Crucial, Overlooked Steps When Buying a Home

Investing in a new home is a long and oftentimes overwhelming process that requires a good deal of research and preparation. In addition to creating a comprehensive financial plan, any potential buyer should take the time to learn as much as possible about the housing market in order to make the most appropriate, informed decision.

To help you better navigate the rigors of a home purchase, and make the best decision possible, we’ve compiled a list of crucial, overlooked first steps.

Learning the Market

Before your home-buying journey begins, it’s important to explore whether or not purchasing is in your best interest. Look at a variety of factors, including:

• Income – Does your current income allow you to invest in a home that offers long-term value? Committing finances to an any property too early may impact your ability to find a more substantial home in the future. Many professionals recommend a maximum price of no more than 2.5x your annual household salary. However, each lending institution will have its own set of rules.
• Five-year projection – Are you fairly certain you will still be living in the desired area within the next five years? If you’re unsure about the future of your career, or are considering the idea of a move anytime soon, purchasing a home could lead to headaches when it comes time to leave. It’s not impossible to sell a home quickly after a purchase, but it can be difficult and stressful, especially in the event of a swift or unexpected relocation.
• Local market conditions – Knowing the local market is an absolute must when it comes to buying property. Local conditions don’t always line up with the national outlook, so researching the state of the local market can give you a better idea of whether or not this is the best time to buy. Use any of the countless available online resources, like Zillow.com, or realtor.com to get a month-by-month look at local and regional market reports.
• National market conditions and projections – Taking advantage of national reporting can benefit your housing hunt just as much as learning the local market. Researching national trends and forecasts can give you a better idea of how the market has changed recently, and more importantly, how it may change in the coming months. For example, you may notice that home prices are on the rise, and that forecasts indicate the trend will continue. In that case, beginning your search sooner rather than later would benefit you the most.

In addition to the factors listed above, it’s important to set aside time to get out and do some real world research. If you’re close enough to the area in which you’d like to buy, make as many driving trips around the neighborhood as possible before truly beginning your search. Look for sale properties nearby, and keep a running list of prices, specs and locations to give you a better barometer of what you can anticipate when you begin looking. Make another list detailing what you like about the area(s), then use that list to see if any other neighborhoods offer similar amenities and essentials to help you expand the scope of your search.

Above all else, take your time. Don’t let your eagerness to get those keys force you into a hasty purchase. Explore the market, learn as much as possible, and then decide whether or not this is really the best time for you to buy.

Assessing Your Financial Options

After the housing crash 10 years ago, many financial institutions have become much more demanding in regards to the documentation required and assessments used to process a loan application. With that, making sure your finances are in order is the first critical step in determining how much you’ll be able to afford.

Let’s take a look at how you can best assess your financial outlook:

• Get a credit check – There is a lot of bad information out there about how multiple credit inquiries in a short period of time can affect your credit score; however, for the most part, running multiple credit checks in a relatively short period of time is viewed as an attempt to retrieve a loan of some kind (which, in this case, applies to you), and won’t negatively affect your score long-term. With that in mind, don’t stress over the possible negative impacts of running a credit check or two before you contact a lender (your checks will typically show up as “soft pulls” and should not even impact your score). Visit annualcreditreport.com (the only free credit report site) to retrieve reports from the three major credit bureaus online. You might be surprised to find leftover connections with family members or friends as they pertain to joint financial ventures (that includes shared bank accounts). Incongruities like those can impact your overall credit rating, and need to be taken care of before the loan application begins. A financial professional can help you navigate these tricky situations more effectively. Obviously, a higher score is preferred, but if your credit isn’t perfect, that doesn’t mean you won’t be able to buy.
• Know your income – After you’ve determined your credit score, it’s time to start thinking about what you can actually afford based on income. If you’re currently renting, take a look at how much those monthly rent payments affect your total financial picture. Are you struggling to handle rent and bills on a month-to-month basis? If so, you may need to adjust your expectations when it comes to the amount of home you can afford. For example, say you’re paying $1,200 a month in rent, and hope to acquire a mortgage with a comparable monthly payment. That might make sense from your current position, but home ownership includes a number of unexpected expenses – especially in the early years. Repairs, appliance replacements and essential upgrades can all rear their ugly heads at any time, and if you’re unprepared to deal with them, you’re simply stuck with the problems. Also remember that rent does not included taxes and homeowner’s insurance. Take a hard look at your income, and draw up a comprehensive plan for how much you can comfortably afford monthly. Remember to leave room for emergency funds, savings and perhaps a little recreation.
• Do you have 20%? – Now that you’ve created a more detailed picture of your financial outlook, the next step is taking a look at available funds. Most professionals recommend making a down payment of at least 20% of the home’s sale price at close, so having cash available (not credit!) is critical. How much money do you have saved? How much money can you practically save between now and when you plan to apply for a mortgage? Remember, making a hasty purchase will only come back to bite you in the end, so if you’re not prepared to make a reasonable down payment on your future property, it may be best to wait.
• Consider getting pre-approved – Read more about the pre-approval process here.

With all of the above information in hand, you’ll have a much greater understanding of what you can afford when it comes time to buy.

Detailing Your Needs for a New Home

Now for the fun part! Once you’ve created a clear assessment of your financial standing, you can begin detailing what exactly you need from a new home. It is important to remember that need is very different than want. Your needs should be limited to only the most fundamental aspects of a property required to suit you and your current or planned family (if applicable).

When making your list, consider the following:

• Necessary (not desired) number of bedrooms/bathrooms
• Minimum square footage
• Location and proximity to work and/or schools
• Yard size and availability
• Pet accommodations
• Neighborhood guidelines (consider Homeowner’s Association dues)
• Central air and heat (are you willing to deal with gas?)
• Appliances
• Storage
• Possible renovations

As you go through the above list, and fill out each category, remember to consider the long-term impact of every choice. Are you planning on starting or expanding a family soon? If so, you need to account for what those new additions will need. Plan on living in your new home for a minimum of five years, and make your decisions from that point of view. Whether or not that’s an accurate plan, it should at least give you a better idea of what you need in the long run.

Finding the Right Agent

Once you’ve determined roughly how much you can afford and compiled a list of your needs from a new home, selecting an agent is your next step. Agents help streamline the purchasing process by finding appropriate properties, assisting with evaluation, negotiating offers and counter-offers, and managing the close. Agents can not only alleviate much of the stress associated with a first-time purchase, but they can also help you land a better deal on your dream home.

When searching for your agent, start by seeking out references. If you have any friends or colleagues in the area who’ve recently purchased, ask about their experience. Specifically, ask if they would return to that agent for a future purchase.

Once you’ve compiled a list of recommended agents, prepare a series of questions for each meeting. Pay particular attention to how the agent responds to your questions. Do you feel rushed? Does the agent appear agitated by your questions? Never let the pressure of the moment overshadow your instincts. If you feel like you’re being ignored or slighted, it might be time to look elsewhere.

The advice above lists some great first steps to beginning your journey toward purchasing your first home. Remember to take your time, do your homework, and recognize needs verses wants.