How to Prepare for Buying a Home

When I bought a home three years ago, the economic climate was different from today. Back then, a house would could be listed on Friday and a contract signed by Monday. It was easy to get a loan (too easy, in fact) and you could make every mistake in the book and still find yourself a home.

Despite the market differences, sound financial planning and a handful of smart moves will ensure that you won't regret grabbing your piece of the American dream. This post isn't going to go over the merits of buying versus renting or how you should pick a real estate agent. Instead, I'll focus on the things you should do to prepare yourself before applying for a loan and then buying a home.

Don't borrow money
Your home will likely be the single largest debt you will take on and represents the greatest risk in the eyes of potential lenders. With lending rules tightening, it's becoming more and more important that you make yourself look as safe as possible. Safe means as little debt as possible and as little access to credit as possible.

Don't apply for any new credit cards. They could be offering some hot credit card offers of a hundred bucks to make one purchase or 0% balance transfer, but you must avoid it at all costs. That hundred dollars will cost you thousands, if not tens of thousands, over the life of your loan. Don't buy a car. Don't take advantage of 12-month 0% financing “same as cash” offers at Best Buy to get that new flatscreen HDTV you've been thinking of.

Don't make any drastic changes
Don't shuffle your funds around, don't change your bank, and most of all don't change your job. This won't necessarily affect your credit score (some banks will do a hard credit check, which negatively affects your score) but it will give the lender headaches when they try to decipher all the moves you've made.

Making large transfers will bring up questions of fund origins. Is this really your money or did you receive it as a gift? Why are you opening up new accounts and shifting your money when you expect to spend it soon? Such moves will result in more questions for you to answer, which takes energy and will prolong the review process. It's not necessarily bad — just a pain.

The only exception to the “not necessarily bad” is the part about changing jobs. Lenders like stability; stability equals low risk. If you've been working with a company for thirty years (or even five), chances are you're going to work there for a while. If you've been working with a company for three months, there's no saying how long you will work there. Maybe you have a falling out and are fired, maybe you can't hold a job, maybe you're perfectly fine and will have a successful career there. All those maybes make lenders nervous. Avoid changes if you can.

Play house
There are two crucial steps to “playing house” (financially). First, you need to correctly estimate your monthly payment. Remember that your monthly payment will include the mortgage, taxes, and homeowners insurance. You will also probably want to add a buffer for maintenance and repairs, as you likely will have both. In three years, my wife and I have spent at least $10,000 in repairs and improvements (windows, roof, carpeting).

Another bit of information to research is how the recent federal housing rescue bill or how local first time home-buyer assistance programs may apply to you. The federal housing rescue bill offers a 15-year zero interest $7500 loan in the form of a tax credit to new home buyers. In Maryland, first time home buyers get one half of the transfer tax waived, which can be up to 0.75% the sale price of the home. Both of those will play crucial roles in how you calculate your monthly payment.

The second step is actually playing by budgeting for the mortgage. If you are currently renting, deduct rent from your monthly mortgage payment, and transfer those funds to an account that offers high interest savings. A great place to put those funds is in a fund you designate for your downpayment. As the months pass, you will get a feel for how much you can comfortably afford rather than simply guessing.

This also serves another purpose: it will keep you within your house budget. The Realtor will likely want to show you homes that are outside of your price range. It's always good to see what is a little above and a little below your range just to see what the difference in value is. By playing house, you have a more accurate feeling of how differences in the monthly payment will affect your lifestyle because you've lived it.

Sell or donate your junk
Two things will happen when you buy your house:

  • You will be short on cash.
  • You will have to move.

By selling some of your junk now, you get a little extra cash, which will likely go towards all the little things involved with a home, and you have less stuff to move. Your wallet will thank you for the former and your friends — whom you will have bribed with pizza and beer to help you move — will thank you for the latter.

Sell or donate anything and everything you honestly can't see yourself ever using on your new home. Good stuff to purge includes:

  • Old furniture
  • Books (do you really need to keep your college textbooks?)
  • Old clothes
  • Electronics equipment
  • Decorations and wall coverings

This will require a bit of intestinal fortitude and an honest assessment of your belongings. It's difficult to sell or give away things with emotional value. That couch you've had since college or that poster you hauled all the way from home — they have emotional value. If you can think of a great place in your new home for it, keep it; if you really can't (where will a ratty old couch go?), give it a new home.

Donation is a great solution if you're on a time crunch because organizations like Goodwill or the Salvation Army will happily come and haul away your gently used items absolutely free (and you get a bigger tax deduction).

