How to Buy a Home: 5 Steps to Take
Before You’re Ready to Buy
Do you imagine owning your own home someday? Perhaps you see yourself in an urban condo or maybe it’s a single-family home in the ‘burbs. Whatever your idea of homeownership is, now is the time to start planning for it. While you may not be ready to buy now (hello, student loans), there are plenty of steps you can take now to turn your dream into reality. By taking some action now and some dedicated budgeting and saving, you can achieve your dreams of homeownership — perhaps even earlier than you think!
Step 1: Let’s Chat!
It’s never too early to start the conversation! We highly recommend meeting with us for a quick chat over coffee as soon as you decide you want to prepare to buy a home – even if it’s years away. We love walking future buyers through the process so they can understand the different costs of buying a home: taxes, closing costs, monthly operating costs, insurance etc. – as well as the different benefits – like forced savings and lower taxes. Our goals for this meeting are two-fold. First, we want you to leave our meeting with a full understanding of the process and second, to help you set a realistic and custom action plan to get you on the path to homeownership.
Step 2: Soul Search
This is the time to think long and hard about your personal finances. Ask yourself these important questions — and answer honestly:
- How much can you spend monthly on rent or a mortgage?
- How much upfront cash you can come up with to buy a property (down payment + closing costs)?
- How much can you save per month to put towards a future purchase?
Step 3: Start a Conversation with a Lender
You’ll want to have an early conversation with a lender as well. If you need suggestions, we have some great ones! We’re happy to connect you. You’ll want to meet with a lender so they can see if there are any financial obstacles to you buying a home. For example, do you need to pay student loans down to a specific number or percent of your income? Your debt to income ratio may need to be improved. Similarly, do you need to improve your credit score?
Cleaning up your financials will be your number one priority.
You will also want to review the answers to the three questions above with your lender. They will use this info to show you your current options (if you were to buy a home today), and the outlook after a year of the new savings plan. Ask your lender to give you a purchase plan for both today and after the year. It’s important to note here that interest rates can change and likely will again before you buy, which will affect your purchasing power.
Another great way to see what you need to do from a savings perspective is to show your lender a few properties you like. They will then work backward and give you a sense of the required cash outlay and mortgage payment.
If you feel like diving a bit deeper, you can also discuss the various loan structures with your lender. For instance, examine a 3.5% down loan versus a 10% or 20% down conventional loan. This will give you different insights into how much cash you will need to save. Secondly, discuss adjustable rate mortgages which will help lower your monthly payment. While there are pros (lower monthly payment) and cons (your rate will increase after a certain time frame) first-time buyers are often great candidates for ARM’s as they often will not be staying in their home longer than 10 years. If, however, you keep the home longer (perhaps as an investment property), your rate – and payment – will increase.
Step 4: Open a New Account
Open a bank account dedicated to saving for your home purchase. Set up the account so that you can arrange automatic transfers into it each month (and do NOT link it to your current checking or savings accounts). With money directly deposited into this account each month, you’re beginning to save for your new home. Do the math to see how much you’ll have saved after six months, one year etc. Be sure to account for future income, such a raise or bonus, but also new expenses like a wedding, childcare or a new car. Determine when these variables could come in to play and if the savings should increase or decrease.
Step 5: Save
Save, save, save. It’s never too early to start saving. Make a budget and stick to it. Beat it if possible. Chances are, you will need to spend more than you anticipate and the more cash you have on hand post-closing, the happier you’ll be. Think about how you can add as much per month as possible into your new account. For example, cut out your daily Starbucks habit. If you’re spending $5 every workday on Starbucks, that’s an easy $100 per month!
After you’ve talked to a lender, opened your account and have thought through your savings plan, schedule a time to meet with us again. We will regroup and talk about the next steps on your path to home ownership!
Want more information on how to buy a home? Download our guide for first-time homebuyers!
The Bottom Line
While you may not be ready to buy a home now, there are plenty of steps you can start taking today to make it happen. With the right lender and Realtor in your corner and a dedicated savings plan, you could be in your new home sooner than you think.
Want to chat about how we can help you buy your first home? We’ve guided countless clients through this process and would love to help you too. Reach out below!
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