How Do You Prepare to Buy a Home?
Your income, debt, monthly expenses, and savings determine how much house you can afford. You can typically buy a home that is two to three times your income. There are some really great mortgage calculators to help estimate what you can afford at GinnieMae.gov, Realtor.com, and QuickenLoans.com, just to name a few. But nothing beats talking one on one with a lender to find out how much you can afford and or what steps you need to take to get on the right financial path.
Lenders also consider other expenses when determining your purchase power: homeowner/hazard insurance, real-estate taxes, and if your down payment is less than 20 percent, you will need private mortgage insurance. When considering costs, don't forget maintenance costs, utilities, and if applicable, homeowners' association fees (if the property you are purchasing is part of a HOA).
Your monthly mortgage payment should not be more than 28 percent of your monthly income before taxes. (So, if you make $40,000 a year × .28, then divide by 12 = $933 monthly mortgage payment.) Your overall debt-to-income ratio — how much of your pretax income goes toward all your debts (mortgage, credit cards, student loans, child support, etc) — shouldn't be more than 36 percent of your gross income.
When you find out how much you can buy, factor in your personal life. If you buy the biggest house you can afford, will you still be able to take a vacation? Will you have enough money for repairs if something in the house breaks? Will you be able to set savings aside for your retirement or will you be able to save for your child's future college tuition? Don't forget your life — it's important — or the little joys you take for granted. You don't want to be so house poor you can't afford the small joys.
The best way to find a Realtor® or lender is word of mouth. But, when you don't have access to a referral, there are some really great websites to help you. Realtor.com can help you find a Realtor® in your area. Visit FannieMae.com and click on “Find a Lender Search” at the bottom of the left-hand column. You can browse for a lender by state.
Before you prepare to buy a home, improve your credit — pay your bills on time or early — reduce your debts, and add to your savings. Seek a reputable real-estate agent to guide you through the homebuying process — it won't cost you anything; find a lender to help you financially prepare and see if there are programs to assist you (grants, closing costs, down payment assistance, first-time homeowner programs); and even talk to your tax advisor about the tax advantages of homeownership.
Most importantly, get preapproved for a mortgage loan before house hunting. This is your best strength as a buyer because: (1) you will know how much you can afford; (2) your agent will show you homes in the right price range; and (3) when you make an offer on a home you love there is nothing better than having that preapproval letter proving you are a ready buyer.
What is the most important thing first-time homebuyers should do?
According to Grey Wilkinson, sales manager, Wells Fargo Home Mortgage, Houston, TX the most important thing is to use a Realtor® — it doesn't cost the buyer anything and will protect the buyer. The real-estate agent usually works with a loan officer. They want the loan to close/home to sell, so they will put you in touch with a loan officer. It is also a good idea to research lenders on your own as well to see which one works best for you.