For most of us, this is the biggest purchase of our lives. Here's how to approach it with sense and confidence.
Shopping for a home brings many surprises. One of those is that buying a home is really two very different jobs: There’s finding the mortgage, and there’s shopping for the house or condo.
Finding the home is the fun part. Mortgage shopping’s more of a slog. You’ll probably want to eat dessert first, but don’t do it. Financially grounded buyers focus first on doing all they can to line up a mortgage, especially finding out how much money they can borrow. Only then do they start shopping for homes. Here’s the right approach:
1. Get your head on straight
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You’ll see something you can’t afford — a bigger home, grander kitchen, better neighborhood, more bedrooms, fabulous design — that will start you rationalizing why you need it and how you can get it. This is normal.
These intense desires, though, cloud buyers’ judgment. Maybe just momentarily but sometimes long enough to cause mistakes with long-lasting consequences — like stretching to pay more than you should, spending too much on mortgage fees and interest, or failing to hold money in reserve for all the costs of owning the home. This is why savvy home shoppers nail down their financing first, before shopping for homes.
2. Pull your credit reports
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The first step in applying for a mortgage is to check that your credit reports have no errors. These could cost you money in the form of a higher interest rate than you’d otherwise get. You can get a free report each year from each credit bureau — TransUnion, Experian and Equifax. Apply for a report from all three, making sure each is error-free. Do it as much as a year before applying for a mortgage so you have time to correct any errors you find. (Errors are more common than you’d guess.)
3. Learn your credit score
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Your credit score is a big factor in determining the cost to you when borrowing money. Mortgage lenders use the score — usually a FICO score — in deciding what interest rate they’ll offer you.
Do this, too, long before home shopping so there’s time to raise your score if it’s low. There are a number of ways to get your FICO score for free. If you find you need to improve it, try these “7 Fast Ways to Raise Your Credit Score.”
4. Consider renting vs. buying
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Owning a home is not always better than renting. Many factors are involved — including the likelihood that you will need to move, how much upkeep will cost, what you will have to pay in interest — and it’s worth taking a good look at the pros and cons of each before deciding to be a homeowner.
5. Save for a down payment
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You can’t borrow the entire cost of a home. You’ll need to put your own money into the purchase — get some “skin in the game,” as real estate agents like to say. The more cash you contribute, the more affordable the home purchase becomes. For example, contributing at least 20 percent of the home’s price lets you avoid mortgage insurance, a fee added to your monthly mortgage payments to compensate mortgage investors should you default. Also, the more cash you bring to the deal, the less you need to borrow and the smaller your monthly mortgage payments.
6. Get preapproved for a mortgage
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Now, get preapproved for a mortgage.
That’s not the same as being “prequalified,” through an initial screening that lenders typically offer home shoppers. Prequalification is a cursory process: Prospective lenders ask about your debts, your assets and your income, and quote you a rate that you’d probably get if your answers turn out to be accurate. Most importantly, they’ll tell you roughly how much money you’ll be able to borrow.
Preapproval, however, requires you to complete an official mortgage application. You let a lender pull your credit score and check deeply into your financials. You’ll learn exactly how much you can borrow and roughly what your interest rate will be (rates change with time so you may not know your exact rate until you can commit to the loan).
With a preapproval, you’ll get a letter from the lender saying that you’ve been approved for a mortgage up to a certain amount. When you make an offer on a home, this letter gives you an edge over buyers who have not yet applied for financing. (This is critical in a very hot real estate market where there are often competing offers.) It shows a home’s seller that there’ll be no waiting around while you apply for a mortgage and no chance your application will be rejected.
Preapproval also tells you exactly how much you can spend, saving you the time and the heartbreak of failing to qualify to buy a home you want. You may have to shop around to find a lender that preapproves borrowers.
A great place to start comparing what lenders have to offer is here, in our Solutions Center.
7. Make a list of must-haves
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Before the excitement of home shopping hijacks your brain, make a list of the bare minimum basics that your new home must have. It must have at least two bedrooms, for example. Or, it must be on one level. Or it must have a yard. Or it must have a fireplace. You’ll need to pull this list out again and again as you consider homes for sale.
A wish list is fun, too, but that’s something different entirely.
8. Get to know the neighborhoods
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You’re not just buying a home, you’re buying a neighborhood, and all of its sights, smells, noises, architecture, conveniences and drawbacks. It’s a good idea to find a few neighborhoods that you can afford and that roughly meet your requirements. When you choose an agent you’ll want one who has expertise in those areas.
9. Find a real estate agent
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Now, shop for the agent who will help you find your home. Talk with several of them and interview them carefully, asking about their backgrounds, properties they’ve helped buy and sell, and use each conversation to learn as much as possible about the market.
Choose someone who knows your particular market inside out and who has helped buy and sell many properties in the neighborhoods you want to live in. Chemistry matters, so listen to your gut. Find someone who is sought-after by clients but who is not too busy to make time for you.
10. Shop for homes
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Finally! You’ve arrived at the fun part. It also can be the grueling, heart-wrenching, exhausting and confusing hard part. But now you are well-prepared for your search. Good luck in finding a new home that suits you to a T.
We’d love to hear about your home-shopping experiences. Post a comment below or at our Facebook page.