4 Financial Steps to Buying a House

A home buying checklist for beginners and veterans alike

For most of us, when we think of the process of buying a house we envision mortgage lenders, real estate agents and, on the more pleasant side, open houses and the hunt for that perfect home. But the truth is that the steps to buying a home begin long before specifics like double sinks, neighborhood charm or even low mortgage rates ever cross your mind.

The home buying process can begin as early as six months to a year before you ever contact a realtor or debate the pros and cons of new developments and established neighborhoods, often beginning with some frank analysis of your financial situation and flexibility. To truly prepare for the rewarding process of buying a house, consider completing our checklist of initial financial steps. It might take a little time, but you will be spared the emotional and financial turmoil of buying a house that breaks your budget.

Optimize your credit scores and reports

Before you begin the process of applying for a home loan, check out your credit score and report. There are tons of online tools that make this step pretty hassle-free, but keep in mind: most free credit report services will not provide your FICO scores, and it is these scores that are most important to lenders. AnnualCreditReport.com is a free, federally authorized provider of credit reports, and myfico.com will provide credit reports and FICO scores for $20 per bureau.

If you find an error on a report, have unpaid or collection accounts, you will want to deal with those before you begin the process of buying a home. Remember that not only missed or late payments affect your credit score, but also a high debt-to-credit ratio. Ideally, first-time buyers should be utilizing less than one third of their available credit. Hold off buying large items such as furniture and cars until after you have purchased your home, as well.

If your credit is less than perfect, know that it might take six months to improve it; be willing to put off the home buying process until your credit scores and reports have improved.

Determine what you can afford

What is your monthly income? How much of it do you spend on utilities, food, clothing, kids’ activities and necessities, entertainment, car payments and other monthly expenditures? Where would your mortgage payment come from? Monitoring your spending for a few months before buying a house is a great way to test your finances and determine how much you can afford to allocate to a mortgage payment. Experts suggest no more than 28 percent of your gross monthly income should go to your mortgage payment.

Money for a down payment and to cover closing costs should also be part of your calculations. Though the typical requirements for down payments are shifting thanks to low- and no-money-down mortgage programs and assistance, if you do not qualify for these programs—or do not need them—expect to put down a 20 percent down payment to compete in the current market. And do not forget to factor in three percent for closing costs!

(Helpful note: When working with new construction home builders, also check whether they have pre-existing relationships with mortgage lenders.)

Savings come into play, as well. Owning a home means all utilities, home maintenance and improvements fall on you, and you should have savings set aside for these expenses. Basically, you should still have emergency funds in your savings—three to six months worth of your monthly living expenses—after all the above costs are covered. If you do not, take some more time to build up your savings. Emergency funds should not be sacrificed to your down payment!

Next comes the—slightly—easy part: find out how much home you can afford. Here is where your wish list and reality might collide. Prices vary by location, of course, but online tools like home affordability calculators help you take all variables into account to find a neighborhood, size and type of home that works for your budget. Be prepared to compromise!

Get your documents in order

Prepare to meet with mortgage lenders by getting needed documentation in order—trust us, it will save time later on! Typically, a lender will need two recent pay stubs, the previous two years’ W-2s, tax returns and your bank statements from the previous two months. Make sure your bank statements include every single page—even if the page is blank.

Prepping all this paperwork ahead of time might seem tedious, but it saves you the hassle of trying to locate all the necessary documents in a week while the house of your dreams sits on the market.

Apply for pre-approval

Most sellers will not even work with a buyer who has not been pre-approved for a mortgage, so seeking pre-approval is a pivotal step to asserting yourself as a serious and attractive buyer. This will also speed up the home buying process on the back end. Once you have put in an offer on a home, the bank will only need to appraise the house itself, rather than the property and the finances of its potential owner.

Keep in mind that lenders will often offer you a larger loan than you might have determined you can afford. Their numbers might look great, but stick to your own calculations! You are the expert on your own financial flexibility. Be true to the number you set for yourself! For a brief snapshot of the home financing process, check out Perry Homes’ easy to follow timeline.

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