Is it time to buy a new home? Maybe your growing family doesn’t quite fit in your current place – the kids are getting bigger, or there are more of them and they need more room to run around. Maybe you’re in the opposite situation — an empty nester, ready to downsize. Or maybe you’re moving because of your work, or you’re ready for the bit of adventure that can come with heading to a new town.
Whatever the reason, there are a few steps that will make the process easier and help you land the right place for your needs.
1. Check your credit rating
Unless you happen to have a giant pile of money lying around, you’re going to need a mortgage. And one of the first things any lender is going to do is check your credit rating. Lending standards have risen since the go-go days of the early 2000s, so a good score is more important than ever. Higher scores generally mean you are a lower credit risk and should help you qualify for a lower interest rate, meaning less of your money goes to the bank and more to your house.
The highest score is 800. While you don’t need to be perfect — which is extremely rare — a higher score will make getting a mortgage much easier. In a 2013 study, the FDIC found that almost no mortgages were issued to people with a score below 620, so consider that an absolute minimum.
Under federal law, everyone is entitled to a free credit report once per year. This report provides a detailed record of how you’ve managed your credit over time. Click here to start the process for getting yours. If your credit rating is poor, start burnishing it immediately — before you go house hunting.
2. Find a lender and get approved
So, your credit score is in order, now it’s time to head to the bank, or at least a lender. The market is hot now in many parts of the country, and many sellers won’t even talk to a potential buyer who isn’t pre-approved.
Sometimes it can make sense to apply for your loan with the same bank where you have your day-to-day accounts, but an independent mortgage broker can also help you find a good deal by comparing the rates and terms of many lenders. While the interest rate is the biggest single item you’ll be looking at, there are likely to be a host of other fees to watch out for. Once you get that pre-approval, you’ll know how much you can spend.
3. Figure out what you need
Note, you are not ready to start scrolling through the thousands of listing on the Internet, but you soon will be. First, though, get your priorities in order. Make a list of what you really need and what you just really want. Here are some key items to help you get started:
- Is it important that the public schools are good, or will you send your children to private school or home school them? Keep in mind that even if you won’t be sending kids to the local schools, being near good ones will help when you eventually sell the place.
- How close do you need to be to a doctor or pharmacy?
- What does the commute look like from the property? (Don’t forget that commuting costs are a part of living costs. If you buy a cheaper house because it’s farther away, you may end up losing that savings in the extra driving costs.
- Do you want to be able to walk places? What amenities are within walking distance?
- What are your personal needs and wants? Don’t be afraid to get into real nitty-gritty details. If you entertain, maybe a spacious dining room or open-plan kitchen are important. Or maybe you want a southern exposure for your garden.
- Once you have your list, put it in order of priority. Get used to the idea that some of the things on the bottom of the list may need to be sacrificed. No matter how much you have to spend, you’ll always want a little bit more house than you can afford.
4. Start house shopping, boots on the ground
Flipping through house listings on the Internet is an obvious place to start, but don’t let that be all you do. Especially if you’re new to a town, there’s no substitute for actually being in a place and getting a feeling for it. Breathing the air and walking the streets in different neighborhoods can help you understand why two houses a few blocks away have radically different prices.
Find a good real estate agent and listen to the suggestions they offer based on your wish list. Go to open houses. Lots of them. It can be fun to visit houses outside your price range to give you some perspective (and to see how the other half lives), but spend most of your time looking at houses that are within your range.
After some looking, you may find you need to revisit the priorities you developed in step three. That’s OK. It will be tempting to stretch a little further and buy something just a tiny bit more expensive. Resist this. Don’t buy more than you can afford. And sometimes the things you’re missing may just call for some delayed gratification. If you can’t afford a house with a hot tub, you can always put the spa on your list for later improvements.
5. Make an offer
This part can be tricky. If you’ve looked at enough houses, you’ve probably got a good picture of your particular market and whether a house is correctly priced. Your agent should be able to offer you advice about this and about what sort of offer to make. They’ll also have information about how long the house has been on the market and may have a feeling for how motivated the seller is.
It’s important to listen to your agent, but remember, you’re the one who’s going to have to live there and make payments for the next few decades. It’s your call in the end. Some markets are very tight, and you might get into a bidding war. Don’t let the thrill of winning the war push you over your budget. And whatever you do, make the offer contingent on an inspection. Read on.
6. Get an inspection
Unless you’re a contractor, you probably aren’t trained to look at the house in the same way an inspector is. That odd bulge in the floor could be nothing, or it could mean problems that will end up costing you tens of thousands of dollars to fix. The inspector (your agent will know at least one) will go over the house and hopefully spot all the little defects you missed.
At this point, you may be emotionally invested in the place, but keep your logical side engaged. Be willing to back out if there are too many red flags. It’s tough to pull back when you’re this close to the end, but it’s important to be open to it. And, if you have to make that call, at least you won’t have to start over from step one.
Director, Luxury Homes Division
Professional Financial Planner
Keller Williams, Santa Barbara