I hope this list of ideas has been helpful, these were some of the tricks I used when my wife and I bought our first home three years ago. Since then, it's been a wonderful ride. Home ownership truly has been all it's cracked up to be. You might be buying a house, but it truly becomes your home.

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John
John
11 years ago

The advice against applying for any new credit cards seems to go against what I have read elsewhere. I am considering buying a house for the first time in the next year or so. I have an 800+ credit score and carry no debt, but recently decided to get an LL Bean Visa account in order to take advantage of free shipping. I had considered closing another credit card account (I now have four) to limit the number of open accounts I have, but everything I have read said that I would be better off leaving them all open. I… Read more »

David
David
11 years ago

I want to buy a house in the next year or so. My fiance and I have a lot of student loan debt both federal and private (60K at 5% variable and 40K at 3.5% fixed). We have good paying jobs and have been paying off much more then the minimums as well as saving some for the down payment of a house. We live in the greater NYC metro area, meaning a 400K house is about where we are looking. We both have pretty good credit scores (low 700s). We both are very good about staying on our budget… Read more »

David
David
11 years ago

John, A few points: – Opening new lines credit will hurt your score because the creditor will do a hard check on your credit (which stays on your record for 2 years). I think you will be OK considering your score because the credit check will only knock you down a few points. -Many mortgage companies do not want to see that you have a lot of available credit, assuming you could use that credit at any given time and therefore rack up a bunch of debt. I am not sure what would consider a lot of available credit. If… Read more »

David
David
11 years ago

One thing I liked in this article was the idea to ‘live’ on your mortgage payment. Subtract the rent and save the rest. I’m trying to do that currently with all of my estimated house expenses. I have rent and food and entertainment expenses now. Soon I’ll have taxes, and hydro and cable etc etc etc. I’ve estimated (over hopefully) my monthly total expenses, subtracted what I have to pay now and save the rest. In not too long I’ve saved over $20k, and have gotten used to having limited money to splurge with. All in all, a great way… Read more »

jim of Blueprint for Financial Prosperity
jim of Blueprint for Financial Prosperity
11 years ago

John: What’s done is done but the advice you heard is also correct when it comes to your credit score. However, the advice I was giving is with respect to how lenders analyze your history. They don’t like people with a lot of credit at their disposal and they don’t like seeing people apply for more credit. They’re wondering why you needed that extra line and it scares them to think you could get into debt very quickly. With your score and only one card, you should be fine (as David said).

Rachel
Rachel
11 years ago

Hey JD, I know that most people say that everyone should save up 20% for a house. I just can’t seem to wrap my head around that logic in todays market. It seems that if you can purchase a house that you can afford (fits into your budget under 25%, not a APR loan, and a good rate) why would it be better to send that money to a house loan then to invest it? Wouldn’t that money be put to better use somewhere else if you can afford the payments the way they are? For instance – we did… Read more »

Ron@TheWisdomJournal
11 years ago

I would recommend checking your credit report and credit score. It doesn’t affect your score to check and you can potentially find errors that you’ll have time to get corrected before you apply for the mortgage.

Also, make a list with three column headings:
Things I MUST have in a new home, things I really want in a new home, and things that would be nice but not necessary to have in a new home. Know what you’re looking for.

jim of Blueprint for Financial Prosperity
jim of Blueprint for Financial Prosperity
11 years ago

Rachel: It’s difficult to say whether it’s better to put it towards the loan or towards investments, that’ll be debated forever. 🙂 As for your decision, your already on the hook for the value of the loan, not the value of the house so the 20% is still a loss for you even if you didn’t put equity in.

Brack
Brack
11 years ago

absolutely love the part about “playing house”. It really takes a theorectical and puts it into real terms. If I can’t afford to save money every month, I don’t have any business purchasing a home that will cost that much.

Daniel@youngandfrugal
11 years ago

Also, DO NOT CANCEL ANY CREDIT CARDS. Cancelling credit cards can ding your credit score. Also, by keeping your cards open (with not much or any balance) lenders see that you have high availability of credit, and that helps your case.

-Daniel

DanL
DanL
11 years ago

Working as a mortgage broker, I see the mistakes people make first hand. JD, I must say that this is one of the best pieces of advice I’ve seen for first time buyers. One huge misconception seems to be regarding available credit. Don’t go out and apply for new credit because that can damage your score via inquiries. However, having available credit is seen as a sign of your credit worthiness and shows that other lenders are willing to issue you credit. The only time it would be seen as a negative is if you have bad credit. Anything below… Read more »

CJ
CJ
11 years ago

I purchased a condo a year ago. It’s interesting that you mention not to shuffle your finances around. I had a bit of an incident with that because the bank started asking where all that money came from. All I did was liquify some investments. It seems so odd to me that they get upset about that. To be quite honest I don’t understand how you’re supposed to make a good down payment WITHOUT shuffling your funds around.

