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family dreaming of new homeDetermine What You Can Afford

While it’s exciting to start shopping for your home, do your homework first prior to searching. Knowing what you can afford is a first critical step that should never be skipped. It’s a great disappointment to find that perfect home only to find out that you’ve wasted many hours pursuing something you won’t be able to finance.

As a general rule, your house price should be two to three times your household’s annual income with payments not over 28% of your total monthly income. Adjust these numbers based on your budget and spending habits that will be in place once you own your home. For example if you live frugally, you may be able to afford more. If you are paying for private tuition in an expensive school, you should lower this percentage.

Examine what you expect your budget to be like after you own your home. You should be able to save money after paying for your new home and considering the changes in expenses and income. You will be responsible for things like broken pipes and other unexpected mishaps, so make certain you can create a reserve for these unexpected items.

Locate A Mortgage And Get Pre-Approval

Check your credit reports and clean up any misinformation. Know your credit scores and do what you can now to improve them.

Choose a lender that answers your questions quickly. How long will the process take? What information will you need to gather and provide? Check reputation and rates. Some banks will only accept customers with high credit scores so finding the right mortgage lender for your situation will save time. Ask up front if your scores are in their target range. There are other institutions besides your bank that offer reliable mortgage financing.

Mortgages do have different options including the length of the loan. A 30 year term is preferred even if you can afford a 15 year term. You can always pay extra on the principle making the 30 year term shorter, but also have the ability to not pay that extra if you run into financial difficulty.

ARM or Adjustable Rate Mortgages have payments that can increase over time. These can work out if you plan on selling the property prior to any rate increase. When reviewing this type of loan, consider this increase and how it will affect you in case you end up holding the property. If you are approved for a higher amount than you determined you could afford, don’t rush into it. You’ve determined what is affordable. Don’t deter from that limit without serious consideration.

Do A Financial Trial Run

Do a budget as if you are already living in the home. What new expenses will you have such as water and sewer, heating, transportation, etc.? What expenses are no longer issues? Are there things that you can give up to be able to afford your dream home?

List Your ‘Must Haves’ vs ‘Wants’

It’s doubtful that you will ever find a home within a budget that fulfills all your wants or perhaps even all your needs. Be prepared to compromise knowing that once you own, you are free to improve the home to match your list. Be very careful listing your needs. Make very certain they are genuine needs and not just wants. These lists will help you decide on which home you want when trying to narrow down to a few properties.

An example of a need could be high speed internet because you work from home, otherwise this may likely be just a want and you could settle for a lower speed for personal use.
Items on these lists could include a dining room off the kitchen, size of back yard, number of bedrooms, or proximity to neighbors. Your need list could be 2 bedrooms, but your want list could state 3 bedrooms because you’d like a guest room.

Include the location of things you’ll go to from your new home. How far can the school, post office, grocery store, commute to work, etc., be from your new address? Many of these will likely be a want.

Don’t forget to list any services you must have (in home health care, delivery services, public travel, etc.)

Start House Hunting

Having a Real Estate agent will help immensely in your shopping and buying process. A good agent will know the market and will be able to take your want list to help you narrow down the homes that fit this list. The most important reason to have an agent is that they’ll be able to work through the paperwork and forms needed to complete the final transaction. Knowing which forms need to be pulled, completed, and sent where can be invaluable, especially if you need this process to go quickly and smoothly.

Work with an agent that helps you find houses. If you are doing all the work, move on. This doesn’t mean you shouldn't search as well, but a great agent will work with you in the searching. Remember to keep your needs list realistic otherwise no agent will find your home no matter how great they are. The market may not have any homes that match all your needs, so be prepared to know which items you can compromise on.

Do your research on your favorite properties including visiting the town office, zoning board, etc. If you have any special requirements contact the town office to make certain you are properly zoned for what you plan to do. For example, there may be restrictions or limitations on having a home based business or you may not be able to have that in-law apartment.

Research Home Owners Insurance

You will need insurance prior to being able to purchase any home so start shopping as soon as you’ve narrowed down the list of properties you want to consider. Typical insurance will cover items like fire, damage, and even people injuring themselves on your property but don’t forget that you can add other items such as equipment, expensive jewelry, furniture, and office equipment. Let them know if you are operating a business in your home and if clients/customers will be coming to the home. Look for discounts by combining insurance such a auto with the new policy. The location of the property will likely alter the price quote making this an important part of narrowing down the homes you want to consider.

Put In Your Offer

What price should you offer now that you’ve found your home? Low ball and you could lose out to another buyer or insult the sellers. This is where your realtor can help with some research. Find out what other homes in the area have sold for. Consider how long it’s been on the market and how motivated the seller is to move the property. If it’s a casual seller that just put it on the market to see how well it might sell, you may have to meet the selling price. If there’s a reason why they must sell now, you have more leverage. How quickly do homes of this type sell in this area? If they sell quickly, it’s best to make a higher offer so you don’t miss out on your opportunity. If the market is sluggish, you may want to take a chance on a lower offer.

Review The Contract and Submit Your Mortgage Application

Read the details very carefully and ask questions of your Real Estate agent. Pay close attention to contingencies as these spell out the details of how either party can back out of the contract. For example, you will want to back out of the agreement if major property defects are found in this stage.

Get a home inspection. Never skip this step even if you think you are familiar with the property. An inspection can cost $300 to $1,000 or more but is well worth the relatively small investment to determine if there are any major flaws in the property. This documentation can be used to back out of the contract or renegotiate the selling price. 

keys to your new home

For example, if serious mold issues are found, you may want to move on to the next home on your list.

Sign The Papers

On this big important day, you are entitled to one last walk through of the property before signing all the forms needed to complete the transaction. Be prepared to sign a lot of documentation and don’t feel pressured into rapidly signing everything without knowing what the document is. By this stage, nothing should be a huge surprise but it doesn’t hurt to ask questions to confirm this.

Bring along the requested ID, all the paperwork you’ve generated during this process, and any other requested documents so the process can go smoothly in one sitting. Most signing sessions last for a few hours so plan on ample time to complete everything.

Once everything is done, you are now the proud owner of a new property and a new set of keys!

Resources:

US Dept of Housing & Urban Development https://portal.hud.gov/hudportal/HUD?src=/topics/buying_a_home 

Consumer Financial Protection Bureau https://www.consumerfinance.gov/owning-a-home/ 

IRS First-Time Homebuyer Credit Questions and Answers https://www.irs.gov/uac/first-time-homebuyer-credit-questions-and-answers-basic-information