This post is sponsored by Lexington Law.
Buying a home is an exciting prospect. Whether you’re buying it for you and your family to live in or as an investment property, there are some things you’ll want to start thinking about the things to do the year before you buy a house.
Preparing to buy a home is like getting ready for a job interview — you want to be as ready as possible so you do your research, polish your resume, iron your clothes, and go in with confidence. If buying a home in the next year or so is something you plan to do, here are 10 things you should be considering 12 months out.
10 Things To Do The Year Before You Buy a House
1. Figure out what you can afford.
Before you get into flooring and paint colors, calculating what you can *actually* afford to buy based on your current take-home income (not gross income) is a good place to start.
The 30% Rule used to be somewhat of a standard when it comes to landing on a number. But many financial experts and financially-savvy individuals are finding that to be outdated in today’s economy.
I’m quite fond of the 28/36 Qualifying Ratio as explained by Miranda Marquit at Lexington Law. She says,
“According to Re/Max, many lenders use the 28/36 rule to figure out whether your finances can handle your home purchase. The 28 refers to the percentage of your gross monthly income that should be spent on your monthly housing cost. The 36 refers to the percentage of income that goes toward all your debt payments, including your mortgage.”
I personally think to be on the realistic side of things — that is to say the side of the money actually landing in your bank account every month — that you should use your take-home pay number, not gross income.
Say for example your take-home pay is $4,000. 28% of that leaves you with $1,120 to spend on a mortgage. 36% of that is $1,440. Using the 28/36 Qualifying Ratio, that leaves you with $320 to spend on all additional debt you may have. Given student loans, car loans, and other consumer debt, it’s now up to you to look at your debts and see if this is realistic. Say you have $500 in remaining debt (for instance, your car loan), that additional $180 is going to have to come from somewhere in your budget. In the chance it can’t, realistically the mortgage you can afford on your income is $940.
If you were to use the 30% Rule, you could end up paying $1,200 on your mortgage, which may or may not be realistic looking at your budget.
Ultimately, a lender will only approve so much and there are other factors to consider as well like your interest rate, down payment, and length of mortgage. Don’t let anyone push you to buy something that is going to strain you financially. That money comes out of your wallet, not theirs. A house or property is not an investment if it drains your bank account.
If you’re concerned about having enough funds for a down payment, there are down payment assistance programs available in some areas, provided by companies like Stairs Financial.
These programs can provide financial assistance or grants to eligible homebuyers to help cover the down payment and closing costs. It’s worth researching these programs in your area to see if you qualify and can benefit from them. Remember, buying a home is a significant financial commitment, and it’s important to make sure you can comfortably afford it in the long run.
2. Check all of your credit reports.
Creditors aren’t legally required to report your credit history to any, let alone all three, of the major credit bureaus. This means there can be differences between your credit reports that you might not be aware of. This gets tricky because there also isn’t any requirement for potential creditors to look at any or all of your reports.
My senior year of high school, right before I was going to college and taking out student loans for freshman year, I checked my credit report for the first time. I was sure there wasn’t going to be anything there because I’d never had a credit card or car loan, but lo and behold, I discovered something unsavory.
My mom and I ended up discovering that I had been a victim of identity theft and someone had been using my social security number to work at a grocery store. Clearing it up required filing a police report and a lot of phone calls, but it taught me the importance of monitoring your credit. Unless you have someone to advocate on your behalf and navigate the tricky situations, it’s really up to you to remain diligent. That situation is why I use a credit monitoring service, like Lexington Law’s OnTrack Tool, to monitor my identity on a daily basis. As I get older, the financial stakes are higher and it’s important to me to protect myself.
If you’re already aptly monitoring your credit, way to go! And if not, I’d recommend looking into an credit and identity monitoring tool to check your FICO score, have your credit monitored, and to actively work towards improving your credit score and financial future.
If you come across incorrect or unfair items on your credit report, Lexington Law will advocate on your behalf to challenge any unfair, inaccurate or unsubstantiated item listed on your credit report which can help increase your credit score. They work for you, not a credit bureau or a creditor and have your best interest at heart.
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3. Get your credit score up.
As we’ve covered before, there are many factors that make up your credit score. Your credit score is so important to lenders (who will potentially be loaning you hundreds of thousands of dollars) because it’s a measure of your credit trustworthiness. The lower your score, the less they trust you to pay them back.
