"Willing" to buy a house and “being able” to buy a house are two completely distinct things.
It is found in a study that 56% of millennials believe owning a house is more important than clearing off debt or retiring comfortably. They may want to buy a house but they might not be able to.
Even as many are still wishing to achieve their American dream of buying a house, that doesn’t mean everyone is financially prepared.
Here are a few things you need to do before buying a house:
Pull your credit report and check your credit score
Your credit report and corresponding score are golden cards to buying a house. They give you an idea about your creditworthiness. Your credit score can severely affect your mortgage rate. The higher your credit score, the lower your interest rate can be. This means you will end up owing a lesser amount of money over the life of the loan.
Your credit score is broken down by:
- Payment history: 35 %
- Credit utilization: 30 %
- Length of history: 15 %
- Types of credit: 10 %
- New credit: 10 %
Tip: Avoid taking new credit within a span of a year of buying a house since it can cause a brief dip in your score. The time of your credit history matters, too.
Evaluate your budget
If you are working on a clean bill sheet of credit health, give your budget a tough assessment. Use the 28-36 rule to understand where your money is going. This is when your maximum household expenses should not exceed beyond 28 % of your gross monthly income. Your bill, like credit cards and loans, should not exceed 36%.
Your debt-to-income ratio is important to lenders for determining how many homes you can afford, and if whether you a good applicant to receive a mortgage. You might feel you need to make some more adjustments, like consuming less on travel and clothing.
Proper planning of your budget will help you put extra cash towards a down payment, closing costs, or maybe higher home costs than you are currently paying.
With a cosmic credit score and a strong down payment built up, you might feel convinced to buy the house of your dreams. But until you get pre-approved, that home will stay in your dreams.
Getting qualified in advance is good, but it’s not the same thing. A prequalification is only based on the information you give a lender. A preapproval is a complete mortgage application that checks all your financial records.
Lenders base how much money they’re willing to give you based on your entire financial existence: your income, debt, and credit history all play a crucial role. But it’s also there to show you how many homes you can manage.
Raise your down payment
Down payments for homes and cars are pretty similar: the higher the down payment, the lesser the interest rate. But homes are much more costly, which means the more you can put through your down payment, the better off you will be every month.
It can be hard to keep saving money for a down payment, when trying to support your basic necessities at the same time. Try cutting down on unnecessary expenses. Make larger debt payment every month until it is completely paid. Then the money you were spending towards your debt can now go to your down payment fund.
Get a real estate agent
Whether you are finding a home 200 miles away or 2 miles, it is always better to find someone who knows the neighborhood better than you do.
A real estate agent is on the quest for your best interest because they want you to find your dream house and buy it. Agents get their own share of commission after a house is sold, so you don’t have to worry about the cost.
Not all realtors are good at their job. So if you’re on a hunt for a great one, do your research. Look for one with top-notch credentials and a good track record. It is as though you are interviewing someone for a job, so speaking to a potential agent’s former customers may help you determine if they are the right fit for you.
Don’t skip on an inspection
You might think getting a home inspection is a waste of money. After all, you checked the house by yourself and you would have spotted major issues if they were any. Although you can spot the big problems, but what about the little ones?
Home inspections go over every minute detail of your house, from walls and appliances to the roof and drainage. Getting an inspection done is a major part of buying a home because if there is any, a kind of leak, you can take this matter back to the seller for negotiation. Either they fix the issue before you buy it or they lower their price of the house to accommodate the cost of fixing the leak.
Have an alternate plan
As you have prepared for your future house, you might have not thought about what might happen if it doesn’t work out. What if your down payment is a little not up to the mark? What if you don’t get the lender with the terms you expected? What if your dream house has an old roof?
Regardless of the difficulty, build in an alternative option into your plan. What if things don't work in your favor, what will you do?