Planning to buy a house soon? Will this be your first time navigating the home-buying process? If so, you’re probably wondering what you should be doing right now, before you actually start the process.
Here are five things you should do — and know — before buying your first home.
5 Things to Do Before Buying a First Home
Note: Every home buying scenario is different, so some of the items on this list might not apply to you.
1. Create a monthly housing budget for yourself.
This is one of the most important things to do before buying your first home. That’s why it’s first on our list. Creating a basic housing budget will help you avoid financial hardship later on. And fortunately, it’s fairly easy to do.
For starters, look at your monthly take-home pay, as well as your non-housing expenses (non-housing expenses are things like credit cards, car payments, etc.). How much money is left over each month? Work down from that number to determine your housing budget.
As a general rule of thumb, home buyers should spend no more than 28% of their monthly income on house payments. But this is a very general rule. Some people are comfortable (and capable) taking on more debt than that. The important thing is that you have a maximum budget in mind, before you try to buy your first house.
And don’t forget your emergency fund. Experts recommend keeping money in the bank equal to three to six months of living expenses.
2. Start saving money — the more the better.
If you’re going to use a mortgage loan when buying your first home, you’ll need to have enough money in the bank to cover your down payment and closing costs. The down payment amount will depend on the type of loan you use, and the price of the home. Closing costs can easily add up to thousands of dollars.
Saving money is one of the best things you can do before buying a home. The more you save between now and your closing day, the better. Having extra money in the bank will also give you a financial cushion as you adjust to your new mortgage payments.
3. Check your credit report for accuracy.
Your credit reports (you have three of them) show how you’ve borrowed and repaid money in the past. This information is used to produce a three-digit credit score (you have three of those, too). Mortgage lenders use these scores to determine whether or not you’re qualified for a loan, and what kid of interest rate they’ll assign.
We recommend that all home buyers check their credit reports for accuracy, and make corrections as needed. This is something you should do before buying your first home, because it can affect your ability to get financing.
4. Check your credit score to see where you stand.
We just talked about credit reports, and how they determine your credit scores. Checking your scores is another smart thing to do before buying a house.
Lenders use these three-digit numbers as a risk-assessment and pricing tool. In short, a higher score will increase your chances of getting a loan and help you secure a lower interest rate.
You can obtain your scores from the three reporting agencies — TransUnion, Equifax and Experian — for a small fee (usually around $20 per score). Credit scores are a good thing to know before buying your first home. It helps you determine what kind of borrower you are, and how lenders will view you.
A score of 600 or higher generally puts you in a good position to buy a house. A score of 750 or higher is considered excellent. A score below 600 might make it harder to qualify for a loan. But these numbers aren’t set in stone. It’s just one more thing to know before buying a home.
Here’s what lenders are looking for, generally speaking.
5. Research your local housing market.
What is your local real estate market like right now? Is it a buyers’ market, a sellers’ market, or somewhere in between? What’s the inventory situation? How competitive is it? Are homes selling fast, or do they stay on the market for a long time?
In short, how much leverage do you have, as a home buyer?
Before buying a house, it’s important to research the local market. Google is a good place to start. Do a Google News search for your city name, followed by “housing market.” Read all of the current articles and news stories.
This kind of research is invaluable. It helps you understand local market dynamics. It will help you shape your offer, when the time comes. It will give you a good idea of where you stand, in terms of negotiating leverage.
These are some of the most important things you should do, and know, before buying your first house. Want to learn more about these topics? Check out our home buying library.