Let’s say you look at all the facts and decide that now is the time to buy a home. Great. But before you take steps for buying a home remember that it’s best to look before you leap. Here are the 7 crucial steps you should take before you buy your home:
1. Credit Report
Get your credit report and make sure to clean up any errors. This is easy to do and there is really no excuse for ignoring this step. You can even get your credit report for free. The reason this is so important is because your credit score will determine how willing banks will be to give you a mortgage. And it goes beyond that. With a good credit score, your real estate agent will have a lot more bargaining power with potential sellers. Make sure you do everything in your power to have the highest credit score possible.
The major complaint folks have against signing up for “free credit reports” is this. When you sign up for most services, you are really only getting a “free trial”. If you don’t cancel, you get reamed. Here is a great new service that is free 100%. You can get a free credit report without using your credit card or signing up for any free trials. I use this service as a credit monitoring service and I love it.
Today you can compare home prices, schools and neighborhoods right from the comfort of your own home – so do it. You might be enticed to buy a large home with a low price tag but slow down. Can you really afford that house? And even if you can, what are other houses selling for in the area? Why is this house so cheap? What is the neighborhood like? Check with the local police and get crime statistics. Do some research on the city. Is it solvent? Are property taxes bound to skyrocket? Compare those numbers to other areas. Also be really sure the house is a good fit for your family for the long-run.
I made the mistake of buying a house that was perfect – except it was just too small for our family at the time. Had I slowed down (and listened to my wife) I could have avoided making that error. We ended up moving again within 18 months and needlessly wasted thousands of dollars as a result. Please don’t repeat my mistake.
Slow down. Don’t jump on a deal just because you think it’s great. Do your research and confirm it. Don’t worry, if you miss this opportunity; there will be others.
3. Know how much mortgage you can afford.
You would be surprised at how many people tell me they are going to buy a house and they have no idea how much house they can afford. I can understand why – the calculation is something they don’t do every day.
But let not your heart be troubled. You can either figure this out for yourself or let your real estate agent do it for you. Simply tell her how much you have for a down payment and how much you can afford for your monthly payments.
Beware. Most real estate agents will try to get you out of your comfort zone and try to wedge you into buying more than you can afford. Understand that the more you spend the more they make. But don’t fall for it. Nobody ever went broke by having a smaller house than they could afford. My advice is to only buy a house that is comfortable to make payments on.
4. Know the true cost of owning a home.
When you own a home it costs you more than simply your mortgage. There are repairs, taxes and insurance. While taxes and insurance are easy to determine, repairs are not. You may go years without any major problems and then your roof, air conditioner and water heater will all go out in the same month!
I suggest that you put aside 2 months mortgage for repairs as a very broad rule of thumb. That means, if your mortgage payments are going to be $2,000 a month, put aside another $4,000 a year for unforeseen emergencies. That adds another $350 a month to your cost of ownership. Make sure to include that amount in your monthly budget.
While we’re on the subject of cost of buying a new home, make sure to do some ciphering on the cost of new furniture and landscaping. When people move they often need to deck out their new digs with the latest bling furniture. Get realistic estimates and make sure you have the money for those furnishings. The last thing you want is to live in a great new home but have no money to buy the appropriate furnishings.
5. Shop for a real estate agent.
This is critical. Don’t just rely on a friend’s recommendation or a friend who is a broker. This is not a personality contest. Interview the agent to make sure she is going to work for YOU instead of trying to pressure you into buying something that isn’t appropriate. If you talk to 4 or 5 you’ll get a feel for who you feel comfortable with. Make sure there are no complaints against the agent and that he or she is active and a full time real estate professional.
Consider how long you are going to stay in the home and if it will really meet your needs over that period. I gave you an example of what it cost me when I failed to take this step. What a pain. Every move you make costs you roughly 8% of the value of your home. With real estate prices stable or declining you can see how important it is to minimize the number of times you relocate. If your situation is not stable consider renting and/or buying a home as a rental rather than living in it yourself.
7. Income Dependability
Before you make a major commitment like a home purchase you should consider how stable your job is. This is plain common sense but people often overlook this issue because they get caught up in the euphoria and emotion of the moment.
Obviously there is no way to guarantee what’s going to happen to your job but at least consider the issue rationally. Have there been any signs of instability at work? Are layoffs in the offing? What’s been happening in your industry as a whole. Think like a business owner and talk to your boss to get a sense of the direction of your firm.
What other steps are important to take before buying real estate?