Whether you are a first-time home buyer or an experienced homeowner, buying a new home is always stressful. Here’s a handy checklist of five things you can do up front to make the process a lot easier. Before you start packing (please!), here’s what you need to do:
1. Prepare a budget.
You need a clear picture of your family’s finances before you even think about calling a Realtor or applying for a mortgage. A basic budget will include all sources of income, as well as a list of all expenses and debts. List all your monthly fixed expenses, such as car payments, current rent or mortgage, utilities, school tuition, and loan payments. Don’t forget those pesky credit cards or any other debts! Then add categories for other expenses such as food and entertainment. As Brian Buffini and Dave Ramsey both agree, a budget is key!
2. List your debts.
This should have really been done in step 1, but if you forgot, go and do this now. If you have existing credit card debts, student loans or other debts that require regular monthly payments, get them down in black and white so you know exactly how much you owe. Figure out your debt ratios. (Hint, if you need help, there are plenty of online calculators that will do this for you.)
You need to know three ratios.
–> Your housing debt expenses (including taxes and insurance) as a percentage of your gross monthly income. This should be around 25-28%.
–> Your installment debt ratio (credit cards and other consumer debt) should be around 10-15%.
–> Your total debt to income ratio should not be more than 40%.
If you would like another way of thinking about this, start by entering your income and debts here, and then use the “How Much Home Can I Afford?” Calculator.
3. Get pre-approved.
#1 and 2 above are important because you want to get pre-approved for a loan before you start shopping. This is an important safeguard not only to keep you from falling in love with something you can’t afford but also to show the prospective seller that you indeed have the funds and qualify to purchase their home.
Pre-qualification is when a lender evaluates information about your overall financial picture (like your debt, income, and assets), and then gives you a ballpark figure of the mortgage amount for which you could qualify. This can be done over the phone or online, usually at no cost.
Pre-approval, on the other hand, means that a lender evaluates your debt ratios, your credit report, and your overall ability to repay a loan and says, “Yes, I would loan this buyer X number of dollars to buy a home.” Having a pre-approval letter in place is KEY before starting to view homes (especially in the West Michigan real estate market) because you’ll want to submit a pre-approval letter with any offer for a competitive edge.
4. Make a list.
Before you begin working with a Realtor, you need to make a two-column list of needs vs. wants. Be sure you know the difference! You need three bedrooms versus you want a swimming pool. Please be very upfront with your Realtor about exactly what constitutes a deal-breaker in your purchasing process. (And sometimes you’ll find that out along the way, and that’s okay too!) If more than one person is involved in making the final decision, be sure that you both are on the same page. (This is important!) If one spouse wants a short commute and the other has visions of a country estate, you could have a problem. Resolve these issues ahead of time. Your Realtor will want to have an initial buyer consultation with ALL decision-makers, so make sure you’re on the same page, partner to partner.
5. Find a Realtor.
Once you’ve done your homework, it’s time to start looking for a pro to help guide you through the next steps. You want to find a Realtor who represents you and puts your interests first. Chemistry is important. Look for someone who is committed to meeting your needs and who knows the area and price range you’re looking in. Don’t know where to start? Give me a shout or read my client testimonials. I guarantee no one works harder for YOU!
Bonus – If you’re not sure where to start with the lender process, I’m happy to help earlier on in your home buying process, as well! Getting a local lender is key and I’m happy to direct you to a few local experts that I know and trust.
Buying a home could well be the single most important decision you will ever make, both financially and emotionally. However, if you do your homework and prepare thoughtfully for the process, it can also be a fun and rewarding experience. Happy hunting, and if you have ANY real estate questions for your local West Michigan pro, hit me up!