Are you prepared to buy a home?

For many, owning a home is still “the American dream.”

According to Gallup's annual Economy and Personal Finance survey, 56 percent of Americans own a home and 25 percent plan to purchase one in the next 10 years.

But sometimes buyers fall in love with a home, only to find out that they don't qualify. Or worse, they barely manage to qualify, but at a sky-high interest rate.

That's because lots of buyers chase the dream of home-ownership without first making sure their financial situation can support it. Instead, they submit a loan application and cross their fingers that they'll get approved.

And even if that's not your story and you're in pretty good financial shape, there's still a lot to do before you apply for a mortgage. For instance, if you don't diligently monitor your credit report, there might be errors you need to dispute. Or if you're a new homeowner, you might spend most of your cash on the down payment and closing costs, not realizing how expensive houses really are. For instance, when the roof starts leaking, there's not a landlord footing paying for repairs. Now it's your problem.

Get finances in order before you house shop

So what should future borrowers do to prepare to buy a home?

Get in good fiscal shape. That means making sure you look good on paper, which makes the home-buying process far less stressful. For instance, you won't have any big surprises when your loan officer runs your credit. Also, there's a chance you'll get a better mortgage rate, which can save you lots of cash over the life of the loan.

Getting in good fiscal shape also means having a healthy savings account. You'll sleep better at night knowing that you can cover closing costs and unexpected roof repairs.

How to get fiscally prepared to buy a home

To find out what steps a future buyer should take to prepare, I spoke with Mark Hanley, a loan officer in Austin, Tex.

“My first piece of advice to any borrower is to go ahead and get a pre-approval from a mortgage person,” says Hanley. “Get some coaching. If you do that a year before you're ready to buy, you can really be ready.”

Hanley says that by going through the pre-approval process a year in advance, you'll learn where you stand. The loan officer can counsel you about what you can do in the next year so that you'll be ready when you actually apply for a loan.

When you meet with your lender, here are a few things you want to talk about.

  1. Credit. Get a copy of your credit report from your lender. “Your lender can help you see what's holding you back and look for things that you didn't know were there,” says Hanley. “These are things you want to work on in advance of applying for a loan.” You also can get free copies of your credit report at www.annualcreditreport.com, says Hanley, but “if you need help deciphering it, talk to a mortgage person.” It's also helpful to talk to a pro because sometimes people try to fix their credit, but actually damage it instead. “People look at credit and think, ‘I need to pay off my car,' but if their car loan is their only form of credit, it actually does more damage to their creditworthiness,” says Hanley.

  2. Loan programs. Discuss which loan program might be best for you, along with what requirements that loan program has. For instance, FHA loans require less money down than conventional loans, so that's something to keep in mind while you're saving up for a down payment.

  3. Cash at closing. Talk about where your down payment and closing costs will come from. “If you're moving money around, a loan officer will tell you how soon the money needs to be in your account so you don't raise flags with underwriter,” says Hanley.

After you meet with a mortgage person, you should have a better idea of what you need to work on. In addition to that list, there are a few more ways you can make sure you're prepared.

  1. Pay every bill on time. “If you are moving from one place to another, make certain that no bills slip through the cracks,” says Hanley. “I've had borrowers who didn't pay the final cable bill when they moved out of an old apartment and didn't leave a forwarding address. It ended up harming their credit.”

  2. Stay in the black. It's an obvious no-no, even if you aren't applying for a loan. But overdraft charges are red flags to underwriters, so make sure you walk the line from here on out. (In truth, the lender will probably only want your two most recent bank statements when you actually apply for the loan, but if you can't stay in the black, you probably aren't ready to buy a home.)

  3. Plan your job hunt. Banks don't like for you to switch jobs when you're applying for a loan. “I had one client who was offered a job that actually paid more than her current job, but the lender wouldn't let her switch jobs before the loan closed,” says Hanley. So if you're thinking of jumping ship, do so well in advance of applying for a loan. Otherwise you'll probably have to wait until after you close on the house.

Finally, start saving, and save more than you think you'll need. After talking to your lender, you should have an idea of how much house you plan to buy, as well as down payment requirements for your loan program.

Also, make sure you have a separate house fund for home repairs and maintenance, as well as new homeowner expenses that pop up when you move in. For instance, when my husband and I had just gotten the keys to our new house, my dad mentioned that we needed brand new ones.

“Have you called a locksmith?” he asked.

“Um, no,” I said. “Do I need a locksmith?”

“You need to have all your locks rekeyed,” he said. “You never know if the last owners or renters kept copies.”

Ugh, of course. Silly new homeowners, we hadn't thought of that. So, $80 later, we had new locks and keys.

