Owning a home is the American dream — especially if you’re stuck every month looking for ways to pay the rent. But securing home ownership can be a process.
Whether you want to purchase your first home or an investment property, you’ll need to do these things first.
The sooner you start preparing, the better. You might discover that there’s more work to do before you buy.
Check your credit score
Your credit score can determine your interest rate, what type of mortgage you qualify for, or if you qualify for one at all.
The most common mortgage loans require a credit score of at least 620. However, there’s still no guarantee you’ll qualify if your credit score is close to this number.
If your credit score hasn’t yet reached the minimum requirement, there are things you can do to improve it, but it can take some time.
Paying all your bills on time, keeping your credit utilization low, and leaving accounts open can all raise your score.
Pay down debt
Carrying debt can impact your credit score, but it also affects your debt-to-income ratio. Mortgage lenders use this ratio to determine if and how large of a mortgage you can afford.
If your debts are too high compared to your income, a lender might offer or lower mortgage. They could also deny you a loan entirely.
Lenders will also consider expenses such as other mortgage payments, loans, credit card debt, and even child support obligations.
Review your work history
Lenders are hesitant to grant mortgage loans without a solid work history and might deny you if you haven’t worked consistently for the past two years.
If you’re self-employed, you should have documentation ready that proves your income for the past two years. Other areas of concern include frequent job changes and a substantial change in income.
It’s still possible to qualify for a mortgage if you’ve been self-employed for less than two years, but lenders will consider your work history for the prior year.
Talk to multiple lenders
You don’t want to pay more than you need to for your home. It isn’t necessary to settle for the first mortgage loan a lender offers. One might provide you with a better offer than another.
The Federal Trade Commission (FTC) suggests considering more than just the interest rate and monthly mortgage payment when comparing offers.
Calculating the APR — which factors in things like mortgage insurance — will help you better decide which is the best deal.
Pro tip: To learn more about your options, check out our list of the best home insurance companies.
Getting pre-approved for a mortgage will help you make the best decisions for your situation.
You’ll have an idea of what size mortgage you qualify for, which will assist you in looking at the most appropriate properties. A pre-approval letter could also boost your odds of having an offer accepted.
Landing a pre-approval is not a guarantee your lender will approve the final mortgage, however. Your letter has an expiration date.
You'll need to contact your lender with updated information if you do not find a home before the pre-approval expires.
Save for a down payment
Purchasing a home requires placing a down payment. Conventional mortgages typically require a down payment of at least 3% of the property’s value. So if the home’s value is $300,000, you’d need a down payment of $9,000.
Because you will pay interest on the amount you borrow, borrowing less means more savings for you in the long run. If you can afford a larger initial payment, you should consider putting down more money.
Create a budget
Creating a budget now can help you meet all the necessary steps before you buy a home. To meet your down payment and closing costs, you might need to save for months or years.
If you determine how much you need to save, you can begin working toward your home-buying goals.
Paying down your debt and raising your credit score can involve additional expenses. If these areas still need work, consider saving money to accomplish these goals first.
Know the value
A home’s list price doesn’t always reflect the home’s value. It isn’t uncommon for a seller to list a home above or below the dollar amount they will accept.
Understanding the difference between the two can prevent you from making an offer that is too high or too low.
The home's value depends on several factors, such as the current market and the property's condition.
You should also consider how well you like the home and the seller’s position. Homeowners wanting to sell quickly might accept a lower offer.
Factor in extra costs
In addition to a down payment, you could face other out-of-pocket expenses. You’ll pay closing costs once you purchase a home and have the title transferred.
These costs usually range from 2% to 5% of the home price.
You’ll also want to pay for a home inspection to ensure that there are no major issues with the property.
If the home needs repairs or you want to renovate, factor those costs into your budget. Moving fees can tack on additional expenses as well.
Get referrals from friends
A major component of getting the best deal on a home is choosing the right real estate agent. With so many options, referrals from family and friends will help you pick one you can trust.
Find out which agent your friends or neighbors used in the area where you want to purchase and ask them about their experience.
A good real estate agent should simplify the home-buying process and work to get you the best price on the home you want.
Make a list
Making a list of your must-haves will make your home shopping experience easier. There’s no point in looking at properties that don’t meet your minimum requirements.
It can take time away from looking at the right ones, and someone could make an offer on your dream home before you even find it.
Things to consider for your list include what you can afford, your desired location, and whether you want something turnkey or a fixer-upper.
If you don’t want to make any renovations, the number of bathrooms, bedrooms, and the layout are things you should focus on as well.
Buying a home is one of the most significant investments you’ll make. It’s a complicated process and takes a lot of planning.
The sooner you begin preparing, the sooner you can achieve homeownership. It can sometimes take a year or longer to find and close on a home.
Making sure you have everything in order by taking these steps can prevent unexpected delays.
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