Buying a home is a simple yet complicated process. It can be a fulfilling and challenging experience simultaneously, both physically and mentally. Some people buy a home as a first-time homebuyer to transition from being a tenant to being a homeowner. The feeling of owning a home can fill your chest with pride. After all, owning a home is the biggest investment for most people. Some people buy a home as an investment to generate passive income. Some people upgrade from a smaller home to a bigger home due to a bigger family and some downsize due to retirement, relocation to a new place, etc. Whatever the reasons might be, do these 5 things below before you pull the trigger: -
Educate yourself- Do you feel overwhelmed in a supermarket when you go to buy a box of cereal? I certainly do. There are 10 different brands of cereal, for god sake! All promise to be the best and the most nutritious. Moreover, they are all priced the same. So how do you decide which one to buy? You just pick a box, right? It doesn't really matter which one. It is just 10 bucks. If you don't like it, you can always buy another one. Now imagine the same scenario when you are looking at homes. You go on Zillow or Realtor.com and browse through 100s of properties. You like some more than others. There are all kinds of homes. Condos, townhomes, ranchers, cape cods, detached, etc. After 30 minutes or so, your brain shuts down and you close the laptop. You think homebuying is not for you. After all, it costs hundreds of thousands of dollars. And you can't even return it if you do not like it. Yeah, you can always sell it but that's a different story and it costs money too. That is why you need to educate yourself.
By educating, I do not mean that you need to complete a course on real estate or something. When your car breaks down, your mechanic can recommend a lot of unnecessary repairs if you don't know the basics. But if you educate yourself about your car and know the basics such as the type of oil your car needs, when to change the oil, when to rotate the tires, etc., you can choose to do the necessary repairs and reject the unnecessary ones recommended by the mechanic. All you need to do to educate yourself is read the car manual that comes with the purchase of the car.
Similarly, before buying a home, spend some time on Google to learn about basic terms such as down payment, lender, home loans, home appraisal, home inspection, mortgage payment, and home insurance. Second, do your research about the home-buying process, such as saving for a down payment, finding a real estate agent, submitting an offer, and completing the purchase. Lastly, you need to introspect and ask yourself why do want to purchase a home. Talk to your friends and acquaintances who already own a home. After all, home buying comes with its own set of responsibilities. Buying a home is probably the biggest purchase for most people in their lives. The last thing you need is to purchase a home only to realize later that it is not for you.
2. Start early- Once you educate yourself and decide your why for buying a home, start early. By starting early I mean start saving, finding a realtor, and start looking at homes. Start saving early even if you are not looking to make a move in the next 6 months or a year. Open a savings account or a high-interest checking account and start putting aside little money each month. Very soon, your home-buying fund will have enough money for a down payment and some money will be left over as reserves for unforeseen circumstances. It is highly advisable to not use all over savings as a down payment and save some money as reserves for emergencies.
Start talking to people, ask for references, and interview a few real estate agents. You can hire the first real estate agent or the third one. As long as, he/she is the right one. The right real estate agent will patiently explain the home-buying process to you in simple terms and answer any questions that you might have. He/she will guide you through the process and always look out for your best interests. Lastly, if there is something that the realtor cannot assist you with, a good realtor will go above and beyond to connect you with one of his/her trusted partners or team members.
Start looking at homes online. Visualize yourself sitting in the living room or gardening in the backyard. Do you see yourself hosting a movie night in the basement? Do you prefer a condo in an apartment building instead? Do you see yourself running up and down the stairs in a multi-level home or you'd prefer a rancher with everything on one floor? After potentially looking at homes for days, if not months, you would be able to narrow down the type of home you can visualize yourself in.
3. Research- go online and research the type of house you want to live in. Visualize it. Do you like stairs? Do you like a basement? Do you like a big yard? Do you want a garage? Do you want a house or a condo? What neighborhood do you want to live in? A good school district might be important for you if you have kids but not so much for couples or single folks. Do you want to live in the city or county?
Make a list of must-haves and a list of things you don't want or don't care about.
Drive around different neighborhoods at different times of the day and visualize yourself living there. Do you like the picture? Or not?
Go to open houses. Visualize yourself living in the house. Visualize yourself cooking in the kitchen, gardening, relaxing on the couch, and sleeping in the bedroom. That way, you will figure out what your perfect home looks like and won't be overwhelmed when you work with your realtor and actually search for your perfect home.
4. Build your credit- building good credit is simple but it takes time. Anyone can build a good credit score through discipline and smart money decisions. According to myfico.com, your FICO scores are determined by 5 major categories as below: -
Payment history- it accounts for 35% of your credit score and therefore, is the most significant factor to build good credit. It means whether you have a history of paying your balances on time or not. Even a single missed payment can wreak havoc on your credit score. So, please make your payments on time.
Amounts owed- the second most important factor that accounts for 30% of your credit score. It means how much debt you owe such as credit card debt, car loans, etc., as compared to your income. Mortgage debt is not included. Most lenders want to see less than 30% utilization of your available credit. For instance, if you have a $1000 limit on your credit card and you have used $200, you have utilized 20% of your credit limit and thus, you are considered a safe borrower. On the contrary, if you used $800 out of the $1000 credit limit, you have utilized 80% of your credit limit and thus, you are considered a risky borrower who might default on payments. Personally, I like to keep my credit utilization less than 10%. However, if a big purchase comes up or if I am traveling and my credit utilization goes up more than 20%, I make sure to pay it off by cutting down on other expenses and bringing it down to less than 10%. Please note that I am not paying any interest on the remaining 10% credit utilized by taking advantage of the 0% intro APR offered by credit card companies.
Length of credit history- it accounts for 15% of your credit score. As a rule of thumb, the longer your accounts are open, the better it is for your credit score.
Credit mix- it accounts for 10% of your credit score. It simply means that lenders see whether you have different types of accounts such as credit cards, retail loans, mortgage debt, installment loans, etc. But you are not required to have all these accounts to build a good score.
New credit- also accounts for 10% of your score. Your credit score takes a hit if you open several new credit accounts in a short span of time. It is worse for people who do not have a longer credit history.
Thus, it is recommended to NOT open multiple consumer credit accounts in a short span of time. Pay off all your cards each month. Limit your credit utilization to less than 10%. Take advantage of 0% APR credit card offers. (Comment below if you want to know more about 0% APR credit card offers and how to take advantage of them).
5. Ask questions- Finally, the most important thing to do is ask questions. Do not be afraid to sound stupid. No question is stupid. It is better to sound stupid for a moment than leave it unanswered and regretting later. A good realtor or a lender will answer all your questions to your satisfaction or connect you with someone who can answer those questions.
By Shashank Mittal
Blogger, Realtor, Physical Therapist
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