You’re about to make the biggest move of your life, so a home checklist will serve you well.
It’s time to move out of that apartment and finally realize another piece of the American dream: homeownership. Buying a home is huge. Congratulations on moving forward on another milestone in your life. Now, it’s time to make sure that you practice proper due diligence or that dream could turn into a nightmare.
Here’s my home checklist to follow before you buy the house.
1. Check Your Credit
The first thing that you’ll want to do on the home checklist is to review your credit. That’s because you’re almost certainly going to need a mortgage to purchase the house.
It’s important to request your credit report directly with AnnualCreditReport.com. They are the official government-mandated website to request copies of your complete credit report from all three credit bureaus. Then, you can follow that up with a free app such as Credit Karma.
Why is it important to check your credit? For starters, you might have incorrect or negative information in your credit reports that you’ll want to get removed. It’s not uncommon for any one of the three major credit bureaus (Equifax, TransUnion, or Experian) to produce credit reports with incorrect information. If that’s the case with your reports, you’ll want to contact the appropriate bureaus to clear your record.
Second, your credit score will affect your mortgage rate or your ability to even get a loan. This is especially true if you have a low credit score (below 680). In that case, you might want to work to improve your credit by paying down some debt and avoiding the use of credit cards for several months. Also, do not apply for new credit (such as credit cards) while you’re trying to improve your credit score. Those applications result in “hard checks” on your credit and they will lower your score.
Increase your knowledge about credit reports and scores here.
Home Checklist Item 2: Get Prequalified
Now that you’ve got your credit house in order, it’s time to approach a bank and get prequalified. If you’re working with an agent (and you should be), then it’s very likely that he or she knows a mortgage broker that you can talk to about getting prequalified. A mortgage broker can help you find the right loan as they work with multiple lenders.
For prequalification, be prepared to share all of your financial secrets with a complete stranger. You’ll need to provide your tax returns, pay stubs, and bank statements to the lender or mortgage broker. That information will be used to prequalify you for a loan. Although the mortgage process is similar across different lenders, they often use different guidelines for underwriting and approval. In some instances, you may be approved by one lender and denied by another.
Pro Tip: Drop Down from the Prequalified Amount
You’ll be prequalified for a specific amount. For example, your mortgage broker might tell you that you’re prequalified for a $300,000 mortgage.
When that happens, knock 5-10% off of that amount. It’s typically not a good idea to try to borrow the maximum allowable because there are always unforeseen expenses that pop up into your life.
So, if you’re prequalified for $300,000, tell yourself that you’re really just prequalified for $270,000. That will give you some much-needed financial cushion.
Home Checklist Item 3: Put Together a Budget – Yes, a Budget
Once you’ve figured out your prequalification amount, it’s time to put together a budget. That way, you can be certain that you don’t buy a house that ends up putting too much of a strain on your monthly income.
Remember, you can’t just substitute the mortgage payment for rent if you’re relocating from an apartment to your own home. You’ll also have expenses associated with the home that you didn’t have with the apartment. You’ll find that a home is appropriately labeled a “money pit” by many homeowners, so budget for repairs and maintenance accordingly.
One thing to keep in mind, when owning a house, your mortgage is the floor and all other expenses add to that amount. This is different than renting where the rent is the ceiling and you’re not liable for any structural issues like leaking roofs or burst pipes.
4. Save for the Down Payment
Up next on the home checklist is the down payment. There aren’t too many banks that are going to give you a mortgage that equates to 100% of the price of the property. You’re going to need to put some money down, typically at least 5%. There are different types of mortgages and most first-time homebuyers use FHA loans to buy their home.
If you’re just putting down a very small amount, then your lending institution will probably require you to purchase private mortgage insurance (PMI). As the name implies, that’s a monthly insurance expense that covers the lender in the event that you default on the loan. You’ll want to include it in your monthly budget.
Pro-tip: Ideally, you’ll want to have 20% down. That will get you out of PMI and it might even get you a better rate. And you may want to save your down payment into a higher yield savings accounts as opposed to invested in the market. It’s great to earn more while the downpayment sits there but you don’t want to be caught with a down stock market when you’ve found your dream home.
5. There are Closing Costs, Too
Keep in mind that the down payment is not the only up-front money that you’ll be required to present at closing. There are additional closing costs as well, such as loan origination fees. Make sure that you have money for that as well as the closing costs.
In some cases, you might be able to fold the closing costs into the mortgage. However, be prepared to pay a higher rate if that’s what you plan on doing. That will cost you a lot more money over the long run.
Home Checklist Item 6: Build a Nest Egg
You’re going to want to have some cash on hand for a rainy day in addition to the other cash mentioned above. Yes, it seems like you need to have a lot of cash just to borrow money to buy a house, but that is the unfortunate reality.
Start putting some money away in an interest-bearing savings account. Let that money grow and accumulate so that, once you’re in your new home, you’ll have some emergency money on hand in the event that you lose your job or major repairs are necessary.
Let us know where you are in the home checklist in the comments below.