Nicole
Nicole
11 years ago

David – I am in a very similar situation to you. Graduated from law school with 60k in private loans at around 6% and 45k in federal loans at 3.12%. I paid down the 60k in a couple of years, but am just paying the minimum on the 3.12% loans (about $214 per month). and building up my down payment. I am also in the NYC area and plan to by a $500,000 home in the next year or so. I am saving up for a $100,000 down payment. I could pay off the federal loans today, but I would… Read more »

Rhonda Porter CMPS
Rhonda Porter CMPS
11 years ago

I often recommend that clients “play house” before actually leaping into a mortgage payment. I wish more people would.

Mortgage companies do not view available credit (they should)…they do factor monthly obligations for debt to income ratios.

I recommend meeting with a mortgage professional up to a year in advance before buying your first home to make sure you are on the right track. Sometimes consumers will do what seems to be “the right thing” with the wrong results: such as closing an account, which actually brings down your credit score.

J.D.
J.D.
11 years ago

DanL wrote: JD, I must say that this is one of the best pieces of advice I’ve seen for first time buyers. I wish I could take credit, but all I did was provide the space. This piece is from Jim from Blueprint at Financial Prosperity! CJ wrote: I don’t understand how you’re supposed to make a good down payment WITHOUT shuffling your funds around. The key is to shuffle them around before you need them. In theory, you’re planning to make this purchase well in advance of doing so. If you know that you’ll need to liquidate some investments… Read more »

Chris
Chris
11 years ago

John,

The short response to your concerns about your credit score would be, “Don’t obsess over optimizing your credit score – manage your finances and credit well and the score will take care of itself”.

The credit score is a statistical expression of the likelihood you will repay a debt. Nothing more, nothing lest. Engage in responsible management of your credit – don’t accept too much, don’t abuse it, and you will naturally be moved into a segment of the population which has a high correlation of repaying debts on time.

Roe
Roe
11 years ago

Ok, so all the assistance for buying a house is for first time home buyers, but what about those of us that have been home owners but now are renting? I sold my home in Phoenix at cost so I didn’t make any profit but I was able to escape the mortgage and now my wife and I have been renting for the last year in preparation to buy a home. Due to unexpected medical bills we don’t have a down payment after a year of renting so the idea of buying a home seems impossible. We have outstanding credit… Read more »

DanL
DanL
11 years ago

Regarding NOT being a first-time buyers, it does not mean its the end of the world. 100% financing is rare to begin with these days. But I would suggest looking at a local housing authority for grants and programs.

It would depend on where you are located, but we have begun working with local housing authorities that offer unique loan programs for similar situations as your own. It’s certainly worth looking into.

Marc
Marc
11 years ago

David: I’d been pondering the same thing myself about paying down college loans or buying a house. I’ve got a bit of credit card debt left but that’ll be paid off for sure before I buy a house. When considering paying off a student loan vs buying a house question the best advice I’d ever saw was this. If your probable loan rate for a mortgage is more than your student loan rate then buy a house. If the opposite is true then pay off your student loans. My student loans are 17k at 5 1/8%. Any mortgage loan rate… Read more »

Roe
Roe
11 years ago

Great Dan, But what do you mean by “local housing authority” (by itself that term doesn’t mean much to me) and how would I go about finding this group/person/company/agency/bank in my area?

Rhonda Porter CMPS
Rhonda Porter CMPS
11 years ago

Roe, you may want to consider a FHA mortgage which will finance up to 97% loan to value. The remaining 3% may be a gift or loan from a family member. Down payment assistance programs (such as Nehemiah) are going away at the end of this month (and some lenders are all ready no longer allowing them) so that may be a possibility for a limited time–unless Congress passes another bill to reinstate DPAs.

DanL
DanL
11 years ago

For example, in MA we have the Mass Housing Authority. I would recommend going to Google and searching for “Nonprofit housing assistance programs” in your state or local metro area.

MA housing offers insured programs that conforming lenders can’t offer and many of them allow little, or zero, downpayment, provided you have compensating factors, such as high credit scores, limited debt, and sufficient income.

jim of Blueprint for Financial Prosperity
jim of Blueprint for Financial Prosperity
11 years ago

You’ll always need to shuffle some funds around but recognize that it will draw the attention of the underwriter, if you can avoid it… avoid it. If you can’t, well just explain it and they’ll understand.