Having a lower credit score is actually beneficial to them. That means that you are going to be paying them back more money in interest over time. At the same time, they are also taking on more risk by lending you money (that if you can’t pay back it back, means they’ll have to repossess your property). Having a good credit score is still beneficial to the lender (they are getting paid back and making interest, after all), but the real difference here is how it affects your own personal finances.
A higher credit score means a lower interest rate which means you’ll be paying less over time to borrow the money you need to buy your home. A few points can make a massive difference, so do everything you can to increase your score.
4. Avoid opening any new lines of credit.
Opening new lines of credit are going to put hard inquiries on your report. This can potentially bring your credit score down. If you’re hoping to use a new line of credit as a way to improve your credit score, begin thinking about this in the range of 10-18 months out of your ideal buying time. New lines of credit require hard inquiries on your credit report which can ding your score.
5. Don’t miss any payments.
Your payment history makes up a whopping 35% of your credit score. Even one missed payment can be potentially devastating, let alone multiple missed payments.
As an example, I have a friend who missed several student loan payments due to a miscommunication while he was deployed. These missed payments dropped his credit score by over 200 points. It’s painful to even think about.
6. Practice living with your new mortgage.
Ahead of time, it’s probably worth it to get a pre-qualification (not a pre-approval) to get an overview of where you stand with a lender. Compare lenders and pick a few and shop smart. Do your research on which lenders are most likely to give you the best rates based on your income, down payment, and credit score.
Once you’ve been pre-qualified and understand what you can afford practice living that way. If it’s less than your current rent, that’s great! You’ll know you won’t have a problem affording it. But if it’s more, get used to budgeting with a higher housing payment every month. Check in with your budget to get an overall feel for your new reality.
7. Save, save, save!
Aside from the down payment, buying a home can also come with extensive costs. From the down payment to independent appraisals to necessary updates to your closing costs, buying a home can be far more expensive than one might expect. Also remember that if you’re purchasing an investment property, mortgage insurance won’t cover it so upfront costs are generally higher.
Talk to your home-owning friends and see what surprised them the most about buying a home. One of my friends shared that she and her husband planned to put down $100k. After closing costs and fees, their down payment was closer to $80k. She and her husband are financially savvy and plan to pay their mortgage off early, and even still it caught her off guard.
If you’re buying an investment property, you might want to make upgrades and repairs before renting it out which can cost you valuable months of rent plus the cost of those repairs. Having cash you can use for this purpose versus taking out a loan can make a huge difference in your standard of living.
8. Scope out the areas you’re interested in at all times of the day.
The vibe of a neighborhood can be completely different from a weekday afternoon to a Saturday night. If you have a specific area you’re looking in, drive through at all times of the day to get a feel for it. How do the neighbors act? Are there kids outside? Does the area feel unsafe? Is there an HOA? Do people take care of their homes? Check local crime reports and look into neighborhood watch updates. Which grocery stores would you go to? What about schools? What conveniences are nearby? Don’t just focus on the home you’re potentially buying but also the must-haves and nice-to-haves for your area as well.
9. Think long-term.
Check the market and values of nearby homes. Take into account your goals for buying a home. Are you planning to sell in a few years or live here for potentially a decade? The neighborhood, and not just your home, make a difference when it comes time to sell.
On a similar note, the home buying process also involves a lot of negotiation. It’s important to remember that not everyone is always on your side. Not that anyone would intentionally try to deceive you per say, but it’s a good idea to also get additional and independent decisions, inspections, and quotes before signing on any dotted line.
Also consider how owning a home will impact your life years down the line. You might be thinking that paying a higher mortgage is worthwhile. But what about when you have other expenses like children, education, or illness? Consider how you’ll feel and what your life looks like in 5-10 years down the line.
10. Don’t rush.
As it turns out, things don’t always go according to plan. It might take you longer than a year to find your perfect location, get your credit up, and go to closing for a home. Don’t let yourself rush into buying a home that’s not truly right for you.
There are a ton of factors that you’ll want to consider for yourself. Many times we hear things on social media about how people bought a house seemingly spontaneously. While we can be happy for them, that doesn’t necessarily mean they’ve made a good decision. At the end of the day, you’re the one who will be living in and paying for the home you buy.
A home is a big purchase and is an exciting prospect. Before signing any documents, though, be prepared going into your search with research and flexibility. If you’re finances aren’t yet in order, do what you can to start improving them today. Consider working with a company who will advocate on your behalf, like Lexington Law. They will work with you to meet your goals and improve your financial standing for a brighter future. So if you’re thinking about buying a house in the next year, congratulations! We’re thrilled for you.