And that was just the beginning — those little expenses really add up! Make sure you can cover them so your new home doesn't instantly turn into a huge source of stress.

And that's really the point here, reducing stress. It's a lot of work to get this prepared, and it requires a lot of foresight. But the American dream can quickly turn into a nightmare if you aren't financially prepared to for it.

Readers, what else can you add to this list? And if you're a homeowner, how far in advance did you get ready to apply for a loan — or did you just wing it?

More about...Home & Garden, Planning

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Elizabeth
Elizabeth
7 years ago

All good considerations! I’m financially ready to buy a home, but there’s more than money to this decision. The “housing correction” hasn’t hit my area yet and I’m not willing to buy at what could be the top of the market (or close to it). I also might move within the next five years, so that would eat into any potential gains I would have made buying.

In the meantime, renting is cheaper than owning in my area so my goal is to invest the difference. As long as I see my net worth increase, I’ll be happy.

Jenny @ Frugal Guru Guide
Jenny @ Frugal Guru Guide
7 years ago

I didn’t rekey my houses. But if I’d bought from a sketchier neighborhood, I probably would have!

lmoot
lmoot
7 years ago

Glad it worked out for you, but that probably wasn’t the smartest thing to do. Individuals can be just as sketchy as neighborhoods. Ever hear of “don’t judge a book by its cover?”. Who knows how many possible sketchy people or relatives the previous owner gave keys to? I rekeyed my house but did not do the in-law suite and I live in a non-sketchy area that does not have robberies, according to my neighbors on either side who’ve been there 30 years. I came home one day to find that someone has moved into the in-law suite. There was… Read more »

El Nerdo
El Nerdo
7 years ago
Reply to  lmoot

Speaking of sketchy people and keys, I’d highly recommend a bump-resistant lock.

http://www.acmelocksmith.com/lock_bumping.html

etc etc

Mrs PoP @ Planting Our Pennies
Mrs PoP @ Planting Our Pennies
7 years ago
Reply to  El Nerdo

Definitely agree with El Nerdo. And don’t hesitate to invest in some nice locks that will last you a while. We went with the ones with a key code and it was the upgrade that we made to the house that we continue to appreciate day in and day out. So nice not to have to carry keys!

Kay
Kay
7 years ago
Reply to  El Nerdo

To Ms. PoP –

Do realize that not carrying a key around with you means you’ll be locked out of your house in the event of a power outage (or, in my friend’s case, in the event that the battery dies on the keypad!).

Mrs PoP @ Planting Our Pennies
Mrs PoP @ Planting Our Pennies
7 years ago
Reply to  El Nerdo

Kay – when our battery was dying, it prevented the door from being locked using the code, in which case we used a key until a new battery was found. (Ours is not connected to our power system so the power being out has no impact.) Overall it’s not a big deal and the battery lasted about 3 years. Minor inconvenience once every 3 years compared to carrying a key on a run every single day. I’ll take it!

Eyal
Eyal
7 years ago
Reply to  El Nerdo

I like more the old keys, don’t have to worry about a batteries or any electrical problem
http://keysandtools.com/

Ann
Ann
7 years ago

No locksmith required, if you’re a BIT handy – we went to a hardware and got new knobs and deadbolts and swapped out the old ones. We’ll donate the old ones to Habitat for Humanity.

Also the amount of money required to make a new house into your new home is EASY to underestimate. New curtains, blinds, shower curtains, closet ortanizers and all that stuff you have that just doesn’t fit in the new house all adds up pretty quickly! You’ll find that a list of “big projects” will probably accumulate pretty quickly too.

Michelle at Making Sense of Cents
Michelle at Making Sense of Cents
7 years ago

We’re waiting to buy our next house until next year. We decided that we’re not ready to sell our current house yet, and still haven’t decided if we want to keep this house and just rent it out.

Matt Becker
Matt Becker
7 years ago

Similar to Elizabeth, we very well might move to a totally different part of the country in the next few years and that alone makes it a poor financial decision for us to buy. Plus we’re willing to rent a place that meets our needs but definitely isn’t as nice as whatever we’d want to buy. That lets us spend much less renting than we would buying. So for us, it’s a no-brainer to rent for now and save the difference for when we’re really ready to buy.

Alex C
Alex C
7 years ago

Another to talk about with getting fiscally fit, is savings. I do not think anybody is in a position to buy a home until they can at least afford a 10% down payment.

This is ideal because it helps pay off some of the house first and secondly, you have to start making a commitment and put money away every month as if you had already purchased the house so you will be able to easily budget in a house payment.

