Financial guru Dave Ramsey would say that I have “house hunger”. I desperately want to buy a house, but my “financial house” is not in order. I am incredibly frustrated because this is an excellent time to buy, but I don’t have a down payment saved and I have too many credit card bills, my condo is not fixed up enough to rent out yet, and I can’t figure out what kind of house to buy. Do I want a lake house, a lovely Victorian house in my hometown, or a sweet bungalow in the city I currently live in — Maybe all three? Hmmm….
So I was thrilled to find an article by Liz Pulliam on MSN Real Estate titled “Think You’re Ready to Buy A Home? Get Your House In Order Before You Start Shopping.” When I first read the article, I panicked. There was just no way I could possibly accomplish all of the prerequisites in a year… or so I thought! But then I realized what she actually meant was that ALL of these steps should be completed a year before you even begin to seriously LOOK for a home. Whew! Of course, there is no law saying that I can’t remain house hungry for two years instead of one…if need be.
Good. Time to breathe (this is where you take a breath, exhale, and relax).
Image from citta-vita @ flickr
Home Buying Schedule: A Clear and Simple Home Buyer’s Checklist
All plans have to start somewhere, and the home buyer’s checklist from MSN Real Estate begins the countdown at one year. As I said, a full year before you even begin to SEARCH for your next dream home, you should complete the following activities to strengthen the foundation of your financial house.
One Year Before You Buy a House
1. Check your credit report.
This is a simple step that people often overlook — after all, your credit report must be correct…right? Wrong. One wrong keystroke and you could have someone else’s debts added to your credit report. I have also seen companies add information to a credit report because two people have the same address (think: parent vs. adult child). A good rule of thumb for those of you who are facing a major financing decision in your future is to opt for a credit monitoring service that will help you keep an eye on your credit. If you are uncomfortable having to pay for this type of service, then go for free credit reports via AnnualCreditReport.com.
Now while I’m all for doing this for free, I make the excuse to pay for FICO scores and credit monitoring in cases that may involve taking on a lot of new debt (e.g. a new mortgage, car loan or student loan). Why? Because by keeping close tabs on your credit and knowing what your credit standing is, you can negotiate for much cheaper rates, saving you money in the long run on that new debt. It’s probably worth the small investment to use credit monitoring for this purpose prior to seeking financing at this level. Here are some credit report monitoring services you can check out.
If you’re not sure where to start, take a look at some well known credit score providers such as myFICO or the credit bureau Equifax (more on Equifax credit report services here).
2. Work on improving your FICO credit score.
See if you can improve your credit score as much as you can possibly do so in one year! There are quite a few ways to do this, but you can start with taking care of any bad marks you might have against you on your credit report. The easiest start would be to make sure that you are simply paying your bills on time. If you’ve got damaged credit, find out more information about repairing your credit here.
3. Protect your identity while you save.
Take advantage of credit monitoring services to alert you when there is any suspicious behavior on your credit report — there are several free ways to protect your identity, so there’s no excuse not to do it. You don’t want someone else’s mistakes to be the basis for whether or not you are approved for a house.
4. Save as much money as possible.
I know, I know. You are DYING to just jump right in with both feet. You can already imagine yourself stretched out on the couch relaxing in your cozy new house with all of the home-buying legwork behind you. However, a minimum ten-percent down payment will give you the most options with your financing. You definitely want to shop around when the time comes to snag the best home loan rates you can!
5. Pay your bills on time!
To ensure that your bills are paid on time, you may want to opt for automatic bill pay. It’s a much easier and more convenient way to pay one’s bills. A single 30-day late payment can knock your FICO score down 100 points, and it can take a long time to restore.
Six Months Before You Buy a House
1. Explore mortgage options.
Research your options and make sure you understand the risks of each. A little research now could save you a lot of trouble later. Should you go for a fixed rate or a variable rate mortgage? I’m partial to fixed rate mortgages because there won’t be surprises with this type of loan.
2. Understand the cost of owning a home.
The cost of home ownership goes way beyond your mortgage payment. In addition to your mortgage, you will also have homeowner’s insurance, property taxes, and repair costs to name a few. Before you get too invested in your search, find out what it means to commit to becoming a homeowner. It can be more expensive than you think!
3. Boost your savings.
Make sure you’ve got enough for a decent down payment (The Digerati Life suggests 20% or more). Saving for a home ranks as one of the most popular savings goals that families have, so much so that there are folks who are simultaneously paying down their debt while saving for their dream home. There are many people who harbor the dream of owning their own home regardless of their financial status. If you’re serious about buying a home, make sure you’ve saved more than enough to afford becoming a long term homeowner.
Three Months Before You Buy a House
Slow and steady wins the race. At this point, the most important thing is to establish stability. Get your credit card balances even lower — so much lower that you are well below your available credit limits. And by all means, don’t do anything to harm your credit rating, such as opening or closing multiple accounts. Slow and steady.
Two Months Before You Buy a House
1. How good were you?
Now is when you see how all your hard work has paid off. What kind of mortgage rate will you get with your FICO score? Make sure you do all of your mortgage shopping within a short period of time (in a one-month period, for example) to limit dings on your credit report. Once you choose a mortgage, getting pre-approved will strengthen your position with sellers. You may want to consider a mortgage broker — especially if your credit is iffy.
2. Go home shopping!
Narrow down the neighborhoods you would like to live in, and find a good real estate agent!
Time to Buy Your House!
So you’ve finally found your dream house and your offer has been accepted! Any good real estate agent will walk you through getting an appraisal, an inspection, and doing a walk-through if necessary to make sure any agreed-upon repairs have been done. They will also help you determine how much money you’ll need at your closing. Finally, shop around and obtain homeowner’s insurance for your new home!
One year may seem like such a long time when you want to buy a new house now. However, a little hard work and diligence will make the time fly, and it will surely pay off in the end.
Created November 5, 2010. Updated July 10, 2012. Copyright © 2012 The Digerati Life. All Rights Reserved.
{ 7 comments… read them below or add one }
Thank you for this! I’ve been piecing something like this together for my real estate clients – it’s nicer to help people buy homes when you know they’re truly ready – and I’m very glad to have this! Good for you for doing your research and thank you for sharing!
A great list. I think I’ll offer something like this on our German website.
This post is right on time, as I have home fever also. Credit looks good but could improve of course. Looking forward to the steps, including boosting that savings for a down payment.
I agree with the other comments that this is really good info for people who are thinking about buying a house in these times of low prices and record-low interest rates. Dave Ramsey was mentioned, and he would say get rid of your credit card debt and then get rid of your credit cards! Credit card debt has to be the worst kind of debt to carry.
I’ve heard that you need at least 20% of your house purchase price to get a mortgage now, Is that true???
There is one more consideration: You absolutely have to pay attention to the economic cycle. House prices go up and down, depending on if we’re in a recession or in a bubble economy.
If you think you’re finally ready, but house prices are at the high end, it definitely will be worth your while to curb your enthusiasm and wait for the next drop. Despite how it might feel, it is never that long before the next drop. In our lifetimes, we’ve had a recession every 7-10 years, like clockwork.
At this time, house prices have already recovered somewhat from their last recession lows. If you’re not entirely ready, it might be worth your while getting everything in order to pounce on the bargains the next recession will undoubtedly bring.
I believe that the housing market will stay flat for quite a while. It could be a few more years before we see any meaningful improvement in the real estate market. Why? Well there’s all the shadow inventory that the banks are still keeping in their books as well as all those homeowners who are “stuck” in their homes due to negative equity. Without these issues resolved, the housing market is expected to be in the doldrums.