2.The First Steps to Take
Grow Your Nest Egg: Gather your down payment with as much money as possible. As stated by Redfin research, 69% of homebuyers save money for their down payment directly through their paychecks. Some took it to the next level: 36% took on a second job, 13% pulled money from their retirement fund, while 10% dabbled in the cryptocurrency investment market. Other options according to the survey included taking on roommates or splitting homeownership among friends, renting out a room to an acquaintance, or making some additional income by driving for a ride-sharing company. If none of these options appeal to you, it’s perfectly okay to slow down the home buying process to establish a solid down payment. I am sure you have heard the myth about needing a down payment of 20% of the purchase price of your new home. In reality you can buy a home with only a down payment of 3.5% of the purchase price. If you are a veteran you can purchase a home without any down payment.
Money, Money, Money: Financial challenges such as pre-existing debt (credit cards, student loans, etc.), along with the challenge of saving for a down payment are the biggest obstacles to homeownership. But the financial requirements don’t stop with the down payment. You’ll also need money to cover closing costs, prepaid insurance, property taxes and other charges. According to Redfin Chief Economist Daryl Fairweather, “underestimating the hidden costs associated with buying and owning a home, including the ongoing responsibilities of maintaining it, is the No. 1 new homeowner frustration.”
Get Your Finances in Order: Prepare your finances by knowing your credit scores and having all of your basic financial documents in order. This can include tax returns, recent pay stubs and bank statements. See the “Before you approach the buying process” checklist for a full outline of documents to have in order.
Obtain your credit score: Obtaining your credit score is easy, it’s your right, and it’s a very good idea to do so before beginning your home search or mortgage process. Many credit card companies offer free credit scores to cardholders. Your bank or investment broker may also make it available to you for free and you can obtain a free copy of your entire credit report once a year from each of the three major credit repositories, Equifax, TransUnion and Experian, from the Federal Trade Commission’s authorized website http://www.annualcreditreport.com. These reports will list your entire credit history in detail. It’s important to review them and be certain that the information they have is correct. If you discover an error on any of them, the process for correcting the information will be provided to you with the report. You definitely want to correct any errors you might find, as incorrect information could impact your ability to obtain home financing.
Make sure you’re paying your bills on time and are paying off high-interest debt. If you’ve got available credit that you’re not using, that’ll be in your favor. But if you apply for a credit card or close one out you’re not using, that’ll go against your credit score.
Get Ready to go Mortgage Shopping: Research various mortgage lenders through comments on sites like Yelp and Google as well as recommendations from family, friends, or other trusted sources. Your mortgage lenders will counsel you on the mortgage finance process and help you find financing you can afford.
Know You Will be Stressed: Yes, buying a home can be overwhelming, but if you educate yourself as to the entire process, you’ll be able to achieve this goal with much more ease. Stress is definitely a normal part of the home buying process, so don’t think you’re alone in experiencing it. DomiDocs offers you tools to manage the home buying process and manage homeownership, reducing the stress of both along the way.
Being prepared and planning are the keys to making your new home buying experience go as smoothly as possible.
How Much Savings do You Need?
How Much Can You Really Afford? Realistically determine how much house you can afford. In the opinion of David Weliver, founder of Money Under 30, you should try to “keep your total housing payments under 30% of your gross monthly income. When you spend much more than that on your mortgage, you risk becoming ‘house poor’ – where you might live in a beautiful home but may find it difficult to save or even cover other monthly expenses.” Chief Economist Daryl Fairweather of Redfin states “you need to know you can truly afford to both buy and own a home, and to get the full picture, you need to do more than simply compare your current rent payment with the potential mortgage payment.” Fairweather suggests doing a check of your full finances as “a lot of hidden fees come with owning a home that you might not consider immediately,” including property taxes, homeowner insurance and closing costs ranging from 2 to 5% of the home price. You’ll also potentially need money for moving, utility down payments, new furnishings and/or appliances.
You should try to keep your total monthly obligations (mortgage payment, student loan payments, auto payments, and credit card payments under 43% of your monthly gross income. Most first time homebuyers are declined because of a high debt service versus mortgage payment. This problem is becoming a major barrier because of student loan debt.
Emergency Home Maintenance Repairs: Experts at the popular HGTV broadcast network suggest building a home maintenance budget of 1 to 3% of your income annually to build a reserve of funds for unforeseen and scheduled repairs. The Harris Poll Home Improvements Report reveals that more than 30% of Americans have not set aside funds for unexpected home repairs and even more alarming, 44% of homeowners experience their first unexpected repair within the first year after closing.
Do You Have Everything in Order?
Financial Documentation: Some of the financial documents you’ll be required to produce during the mortgage shopping process will include income and employment verification, basic financials such as bank accounts, tax returns and a list of assets and liabilities, along with proof of your down payment and the property details of the specific home you want to purchase.
Where Do You Find a Home to Buy? In this digital-first generation, a report by the National Association of Realtors cites 81% of new home shoppers ages 29 to 38 found their new home via a mobile app. If you can swipe right looking for a partner, it only makes sense you can swipe right for your potential new home.
Finding the Optimal Real Estate Agent: Spend some time finding the right real estate agent for you. You’ll want someone knowledgeable about the local market, features of your potential new home and the neighborhood it’s in, as well as skills you can use during the negotiating and buying process. It’s important to note whether or not they’re actually listening to what you’re saying. A great real estate agent will make the entire home buying process seem easy. Don’t be afraid to interview your agent and make sure they are the right fit for you.
Does the Real Estate Company Offer Incentives? In some markets, realtors may offer incentives such as smart home products, home security systems, electronics, cleaning services and even cash or closing cost rebates to attract business.
Know Your Must-Haves and Your Compromises: Having a basic wish list for your new home is a great way to break it down to the absolute must-haves like the number of bedrooms or a backyard for your kids or pets. Of course, there will always be dream items but knowing your non-negotiable aspects can weed out potential new homes quickly.
Checklist Before You Approach the Buying Process
- Gather Down Payment & Closing Costs
- Check Your Credit Scores
- Shop around for a Mortgage Lender
- Have Your Financials Readily Available:
- Bank account statements
- Cash value of any life insurance policies
- Documentation of any supplemental income
- Employment history for the last two years
- Statements for all investment accounts, including IRAs and other retirement funds
- List of Liabilities including names, addresses, account numbers and contact information for credit cards, automotive loans and/or existing mortgages. This includes other financial responsibilities such as child support and/or alimony.
- List of your current assets including vehicles, household items, collectibles
- Paycheck stubs
- W-2 statements for the previous two years
- Self Employment income for the previous two years to include profit-and-loss statements, 1099’s and tax return.
- Obtain Mortgage Pre-approval
- Establish a New Home Wish List
- Find a Real Estate Agent
- Explore Open Houses
Be prepared to provide Your personal information: Social Security Number, driver’s license, home address (for the previous two years), divorce/separation/trust agreements as applicable