Before you take the leap into homeownership, there are critical things to know before buying a house. This includes how to shop for a mortgage, figuring out how much you can afford, how to choose a home, and so much more. Because buying a home involves so many steps, you may find it overwhelming if you’re new to the process.
Being more informed about the homebuying process can help you make a financial decision that fits your budget and lifestyle. Let’s take a look at five things you should know before buying a house.
1. Decide how much home you can afford
How to know when to buy a home is a difficult question to answer, but reviewing your finances can help you determine when you’re financially ready.
Your budget is one of the most important things to consider when buying a house. That’s because if you spend more than you can afford, you’ll have less money left over to put toward vacations or retirement funds. To reduce the chances of this happening, review your personal finances to get an idea of how much of a monthly payment you can afford based on your monthly income, debt, and expenses.
Afterward, use a mortgage calculator to estimate your monthly housing payments, which should include an estimate of your mortgage, property taxes, homeowners insurance, and any required mortgage insurance. Then add any housing-related expenses not included to see how much they increase your monthly housing costs.
Here are some additional ongoing expenses and upfront costs to consider:
- Down payment
- Closing costs
- Utility bills
- Homeowners association (HOA) fees
- Home repairs
While your ongoing housing expenses and upfront costs will vary, they can quickly add up. For example, the average cost of homeowners insurance was $1,249 in 2018, according to the National Association of Insurance Commissioners. That breaks down to an average monthly cost of $104.08.
When calculating your housing costs, try to spend no more than 30% of your gross monthly income on housing costs, including utilities. That’s the guideline the U.S. Department of Housing and Urban Development has set for home affordability. Whether that’s an affordable percentage for you, however, will depend on your unique financial circumstances.
2. Don’t buy for the life you have today
Since your current lifestyle is likely to change, it’s best to heed the homebuying advice to consider your current and future needs while shopping for a house. Doing so might help you find the perfect house for now, and later. For example, if you don’t have kids but plan on having a family soon, buying a home with enough bedrooms to accommodate your future children is a good idea.
Here are some other lifestyle questions to ponder:
- How long do you plan on staying in your current location?
- Do you anticipate your income remaining the same in the future?
- Will you like living in the same neighborhood five years from now?
Considering the prompts above will better prepare you to answer the question: How can I know when to buy a house? If you see yourself relocating soon, believe that your income may suffer a significant drop, or don’t think you’ll like the neighborhood in the future, it might not be the right time to buy a home.
3. Don’t let superficial things dissuade you
Another point to consider when buying a home is the difference between major and minor repairs. Major repairs are costly, and they can greatly increase your homeownership costs. Some common examples include electrical problems, roofing and structural damage, and plumbing issues.
By contrast, minor repairs are more affordable and include easier remedies, such as improving landscaping, painting the interior or exterior of your new home, installing new floors, or buying new appliances.
While you don’t want to buy a home you dislike, you also don’t want to risk passing up the right home based on your distaste for certain features. Remember to prioritize features that you can’t change, such as the neighborhood and size of the yard.
Also, remember that it’s OK to choose a home that doesn’t have all the features you’re looking for. One great way to prioritize what you want in a home is to make a list that includes your must-haves and nice-to-have features.
4. You can negotiate the real estate agreement
What you need to know when buying a house is that the standard agreement can be modified. Although you can’t remove the terms that are required by law, others are subject to negotiation.
Here’s a list of items that are commonly negotiated:
- Closing costs: Some sellers may agree to pay some or all of your closing costs, which typically range from 2% to 5% of the purchase price of the home.
- Date of closing: If you need to move in earlier or later than the closing date listed on the standard real estate agreement, you can request a different closing date.
- Inspection contingency: You can make the purchase of the home contingent upon the seller making certain repairs before and after the home inspection report is completed. If your requested repairs aren’t made to your satisfaction, you can walk away from the sale of the home.
- Appliances: If you prefer to keep the current appliances in the home, you can ask the seller to agree to that arrangement in writing.
Negotiable terms can also give you leverage over other potential buyers. For example, if you know the home you want has multiple offers on it, paying your own closing costs could make you a more attractive buyer. But if the home has been sitting on the market for a few months, this may be a good sign that you can ask for more.
5. You don’t have to borrow the maximum amount a lender offers
When thinking about buying a home, keep in mind that your monthly mortgage payments should be affordable for the foreseeable future. One way to ensure this is to avoid accepting a lender’s maximum offer if doing so means you can’t comfortably afford the loan’s monthly payments.
While a lender reviews your debt-to-income (DTI) ratio, income, and debt when calculating your maximum loan amount, it doesn’t consider your everyday expenses. As a result, it may approve you for a loan that’s more than you can afford. Because of this, it’s critical that you crunch your own numbers so you can find a home that fits your budget.
You should also consider your down payment amount before buying a house. The higher your down payment, the lower your monthly mortgage payment will be. Another benefit is that if you put down more than 20% on a conventional loan, you can avoid paying private mortgage insurance (PMI).
The downside to making a large down payment is if you don’t have a large cash reserve, you’ll likely have less money to cover unexpected expenses.
What to do before buying a house
Here’s a quick checklist of items to tackle before you buy a home:
- Get your credit score in order
- Review your credit reports for errors
- Improve your debt-to-income ratio
- Calculate how much you can afford for a down payment
- Get preapproved for a mortgage
- Find a real estate agent
- Evaluate the condition of your local real estate market
Ready to buy a home? Contact a local Finance of America Mortgage Advisor today to learn about your home loan options.