasn't already been done, protect yourself by having one done before making a purchase offer. Home inspections are money well spent in the overall home buying process as they can help buyers avoid future expenses for undetected problems.
4. What to Look For In a Real Estate Agent
Hiring a real estate agent is always the smartest option. After all, when your car needs repair, you take it to a mechanic. If you are investing or building a financial portfolio, you hire a financial planner. Partnering with a professional real estate agent to help you make one of life's biggest purchases makes good sense.
Some key factors to consider:
- How compatible is your personality with that of the real estate agent?
- Does he or she return your calls promptly, value your time and treat you with respect?
- What are the applicable professional qualifications and the agent's reputation in the local market?
- How did you hear about this particular real estate agent?
In this scenario, you are the boss—you are hiring the real estate agent—and you have every right to ask questions, check references, and do a background check to make sure you are hiring the right person to help you find and buy your dream home.
3. Why Is the Owner Moving?
It's important to learn why the home owner is selling the house. Sellers who are moving out-of-state, divorcing or down-sizing are what real estate agents refer to as "motivated sellers." In other words, these are people who need to make a quick deal and move on to the next phase of their life.
However, what if the sellers are elderly and want to move because they can no longer keep up the property? Will you be looking at expenses for major repairs or renovations if you buy their home? Is it an estate sale because of a death in the family? Is the title to property clear or will tracking down all the heirs for any necessary signatures impede or even prevent the sale? Consider all these potential problem areas before making a purchase offer on a home.
2. What About Utilities, Taxes and Other Expenses?
The location might be picture perfect, but what happens if you can't afford the property taxes or the cost of the utilities is double—or even triple—what you calculated? Make sure you've done your due diligence and calculated all the costs of buying your dream home.
1. What's Ahead In Your Future?
The real estate market is cyclic; sometimes it's a buyer's market but other times, it is a seller's market. It's easier to sell a home in a seller's market than it is in a buyer's market because the law of supply and demand kicks in to the seller's advantage. Unfortunately, most of us don't have access to a crystal ball or a way to predict future real estate market conditions. Before you commit to a 15- or 30-year lease, it's a good idea to analyze your future personal and business options.
For instance, how likely are you to change jobs or even move to another town or state? If you are single, what happens when you get married? If you are married, how would you manage if you bought a tiny cottage and ended up with a giant-sized family?
If there's a chance your life circumstances would change dramatically in the first few years of your mortgage term, you might want to reconsider whether the timing is right for buying a house.
These things to consider when buying a home cannot guarantee you won't make a buying mistake on your home purchase, and you may want to consider making a first house checklist. However, the odds of making a mistake or being dissatisfied with your home are lowered when you to do your research and are prepared before you commit to buying a house.