Almost everyone starts their adult life as a tenant. Signing that first lease, finding great roommates, and making that proud trip to IKEA.
However, long-term renting can have its downsides, ranging from not having the freedom to decorate how you want, not being able to have a pet (in many cases), to having to allow the landlord into your home and, to paying for someone else’s mortgage with nothing to show for it at the end of your lease.
It’s time to buy your own home – to pay your own mortgage and build long-term wealth.
Need proof? A census study shows that homeowners are worth, on average, $197,349 more than renters. That’s 90 times a tenant’s median net worth.
The First Steps
Come on, admit it: when you think of buying a house, you imagine yourself driving through cool neighborhoods and touring homes for sale, right?
Well, we’re sorry to say, but the initial steps you need to take are far more mundane. But they’re critical.
Start with research
Before you begin, make sure you have a high level understanding of the home buying process. It’s not terribly complicated, but it’s good to have an overview of what to expect, how long the process will take, and what questions you may have.
A great place to start is with our Home Buying 101 Guide.
Get your finances in check
As you continue your research, be sure to get your finances in check. Start by writing down all your recurring monthly debt payments (See? Mundane.). Include your rent and any other payments you make to repay creditors (alimony, child support, credit card payments, auto loan payments, student loan debt).
“Don’t include living expenses such as utility bills, food, and entertainment,” suggests the experts at Wells Fargo Bank.
Then, take the total and divide it by your pre-tax monthly income. For instance: assume you’re your monthly debt payments total $1,540 and your monthly income is $5,000.
Dividing 1,540 by 5,000 gives us 31 percent. This is your debt-to-income ratio (DTI) – a number that lenders rely heavily on to determine whether or not to lend you money.
An alternative method is to plug your numbers into an online DTI calculator.
Your goal should be a DTI of no higher than 43 percent, according to Investopedia.
If it’s higher, start paying down your debt. Consider bringing in extra income as well.
Check your credit
Working on a too-high DTI is just one area of your finances to concentrate on. You may also have some credit messes to clean up. You won’t know, however, unless you get credit reports from all three of the major credit-reporting agencies: TransUnion®, Experian® and Equifax.
By law, you are entitled to a free copy from each of the agencies every 12 months. The best place to obtain your reports is at annualcreditreport.com, the only provider authorized by the federal government.
Go over the reports, looking for inaccuracies and mistakes. If you find any, file a dispute. Each credit report will offer instructions on how to do so.
You may be surprised how merely ridding your reports of inaccurate information will raise your score.
Go get that loan
When you’ve squared away any credit problems and have lowered your DTI, it’s time to go shopping for a loan. See several lenders and compare their offers to find the best rates and terms. Let us know if you want some recommendations. We know some great local lenders who will work hand in hand with you every step of the way.
The Federal Trade Commission also offers a handy guide on how to compare loan offers.
Time For The Fun Part!
With your loan pre-approval in hand, it’s time for the fun part every first-time home buyer dreams of: shopping. It’s time to check out listings online, sign up to receive alerts for new listings that meet your criteria, attend open houses, and set up time to tour homes you’re interested in.
As you’re looking at homes and home prices, keep in mind that the pre-approved loan amount that you get from the lender is the maximum amount you can borrow. And, keep in mind that in this heated Bay Area market, homes often (though not always) sell for a price higher than the list price.
If a mortgage payment for a home will leave little left in your monthly budget to cover unexpected expenses, consider buying a less expensive home.
As a homeowner, you’ll need to have a fund in place to cover not only ongoing home maintenance expenses, but those nasty surprises that happen. Installing a new water heater may, for instance, set you back more than $1,000.
If the A/C unit dies, installing a new one may cost more than $5,000. Plan on spending in excess of $200 to replace broken glass in a window.
Then, what happens if your property taxes increase? Your mortgage payment will as well.
It’s Almost Yours
Many first-time homebuyers are under the impression that by signing the purchase agreement and getting the home under contract, the home is pretty much theirs. It’s a big mistake, because it leads to emotional lock-down – the feeling that you are committed.
Remember: you signed the purchase agreement – not the closing papers
In reality, you aren’t committed until the last contingency is removed. You can, in fact, change your mind, for a number of reasons, and even be entitled to the return of your earnest money deposit in many cases.
Common contingencies include the approval of the home inspection results, final loan approval, and a satisfactory lender appraisal of the property.
Think of these contingencies as your “get-out-of-the-deal-free’ cards. This way, regardless of how emotionally attached you become to the property, you’ll know that, should you need to, you can walk away gracefully.