LK
LK
11 years ago

Roe – google “[your city] housing authority” – you are likely to get hits in the direction you want. Unfortunately for my husband and me, we make too much money to qualify for much of anything. Darn middle class! We’ve got a leetle bit of savings right now, so I am going to try and sock every bit of extra money at cc and some loan debt, then sock all that money into a downpayment. I figure lenders will not care as much about a car payment and small school loan as much as they will a $10k cc bill.… Read more »

DanL
DanL
11 years ago

It’s not so much the type of debt (CC, student loan, car loan, private loan) as it is the monthly payment.

A student loan with a $500 monthly payment can be worse than a credit card with a $400 minimum payment. It’s all about your debt to income (what’s going out vs. what’s coming in). Thus, paying down the CC with the highest monthly payment should reduce your monthly payment on that card, which should reduce your DTI.

Rhonda Porter CMPS
Rhonda Porter CMPS
11 years ago

LK, in addition to what DanL is stating re: lenders, if you have installment debts with 10 months or less owing (such as a car) they may not be factored into your debt to income ratio. It really is just the payment that is being looked at, not the type of debt when lenders are prequalifying you for a mortgage payment.

Rhonda Porter CMPS
Rhonda Porter CMPS
11 years ago

PS You may be better off in a lenders eyes with the credit card debt (if the payment is low) and money in the bank (3 months mortgage payments, for example) as a reserve account instead of paying off all debt and being cash poor.

Martacus
Martacus
11 years ago

Having recently bought a house for the first time, I must say this is all very sound advice, not to mention fairly comforting knowing that my wife and I did most of the right things while looking. No additional borrowing (we DID get a sizable gift from my parents, with a letter to the bank saying what it was for), no major shuffling of funds, changing jobs, etc.; we didn’t “play house” as such, but we did get some sizable downpayment assistance from both state and local non-profit programs. The most important thing of all, I think, is simply to… Read more »

Early Retirement Extreme
Early Retirement Extreme
11 years ago

Is it really worth it to spend so much time and effort optimizing something that only FICO really knows how is calculated? The FICO score is a mathematical estimate of how likely someone is to behave irresponsibly with credit. Trying to game the system is in a sense irresponsible, right? (This is why the formula is secret and why it is continuously modified). Anyways seems the getting involved with mortgages is such a hassle so when it becomes time for us to buy a house, we’ll probably just save the money and pay cash and leave the leveraging to real… Read more »

kick_push
kick_push
11 years ago

i still find it crazy how people can afford mortgages these days

i’m doing all the steps above to owning a home a reality.. no debt.. great credit.. no crazy changes.. job stability.. etc..

the problem is i’ve been saving for 3 years now and only have 10k saved up for a down payment.. which is not even 10% on a condo in california.. plus the most mortgage i can afford on my income alone is probably 1k a month.. lol.. not gonna happen

i just don’t get it.

Cath
Cath
11 years ago

J.D.’s advice to CJ in comment #15 is HUGE. When we were selling our last house, the buyer waited until four days before the closing date to liquidate $94,000 worth of stocks!! Needless to say, closing was greatly delayed and caused us a good number of headaches and some panic on our part as we tried to close on our new home.

Adam
Adam
11 years ago

@kick_push

The reason you are having a hard time is you live in California. Real estate is through the roof absurd there, even with the mortgage mess. There are millions of millionaires, and more and more people of lesser income are being pushed inwards, away from the coasts.

Rachel
Rachel
11 years ago

Doesn’t all of this kind of sum up to this: When your bank looks at all your bills and income going in and out – they are basically looking to see that, yes, you are attempting to purchase something you can afford? (aka – 25 to 30% of your take home income is available for you to use) Like a few other people said, I don’t think it really matters as much if the cards are new or not, or if its a student loan or a car loan, or whatever – just that by the basic numbers you give… Read more »

Adam
Adam
11 years ago

“Like a few other people said, I don’t think it really matters as much if the cards are new or not, or if its a student loan or a car loan, or whatever – just that by the basic numbers you give them that you can actually afford to pay them back?” I would imagine they want to know not only that you can afford to pay the loan, but that you will pay it. That is why a longer credit history is better. Just like feedback and user ratings on eBay, it gives them more security that they aren’t… Read more »

Charlotte
Charlotte
11 years ago

A few more expenses we did not budget when we bought our home last year:

-refrigerator if the house did not come with one
-washer/dryer since we came from an apartment
-higher heating bill – from $150 to $200/month for cold months
-higher water bill – from $50 to $90/month
-garbage bill $25/month
-lawn mower

other things I can think of but not a problem for us:
-drapes/blinds
-carpet
-paint

one thing I thought we did right was not buy any furniture until we get caught up with our cash flow. still no new furniture right now.

brian
brian
11 years ago

Where was this article 2 years ago when I bought my first home?

