Many people start their home search immediately after making the decision to buy.
It’s understandable — looking for a new home is exciting, and the anticipation can be hard to ignore!
But if you’re thinking about buying a home, know that you can position yourself much more favorably to mortgage lenders and home sellers if you’re fully informed about what you want and what you can afford.
- Buyers should assess their full financial situation before they start their home search.
- Getting pre-approved for a mortgage tells buyers what they can afford and makes them more reliable from a seller’s perspective.
- Living expenses vary by location and are important to take into account when budgeting for a new home.
- Buyers should know their must-haves and must-have-nots to avoid wasting time during the home search.
Your Current Financial Situation
Before you begin your home search, you want to know everything about your current financial situation. The more you know, the better prepared you are to get approved for a mortgage and look for homes that are financially realistic for you.
It also helps you avoid disappointment down the road. There are a lot of factors mortgage lenders take into consideration when they’re making your loan decision, and it’s much better to improve your outlook before you even start the process.
Here’s what you want to know about your financial situation:
- Income – How much money do you currently make and dependably count on? Your mortgage lender will want to see a steady and reliable stream of income before you purchase a home.
- Savings – How much money do you have separated into a savings account? This affects the potential size of your down payment and your safety-net fund (you should be able to afford at least six months of home expenses in case of emergency).
- Credit Score – Lenders are definitely looking at your credit score. Ideally, you should have an established credit history and no (or very minimal) derogatory marks such as late or defaulted payments.
- Debt-to-Income Ratio – Your debt-to-income ratio compares your recurring debt expenses to your monthly income. DTI requirements vary by lender but are generally expected to be around 30% or lower.
- Employment History – Lenders take your employment history into account when determining the dependability of your income. While it’s not required for you to have held the same job for years, a very recent job change may concern lenders.
Know the 5 C’s of Good Credit to get an idea of how you’re lender will take a big-picture look at your financial situation:
Your Home-Buying Budget
Once you have a full picture of your financial situation, it’s time to get pre-approved for a mortgage.
It’s important to get pre-approved before you start seriously looking at homes because, without pre-approval, you don’t really know for sure what you can afford. You definitely don’t want to experience the heartbreak of falling in love with a home only to find out it’s outside your price range.
To get pre-approved, you have to apply with a mortgage lender. You can apply with multiple lenders, and it’s recommended that you do in order to get the best possible loan. Many people use their personal networks or real-estate agents to get lender recommendations.
Once you have your pre-approval, you’ll know exactly what your home-buying budget is and you’ll be a more attractive buyer since sellers will see that the mortgage is more likely to go through.
Once you know your direct home-related expenses (mortgage, insurance, taxes) you want to think about your living expenses so that you can account for them in your overall budget.
Your exact living expenses depend partly on your location since the general cost of living varies by region. When you’re thinking about the cost of living, think about:
- Home expenses (mortgage, insurance, taxes)
- Food and clothing
You also want to keep in mind anything else that you personally spend money on. If you have a pet, include your pet expenses. If you always go on two vacations every year, include those in your budget.
You may be able to eliminate some optional expenses when you need to, but the goal is to be as inclusive as you can at the start. That way, there are no surprises later on and you’re never left unable to cover your required expenses.
One good rule of thumb is the 50/30/20 rule: 50% for your needs, 30% for your wants, and 20% for your savings.
Manage Your Money Using the 50/30/20 Rule
Know your must-haves before you start looking at homes. When you do, you avoid wasting your (and your real estate agent’s) time on homes you’ll never purchase.
Your must-haves are different from your wish list items. Must-haves are things you absolutely can’t live without in your new home, and your wish list items are things that would be nice to have but aren’t necessary.
People tend to think a lot more about what they do want, but your must-have-NOTS are just as important to know when you’re looking for a new home.
Maybe you are totally opposed to living on a busy road, or you absolutely do not want a pool in the backyard for safety reasons, or you hate split-level layouts and would never buy a home with one.
Whatever your must-have-NOTS are, you should know them too before you start looking for your new home.
Get Ready to Buy!
An informed buyer is always in a better position to find and close on a home they love. You’ll also enjoy the process more when you’re prepared.
If you are ready to start your search, Oberer Homes can help you find the perfect home for you.
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