Prospective homeowners often ask me what they can do to buy a home – and get into the house of their dreams quickly.
Frankly, not everyone should buy a house. There are lots of rights and responsibilities that go along with homeownership. And as I explain in my book, Your First Home, if you’re not adequately prepared to handle a home you could be setting yourself up for a big financial catastrophe.
Still, I recognize that many of you aspire to achieve this part of the American Dream – having a place you call your own.
So rather than tell you “go read my book,” – which would definitely help you! – I thought I’d share 10 practical tips to help would-be homeowners prepare to buy a home this year.
If you can’t do these 10 things, trust me: you’re better off postponing your homeownership plans until you’ve sufficiently prepared for this major financial milestone.
1. Get your current FICO credit score.
I’m not talking about the score you got last year or even the credit score you obtained last month. What’s your score today? You need to know that information if you’re serious about house-hunting and are planning to buy a home anytime soon.
Keep up-to-date tabs on your credit score by monitoring your credit throughout two critical phases: the planning process and home-buying process itself.
2. Educate yourself about mortgages, then select a good mortgage lender.
Don’t just pick a mortgage lender based on who’s offering the lowest interest rates. Rates change every day, so relying solely on rates isn’t a sound strategy.
Instead, choose a lender that specializes in the type of loan you need, as well as a lender that won’t shy away from your particular credit profile. Also go with a lender whose overall fees are reasonable.
If you don’t know which lenders fit this profile, you haven’t yet done your homework. If you don’t know what fees various lenders charge, you’re also in the dark about basic things like getting a good faith estimate – a critical step when you’re comparison-shopping among lenders.
Likewise, if you’re clueless about whether you need a fixed-rate or adjustable mortgage, you’re unsure about the differences between FHA loans and conventional mortgages, or you don’t know whether you need a loan with or without mortgage insurance, go back to square one and better educate yourself about mortgages and the mortgage-lending process.
Otherwise, you risk being taken advantage of by a mortgage lender – or simply going with a lender that’s not optimal for your situation.
3. Figure out how much house can you really afford.
Don’t use some of the crappy online calculators you might find on the Internet. Some home calculators are good, but many are not. The bad ones only tell you about what a house payment is going to be based on the price of the house and the downpayment you have. But good calculators will factor in contingencies and let you run multiple “what if” scenarios.
Very few calculators will take a holistic look at your finances. Lots of mortgage professionals won’t do this either. But only you know whether or not your current income is likely to remain relatively stable in the future based on your own personal or family choices.
For example, only you know if you’re planning to have a baby in the next year or two – or whether or not you already have one on the way. Such a major life event will change your finances dramatically. So you need to be conservative in estimating how much house you can truly afford.
To do it right – or at least get a more realistic picture – try this trick: take the typical online calculator, or the standard affordability advice offered by a mortgage rep, and then slash about 25% off that figure. The end number will probably produce a far more realistic assessment of what you can afford – especially because unexpected things happen in life.
4. Consider house location very carefully.
I’m not talking about that old real estate axiom: “location, location, location.” It’s a given that you want to live in a nice neighborhood. Who’d want to live in a lousy community or on a trashy, ugly block?
I’m asking you to consider this question: how far are you willing to drive to work to have the home of your dreams? Realtors and real estate agents have a saying called: “Drive ’till you qualify.” It basically means: go out further, perhaps much further than you’d previously anticipated, until you can qualify for and actually afford your dream home – all without cramping your budget.
The fact is: the closer you are to easy transportation, attractive amenities and access to major work areas, the higher home prices tend to be. So if you sacrifice some of that convenience, you can likely find a cheaper home.
5. Do the breakup test.
If you are married or have a partner, figure out, realistically, whether you could still afford the house on your own if your spouse or significant other packs their bags and leaves. In other words, could you comfortable buy this home and pay for its ongoing costs on one salary? Be honest with yourself about this.
6. Act like Nostradamus.
Nobody has a crystal ball, but how far into the future can you predict what your life will look like? Is that biological clock ticking? Are you planning to go back to grad school, or are you looking to tie the knot or start your own business in the next few months or in a year or two? Any of these are major, life-changing events — and they all come with a significant financial cost.
If your life will likely go through a major upheaval in the not-too-distant future (i.e. a few months to a year or two), think through whether this year is truly the optimal time to buy a house. It may well be. But then again, it could be a disaster in the making – personally, financially and professionally if your timing is just dead wrong.
7. Go beyond having a PITI party.
Realtors and mortgage professionals love to make you think a home is “affordable” if you can allegedly afford the four primary costs associated with a house: Principal, Interest, Taxes, and Insurance, or PITI.
Well, before you have a PITI party and start celebrating how big a mortgage you can qualify for, put your practical hat on and think about the true cost of homeownership. I tell people: “It’s a pity it’s not just PITI.” And what I mean by that is that you must calculate the real cost of homeownership because it goes way beyond Principal, Interest, Taxes, and Insurance.
These are just some of the expenses you can incur when you buy a home: appliances, carpets, flooring and rugs, furniture, gardening supplies, home improvements (additions, renovations and upgrades), lawn care, lighting fixtures, maintenance, moving costs, repairs, supplemental insurance (earthquake, flood, hurricane or tornado coverage), utilities, and window treatments
Do you get my point? Being a homeowner is expensive – so don’t kid yourself about the immediate and ongoing costs of homeownership.
8. Take a stress test.
Read at least 3 articles about why you absolutely should NOT own a home. Do a Google search; you’ll find plenty of arguments against homeownership, like this one.
Bottom line: a lot of homeowners who bought houses in the past regret their choices. Many are now thinking renting would have been smarter and less stressful than big homes and white picket fences.
After reading these articles ask yourself: are you still convinced homeownership is right for you? If so, carry on. At least you’re going into homeownership with eyes wide open.
9. Get your financial records in order.
If you need a loan to buy a home – and who doesn’t these days? – get ready for what some homebuyers describe as the inquisition of their lives. There will be documents galore to turn over a lender: income and bank statements, W-2 forms, paycheck stubs, and more.
Also be prepared to explain everything: like that large deposits that went into your bank account last month. Bankers don’t like to see big, unusual deposits, because they think you may have gotten money from a relative or friend to use as the source of funds for a downpayment or closing costs.
Mortgage lenders want you to put up your own money and be fully vested in homeownership….which leads me to my last tip: about cold, hard cash.
10. Know exactly what’s in your financial war chest.
Remember, the goal of homeownership isn’t to barely get approved and struggle to make it to the closing table, just so you can get the keys and say “Yes! We made it!” –even as you stumble into a new house totally broke.
That’s a hollow victory and you’ll soon regret your homeownership decision. Instead make sure your cash is in order before you buy. Do you have the funds for an adequate down payment? Will you be able to pay closing costs without liquidating all your assets? Will you have a cash reserve and a decent cash cushion left over after you get into the house? If you can’t answer “yes” to all these questions, then wait to buy.
I called my book Your First Home: The Smart Way to Get It and Keep It for a reason: Even though it may seem like I’m down on homeownership, I’m really not. I’m a big believer in people buying homes, and I love to encourage prospective homeowners and help them meet their goals.
But I also know that going into homeownership before you’re really ready is a recipe for financial ruin.
So if you can get a house this year, kudos to you! But if you can’t, there’s no shame in renting until you’re ready. After all, when you finally are ready to buy, you’ll be a happy homeowner, not one who is constantly cash strapped and certainly not one who winds up in foreclosure.