From experience… it’s all true.

ladykemma2
ladykemma2
11 years ago

another thing to consider is home maintenance. i save 300 a month to maintain this castle.

so, budget money on top of the mortgage 10% of the value of the home for repairs.

Chris
Chris
11 years ago

Not to make kick_push feel worse, but, I also live in california, have about 6 times the down payment he has and I still can’t afford anything. Well at least in an area where A) I can commute to work and afford it, and B) Can walk around without fear of being shot. The funny thing is, back in February I could afford more than I can now, despite having a (slightly) larger salary and more for my down payment. And of course despite a drastic reduction in house prices since February. (in my area most houses have dropped at… Read more »

kick_push
kick_push
11 years ago

chris =(

times are tough man..

Ryan @ Smarter Wealth
Ryan @ Smarter Wealth
11 years ago

Saying “don’t borrow money” is a massive ask
Not many people can afford to buy their home with cash

LC
LC
11 years ago

Ryan – he meant don’t borrow money for a car, open a new credit card, etc, before you apply for a mortgage loan because it will hurt your score.

I agree with this advice, and also agree about moving away from CA if you want to afford a house. You can get a 3500 sq ft house in most states for about $150k.

CJ
CJ
11 years ago

Hi guys, I agree with what was written above about shifting your finances earlier and letting it season, but that’s not what’s written in the article itself.

Wova
Wova
11 years ago

Thanks for tipping me off to the first-time homebuyer’s tax credit. I bought a small place just a few months ago, just a few weeks after the credit eligibility period started. I ran the numbers, and it looks like taking the tax-credit and turning it into a pre-payment on my mortgage could end up saving me in the neighborhood of 8k of interest expense on my 15-year loan. The only real problem with the credit is that you can’t easily get your hands on the cash until after you’ve settled and filed taxes. I suppose you could alter withholdings, if… Read more »

Bill in NC
Bill in NC
11 years ago

“You can get a 3500 sq ft house in most states for about $150k.”

Maybe on an abandoned farm in Kansas, but in any area with a functioning economy prices are not that low.

Here in a city of 100,000 in flyover country you’ll still pay over $100/sq.ft. for a 4 bedroom, 3 bath detached SFR.

Cheaper ($/sq.ft.) houses are much smaller in size.

But are you willing to live (like in the 1950s) with a family of 4-6 people in a 1100 sq.ft., 3 bedroom, 1 bath house?

Meghan
Meghan
11 years ago

I almost got burned buying a house by odd banking habits. I have a checking account, and a savings account. Savings account gets interest, checking account doesn’t. If the checking account a $0 balance, it will automatically pull from the savings account. So I thought I was being clever keeping all of my money in my savings account, so I could get the benefit of interest, and if I wrote checks, money would automatically be moved over. Not only was it a huge pain in the ass to track money movements, but at first glance, it looks like I’ve bounced… Read more »

Robin
Robin
11 years ago

My opinions on buying in CA. I’ve just opened escrow on a condo here in San Diego. Lots of my co-workers are also buying right now because suddenly we can afford to. I’ve mentioned here before I’m in auto insurance claims, we don’t exactly make huge salaries. In the time period of about 2004-2006 the prices here in SD were rising over 30% per year and prices got completely out of control. This mortgage crisis has resulted in a market correction here, bringing things down to where they’re affordable for regular people. I followed none of the advice here because… Read more »

Chris
Chris
11 years ago

well interest rates have dropped. I don’t know if it will help me out or not since I still can’t get 20%. But, maybe I’ll put the apartment search on hold for the moment.

Karel Zeman | Real Estate Portal
Karel Zeman | Real Estate Portal
11 years ago

Good article. So many people are unprepared financially to buy a home, and they’re getting into trouble – especially with the risky loans of late. I suggest this Rent vs Buy calculator. It’s more complete and detailed than the one provided at Ginnie Mae. I recommend putting 1% to 1.5% of the price of the home as an annual budget for maintenance, repairs and remodeling (divide annual amount by 12 months to put monthly figure into this calculator). In today’s market, we personally can live in a nicer home by renting than buying, AND we net more money in the… Read more »

Geoff
Geoff
4 years ago

Excellent post. We are in process of buying a house after overcoming struggles we had during the recession.Thank you for all of the helpful tips.

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