What to Do Before You Buy a House
Buying a house is a major investment that gives you and your family a place to live, and hopefully makes you money over time. Most people take out a loan or mortgage to pay for the home at purchase, then pay off the loan to the bank or lender over a number of years. Fifteen- or 30-year mortgages are the most common, though you can always choose to pay your loan off faster, saving you money on interest in the long run. Before you buy a home, there are a number of things to do.
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Down Payment
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Start saving for a down payment as early as possible. It might take years to save for a substantial down payment. Typically, lenders like to see you put at least 20 percent of the home's cost down when you buy the house, leaving the bank to loan you the remaining 80 percent or less. You can still qualify for a loan with less than 20 percent down, but CNN Money and MSNBC both indicate that 20 percent is a healthy down payment amount. For existing homeowners, you might already have this much in home equity, so you can use the profit you make from selling your existing home to fund your new home's down payment.
Credit Score
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A few months before you begin to hunt for houses, check your credit report. You can do so for free at AnnualCreditReport.com, or by visiting your bank and going over your credit score and history. If there are any negative marks on your credit report, fix them by paying all past due or unpaid bills. Bring all balances current. Also, if you have a lot of credit card debt, pay it down as much as possible. A lower debt-to-income ratio, which is the amount of debt you carry versus your income level, will improve your chances of qualifying for a loan. The better your financial health, the more likely banks or lenders will approve your loan.
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Create a Budget
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It is important to look at your finances and income to determine how much house you can afford. Your total monthly house payments, including mortgage, taxes and insurance, should not exceed 25 to 33 percent of your total monthly income, according to John W. Schoen on MSNBC.com. Some banks prefer to see a more conservative budget where you only spend up to 25 percent of your income on home expenses, while others will approve you for up to 33 percent. It all depends on the bank and your situation. But the general range to shoot for is 25 to 33 percent or less of your total monthly income as your monthly home expenses. Anything higher, and you might be setting yourself up for financial issues. Many financial websites like CNN Money offer a calculator to help you determine your budget for buying a home (see Resources).
Location, Location, Location
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The house itself is not the only thing to consider when buying a house. Location is often equally or more important. Before you buy a house, you should scope out the surrounding area. Are there good schools nearby? Is it close to where you work? Are there grocery stores, shopping, restaurants and other amenities nearby that are important to you? These are all important questions to consider when buying a house. Crime rate and general safety from natural disasters is another important factor in choosing a location. A great location can also add value to your home.
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References
Resources
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