My Financial Independence Journey
My Financial Independence Journey
7 years ago

I consider the financial aspect of buying a home to be the easiest – or at least the most straight forward. All the little things, like rekeying the house, are what will probably bury me if I bought.

@debtblag
@debtblag
7 years ago

I think too many people default to the idea that they need to buy a house, and far too many people are all too certain — even in dense, high-cost areas — that it’s always a better option than renting from a financial standpoint.

Also, I’m surprised there’s no mention of avoiding PMI by having 20% ready to put down…

Mrs PoP @ Planting Our Pennies
Mrs PoP @ Planting Our Pennies
7 years ago
Reply to  @debtblag

Especially given the recent changes to PMI that make it tougher to get rid of once you’re required to take it. You need to fully refi when you are under 78% equity to get rid of it and who knows what interest rates will be like by that time? You might be better off paying the 1.35% PMI rather than refi into a loan 2% higher than your old rate…
http://www.governmentrefinances.com/2013/01/31/fha-makes-major-changes-to-mip-starting-april-2013/

Sara
Sara
7 years ago

Note that these changes only apply to FHA loans.

Mrs PoP @ Planting Our Pennies
Mrs PoP @ Planting Our Pennies
7 years ago
Reply to  Sara

True, but as of 2010 some 40% of new home purchases were made with FHA financing.
http://www.nytimes.com/imagepages/2012/02/28/business/28fha-gfc.html

Ohio Mortgage Solutions
Ohio Mortgage Solutions
7 years ago
Reply to  Sara

Yes, FHA saw a large uptick in recent years. However, over the last 2-3 years FHA has drastically increased it’s monthly mortgage insurance (FHA MIP), making Conventional loans MUCH more attractive. I’d be interested to see the number of FHA mortgages compared to Conventional for 2012.

Krishanu
Krishanu
7 years ago

There one subtle but significant distinction to be made: MIP and PMI.

MIP is Mortgage Insurance Premium, which is for FHA loans. PMI is Private Mortgage Insurance, which is for Conventional loans. Though they cover the same thing (protecting the lender if the borrower defaults), they are very different in terms of their structuring and amounts. It is easy to use them interchangeable, but should not be!

SAHMama
SAHMama
7 years ago

We bought this house 9 years ago and are now looking to sell it and move to a different neighborhood. There are a lot of costs you don’t realize until you’re going through the process. For us, these included:

*Home inspection $400
*Pest inspection $100
*purchase of lawn / garden care equipment: hoses, mower, trimmers, gloves, etc
*purchase of doormats, shelving units, waste baskets, window coverings, yard waste containers
*rekeying
*sending out “we moved” cards
*required utility deposits, even though we had excellent credit

Strick
Strick
7 years ago

You need to have a pretty good idea of your future plans. The benefits of owning are obvious, as this ‘investment’ simultaneously greatly lowers expenses (rent).

But a couple of years of rent isn’t much compared to the risk you’ve taken by buying a house: it’s not often people jump at the chance to buy a single stock leveraged to the hilt with a 8% front load (which is what a 0-20% downpayment and closing/realtor costs basically equates to).

Jake Erickson
Jake Erickson
7 years ago

This is great advice. As someone who just bought a house a few years ago I definitely agree with everything you said here. I got pre-approved a month or so before actually buying. Another big thing is to budget for the new mortgage payment while still in your current house so that you know you can afford it. The bank will sometimes pre-approve you for more than you should probably spend on a home.

SavvyFinancialLatina
SavvyFinancialLatina
7 years ago

We are going to be buying a house by the end of 2013. It’s both exciting and scary! These tips are very useful and I will take note of them as we move forward in the search.
We are preparing ourselves financially. We will have 20% down for a $150,000 house, plus the plan is to have extra cash for any renovations we want to do then.
I’m already planning for an increase in bills, and I’m trying to figure how i can lower my expenses and increase my income to cover the costs.

Mk
Mk
7 years ago

Don’t forget about increased utility costs, especially if you’re gaining a lot more square footage when you leave the apartment for the single family home.

Also–furniture. It isn’t very fun to buy a house that you can’t afford to furnish for a long time. The cost of furniture can be shocking.

Laura
Laura
7 years ago

Find a GOOD home inspector ahead of time. Ours was excellent; he took pictures throughout and generated a detailed report of about 50 pages that covered the house top to bottom. Based on a few things he found, we negotiated $8000 off of the selling price. It also gave us our list of repairs to start on as new homeowners rather than being caught by surprise. Definitely worth the $400 to do it.

