For most of us, buying a home is the biggest purchase of our lives — and the process is far from simple. Here are nine steps to take to make sure the home you buy is one you can afford:
1. Check your credit score and look at your cash flow.
Start by checking your credit score. "The higher your score, the better the interest rate on your mortgage will be," writes Ramit Sethi in "I Will Teach You To Be Rich." Good credit can mean significantly lower monthly payments, so if your score is not great, consider delaying this big purchase until you've built up your credit.
As for monthly payments, personal finance experts say a good rule of thumb is to make sure make sure the total monthly payment doesn't consume more than 30% of your take-home pay.
It's also to your advantage to plan on being in this home for a while — at least 10 years, Sethi recommends. "The longer you stay in your house, the more you save," he explains. "If you sell through a traditional realtor, you pay that person a huge fee — usually 6% of the selling price. Divide that by just a few years, and it hits you a lot harder than if you had held the house for ten or twenty years." Not to mention, moving costs can be insanely high.
2. Have cash for a down payment.
Technically, you don't always have to put any money down when financing a home today, but if you can't afford to put at least 10% down, you may want to reconsider buying, says Sethi.
Ideally, you'll be able to put 20% down — anything lower and you will have to pay for private mortgage insurance (PMI), which is a safety net for the bank in case you fail to make your payments. PMI can cost between 0.3% and 1.50% of mortgage, depending on the size of your down payment and your credit score.
3. Plan for the surprise expenses.
Even if you can afford the monthly payment, be aware of hidden costs. Buying a home means property taxes, insurance, and maintenance fees that can add hundreds of dollars per month.
Check out the New York Times' "Is It Better to Rent or Buy?" calculator, which factors in things such as maintenance, renovations, closing costs, taxes, inflation, and cost of buying and selling, to help you decide whether renting or buying makes the most sense for you.
4. Get pre-approved for a mortgage.
Once you've aligned your finances and have decided investing in a home is feasible, determine how much you can afford to spend and stick to that limit.
David Walker and Philip Lang, cofounders of full-service real estate brokerage TripleMint, recommend getting a pre-qualification letter from a mortgage lender before house hunting, which demonstrates to you, your realtor, and to sellers how much you can afford. When considering multiple offers, sellers will likely make an offer to those with a pre-qualification letter before those without one.
To apply for pre-qualification, you'll have to find a lender — either the bank or a mortgage broker. Compare offerings from the bank and a few mortgage brokers before settling on the right lender for you. Remember, though: You don't have to spend every cent for which you're approved. It's generally good practice to aim for a home that costs less than the maximum amount for which you qualify.
5. Find the right real estate agent for you.
"Look for a real estate agent who aligns with your goals. That's going to yield the best results for you," emphasizes Walker. "If you're an investor buying an investment property, you might be looking for a different personality trait and a different type of agent than if you're buying a primary home and the most important thing is school district."
Meshing with your agent, and making sure they understand your needs, can pay large dividends in the long run. "We've seen huge success with agents who are paid in bonus based on client satisfaction and not just commission. It completely changes the dynamic," says Walker. "Find a real estate agent that puts client satisfaction as the top priority."
You're going to be spending a lot of time with them, so it pays to put in the time and effort to find the right agent. Reach out to friends for recommendations, and interview several options over coffee to determine their level of experience and expertise in the neighborhoods you're interested in.
6. Start hunting for places within your price range.
Start off by determining your general needs — where you want to live, how many bedrooms and bathrooms you need, and certain school zones you're trying to be in.
Then, become your own expert, says Lang: "Technology has empowered people like never before to do a lot of the searching online, and to really understand the market before actually going out in person. For the type of person who's really active in their search, it has never been a better time to find a home. The data is out there. You can really become your own expert on the market and the inventory."
Zillow.com provides homes prices all over the US, and Insure.com will give you home insurance quotes and let you comparison shop.
Also, check for perks with the government and your employer. Many states offer benefits if you're a first-time home buyer, and some employers will offer special lower rates for first-time buyers.
7. Look at floor plans before going out to see the properties.
Don't be fooled by photos, Walker and Lang emphasize. If you see photos of an apartment or home and the blinds are closed, chances are the view is not great, they explain. Additionally, certain camera lenses can make spaces look much bigger than they actually are.
"A floor plan never lies," says Walker. "When you're buying, you're going to make that space your own, so it's important that the floor plan and layout — the physical space — works for you."
If it will work, then take the time to go out and look at properties in person.
8. Put in an offer you're comfortable with.
You want to make sure the home meets your basic requirements before putting in an offer. "Buying a home is a very emotional process," warns Lang. "It's important to remain rational and stick with your price limit while buying. A lot of times people get caught up in bidding wars, and will go way over what their price needs to be because they love the house so much."
If you've found the right one, make your bid quickly. There may not be much room to negotiate or drive the price down, as you'll likely be facing competing offers. "What people are competing on is who is most qualified to buy it," explains Lang. "It's not always the highest price offer that gets accepted. Sellers are really looking for certainty of close, so if you can provide the most certainty of close to that seller, they're more likely to accept your offer."
If the seller accepts your offer, you will enter contract before closing, and the deal will be contingent upon you securing a loan with your lender, getting the home inspected, and doing a walk-through inspection 24 hours before closing.
Be prepared for closing costs such as appraisal fees, attorney fees, title insurance, property transfer taxes, and inspection fees, which can add up to be about 5% of the mortgage amount.
Closing customs will vary depending on the state you're buying in, which your real estate agent or lawyer will be able to explain to you.