5 Things to Do Before Buying a Home
First-time home buyers usually have a lot of questions about the home buying process, and rightfully so. It can seem overwhelming if you've never been through it before. Where do you even begin?
Have no fear. Below, we've outlined some of the most important preliminary steps you should take, before entering the market.
5 Things to Do Before Buying a Home
Your home buying experience may differ from the one outlined below. For instance, if you're paying cash and don't need a mortgage loan, steps 3 and 4 won't apply to you. With that being said, most home buyers will benefit from following these five preliminary steps.
1. Check Your Credit Reports and Scores
Mortgage lenders use credit reports and scores to see how you have borrowed and repaid money in the past. Your credit reports are basically a history of your past borrowing activity. Your credit score is a three-digit number that's derived from the information within your reports.
According to industry experts, home buyers generally need a credit score of 580 or higher to qualify for a mortgage loan, and 750 or higher to qualify for the lowest interest rates. But these numbers are not set in stone.
You can order order your credit reports online, for free, by visiting AnnualCreditReport.com. You can obtain your credit scores from myFICO.com, for around $20 per score. Check your reports for errors, and have them corrected if you find any mistakes. Check your scores to see where you stand in terms of mortgage qualification.
2. Determine Your Budget
Mortgage lenders cannot tell you where your financial comfort zone lies. That's not their responsibility or their business model. The only thing a lender can tell you is the amount they are willing to lend you. You should determine your home buying budget for yourself, before you start talking to lenders.
Start by taking a good, hard look at your net monthly income (a.k.a., take-home pay), and your recurring monthly expenses. Subtract your expenses from your income, and work down from that number to determine your maximum mortgage payment amount. And don't forget to leave some emergency funds in the bank.
3. Research and Choose a Type of Mortgage
Do you know the difference between a fixed-rate mortgage and an ARM? If not, you've got some homework to do. The key to success when choosing a mortgage is to consider your long-term plans and find a loan that matches those plans. To do this, you must learn the pros and cons of the primary loan types.
Fixed-rate home loans are generally best for people planning to stay in a home for a long time. Adjustable-rate (ARM) loans might offer savings in the short term, but are less predictable over the long term.
4. Get PreApproved for a Loan
Preapproval is when a mortgage company reviews your financial and credit history to determine your "creditworthiness." When you get preapproved for a certain loan amount, there's a good chance you'll receive a final approval for that amount as well (though it's not a guarantee).
Having a preapproval letter in hand shows sellers that you're serious about -- and capable of -- buying their home. And this goes a long way, especially in a competitive real estate market.
5. Find a Real Estate Agent
It's always a good idea to hire a professional real estate agent when buying a home. When you compare the standard agent commission to the size of the investment you're making in your home, you'll see the value and reason in hiring an agent. And remember, the agents' commissions are usually paid by the seller, out of their proceeds. So there's really no reason for you to fly solo.
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