KC @ genxfinance
KC @ genxfinance
7 years ago

I am prepared. It’s the money I’m having problem with. But kidding aside, these are great advices. Others don’t think about calling their local locksmith to re-key their homes. classic mistake. this goes tot your locksmith too. Make sure that they can be trusted.

El Nerdo
El Nerdo
7 years ago

I’m still too nomadic to buy anything anywhere… maybe an RV! 😀

lmoot
lmoot
7 years ago
Reply to  El Nerdo

It’s all good! I’m a nomadic homeowner. I’ve already got tenants to rent my house out to when I buy a second house in January, in the city I want to go back to school in. Getting roommates in a large multi-college town should be a cinch. And when I leave I plan on renting that out to the college kids. If I get the job I want in a 3rd city (an international tourist spot…but with affordable housing), I’ll buy a house there too (no roomates). Eventually I do want to move back to my 1st house to be… Read more »

John S @ Frugal Rules
John S @ Frugal Rules
7 years ago

These are some great tips and we did many of them when we bought six years ago, other than having the locks rekeyed. We totally spaced that the first year or so and finally had it done after that. I would also add to make sure you have some cash saved to do anything to the house once you move in. We were shocked by how much curtains were. Thankfully we had the money saved.

HKR
HKR
7 years ago

Getting prequalified is great, but lenders have to estimate what you can afford and if your spending habits differ from the average, their estimates could be off. A typical method lenders use to estimate how much you can afford is to take (42% x Your Monthly Gross Income) – (total of minimum payments for debt shown on credit report and alimony/child support) = Money available for monthly principle, interest, taxes & insurance. The lender assumes that the remaining 58% of your gross income will be sufficient to pay income taxes, all your savings, and everything that does not appear on… Read more »

Janna
Janna
7 years ago

When we bought our house the market was very competitive-houses were flying off the market in about 2 weeks. So we got pre-qualified first to know what we could afford and that the seller’s would accept our offer. Then we waited and searched the MLS listings every few days. We knew exactly where we wanted to live and what area. So we just waited. Finally after about 2-3 months a property came up. We called our relator and looked at it that day. Two days later we made our offer and bought the home. I do agree you need to… Read more »

Kris L.
Kris L.
7 years ago

Another thing to keep in mind is that a lot of people will be telling you that you can go over budget. “You’ll find the money.” or “You’ll get to write off the interest at tax time.” The key is to you buy what you know you can afford in the long term. It’s easy to get house-drunk and think it will be simple to handle the large payment each month, or that you need a huge amount of space, or that you deserve everything you’ve ever wanted in a house because you’re a good person. Take a moment (or… Read more »

BC
BC
7 years ago

We are under contract on our first home so this is timely for me. We’re taking the plunge to lock in a low interest rate of 3.5%. If we waited another year we might have been saving to feed the banks. So far we have put out $2k for the ernest money, inspections, and appraisal. We are anticipate another $3k for basic move in expenses. We are putting in a low down payment in order to keep more cash reserves in our emergency fund. Our mortgage/insurance/taxes will come to 12% of our monthly gross income (our current rent is 10%… Read more »

Sara
Sara
7 years ago

My biggest tip is to try and accurately estimate utility costs. I know a lot of people that bought a house thinking that the electric bill would be about the same as their apartment, and then were surprised to find out it was much higher. Or assumed that the oil bill would be the same as their friends without considering that the new house might be much bigger (or they might keep the thermostat much higher).

Pretired Nick
Pretired Nick
7 years ago

I think buying too much house is the biggest mistake people make. For some reason we become convinced that “more is more” and try get as much as we can, straining our budgets and future in the process. People should focus on what they need, not what they can afford.

KSK
KSK
7 years ago

We did wing it when we bought our home 20+ years ago. When I look back I realize how lucky we were/are. The best thing we did was made sure we had an intact emergency fund when we purchased our home. We could have put more down, but opted not to dip into the emergency fund. I’m glad we did because 2 months after we bought our house, I was laid off from my job. I was unemployed for a year. So, we were very lucky that we had that emergency fund.

Diane C
Diane C
7 years ago

Pre-qualification isn’t enough these days in hot markets. Prospective buyers must submit pre-APPROVAL letters from their lender for their offer to be considered in my area. Next, do not open or close any credit accounts. The lender will scrutinize every single account in your history. Opening and closing are both black marks. Finally, create a cover letter to include with your offer. Tell the seller about yourselves and why you want to buy their home. I just sold my house last week for well over asking. The top two offers were for the same amount. I went with the one… Read more »

Marie
Marie
7 years ago

A lender wouldn’t LET a woman change jobs? Seriously?!? Why would anyone give someone charging them interest that kind of power? I’d tell them to eat a **** and go elsewhere. There will always be another house.

What is this place, so I can never do business there?

HKR
HKR
7 years ago
Reply to  Marie

The lenders aren’t trying to be jerks about it-they have to follow policy. Most lenders can’t afford to keep hundreds of mortgages on their books, so they sell mortgages to Fannie May or Freddie Mac, or sometimes large banks like Wells Fargo. When they do that, they have to follow the secondary market rules, which usually include a minimum of 1 year full-time employment at the same employer. Since Freddie and Fannie have been taking a whipping since the housing crash because they made so many bad loans, you really can’t blame them for setting some standards, and thus you… Read more »

Ohio Mortgage Solutions
Ohio Mortgage Solutions
7 years ago
Reply to  Marie

I didn’t see the comment about changing jobs, but I have originated plenty of mortgages for clients that have recently changed jobs.

Heck I’m closing one next week that the client changed jobs during the loan process (without telling me).

Lenders will look at job history (same line of work, job gaps, likelihood of continuance, etc.). But they do not require you to be at a certain job for a set amount of time.

However, if you are self employed, you will need to have 2 years tax returns to document self employment income.

Mike@WeOnlyDoThisOnce
7 years ago

Great idea to know your finances in and out before you even start looking. That way, you won’t be disappointed and/or make unwise decisions.

M
M
7 years ago

I’d put 5% plus down and go conventional with private PMI if you can’t put 20% down (I will likely put 5% down as housing prices are high but rent is at record levels in my market). Don’t so FHA. The insurance is more than double the conventional rate and for loans closing this summer and beyond, the mortgage insurance doesn’t go away. HUD really doesn’t need to be THE lender and these changes are to encourage people to go to the private market (side benefit is to fund FHA’s reserves). Mrs. Pop, props for being informed! I work for… Read more »

BC
BC
7 years ago
Reply to  M

I was hell bent on not doing FHA and wound up now buying under FHA with the current rules (5 years PMI as opposed to 11 or full term). Even with the fees/insurance, FHA was a better loan for us because of the lower rate. It was 3.5%-FHA versus 4.25%-conventional. Over the life of the loan the numbers worked out in FHA’s favor because of that 0.75% difference. Now our mortgage officer is working to get our rate down to 3%. We have great credit and are buying a home below our means. We are not putting a lot down… Read more »

Belinda Mills
Belinda Mills
7 years ago

Well I can say for sure that applying for a mortgage-approval letter is something best done in advance,but I didn’t know a whole year was even possible. I just bought a home and since the last one i had bought was in the relatively un-regulated days of 2004, it seemed much more difficult this time around. Definitely start planning WAY ahead!

Crystal
Crystal
7 years ago

I guess we winged it both times technically, but we already knew both times that we had excellent credit (I check for free every 4 months) and enough cash to cover 20% and still have leftovers for emergencies and new home necessities. So, I guess our winging it and the “normal” winging it are a bit different. 🙂 Whenever we talk about home buying with our friends or family that don’t have a house yet, I also remind them to check their credit history and save up enough cash for 20% plus a minimum of $5000 for padding (I prefer… Read more »

Jess
Jess
7 years ago

I wish this talked more about down payments. I spent nearly a decade doing mortgage underwriting before becoming a full-time Mommy. I saw WAY too many people putting 3% down on a house because “it’s a great time to buy” or “the rate was better than conventional 30 year” or some other reason that was weak to justify it. Did you factor in pre-paying and then monthly paying that mortgage insurance premiums? And then the cost to refinance to get rid of it (assuming you don’t just pay it down to 78% and ask for removal)? Very few folks keep… Read more »

SLCCOM
SLCCOM
7 years ago

If the door has two locks, you only need to replace or rekey one of them.

Regretful Owner
Regretful Owner
7 years ago

I’ve read through most of the comments and only have one thing to add. I don’t believe single people should own. The added income of a spouse or GF/BF living with you is essential. I’ve lost my “emergency savings” numerous times due to things breaking down/needing repair due to neglect from the previous owners. I purchased my home at the height of the bubble and knew nothing about true market value vs. inflated price value and wound up severely overpaying. I really regret owning something that’s lost nearly 1/2 its value over seven years and really wished I’d remained a… Read more »

lmoot
lmoot
7 years ago

To be fair I think it’s rarely a single income vs dual income issue. Any single person, provided they are prepared, can be successful at owning a home, or multiple homes. Personally I spend much less (and save much more) being single, than I did living with an ex. I always joke that my Home Depot credit card is my second income because they have amazing 0% interest opportunities for projects, and the length of time for the 0% interest goes up based on the price of the project. Even if I have the cash, I use the card for… Read more »

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