There is nothing more exciting then the thought of owning your own home. I bet you can picture it now, snuggling in front of the fire, sipping hot cocoa, in your perfectly decorated living room listening to Christmas music while you watch “It’s a Wonderful Life.”
There is just something magical about owning your own little piece of dirt.
What isn’t so magical is all the paperwork, stress and junk leading up to the purchase of your brand new home.
To make the process a little bit easier for you. I’ve compiled the ultimate checklist for buying a new home.
Ideally you should start working through this list six month before you purchase your new home. I know that isn’t always realistic, but the more time you give yourself to prepare for the process the better.
Home Buying Checklist (to save you money and time)
1. Check your credit score
Your credit score is the single most important piece of the home buying checklist process. I know that sounds dramatic, but the higher your score the better your mortgage loan rates will be. The lower your rates the more money you will save.
Check out this credit score guide for a quick reference on what your score means for your interest rate and the cost of your loan.
As soon as the thought of home purchases goes through your mind it is time to check your credit score. I personally use Credit Sesame to monitor my credit score. It is free and really simple to use.
Since it is a free service they are going to be constantly offering you credit card deals and all that junk. I finally turned off all their promotional emails and only get the monthly credit report.
It has been a great way to keep track of my score and watch for any minor changes that indicate I may be the victim of identity theft again.
2. Clean up your credit score
Okay, this is easier said then done. There is a lot of conflicting information out there on cleaning up your credit score.
I was the victim of identity theft about two years ago and learn the hard way that cleaning up your credit is really messy and time consuming.
I recommend keeping it simple and do this in conjunction with step #5 which is finding a mortgage lender.
Once you find a mortgage lender they will be able to run a credit report and tell you exactly what you need to do from their end to get your credit cleaned up so that they can give you the best rates possible.
Obviously, there are a lot of little things you can start by doing such as:
- Pay down your existing debt
- Stash cash for your down payment
- Settle older debt (check the date thought and don’t settle anything that isn’t showing up on your current credit reports)
3. How much home can you afford?
To be honest, this is the wrong question you should be asking. What you should be asking is how much per month can you afford to pay towards a house payment.
Keep in mind that the mortgage payment itself isn’t actually the full amount you will be paying. Typically your mortgage payment will also include a line item called “escrow”. Your escrow account is held in trust through your bank and used to pay for costs like home insurance, property taxes and potentially PMI (I’ll discuss this below when we talk about down payments).
For example, my mortgage payment is around $850 per month, but by the time I add in my property taxes and home insurance, by total payment to the bank is $1,150. I also have to pay a quarterly HOA fee of $310.
I also pay the following housing related costs monthly:
• Garbage/Sewer/Water – $90
• Electricity (Monthly average cost) – $250
• Lawn Maintenance – $40
• Pest Control – $20
• Internet/Phone – $115
• Sinking Fund for Future Home Repairs – $150 (this is my emergency fund for our home)
Some of these costs you are likely already paying, but with a home, they may increase, so it is important to include them in your equation.
Long story short, owning a home is a lot more expensive then just the mortgage payment.
The best way to calculate how much you can afford to pay is to look at your income and expenses for the last three months and then run some numbers.
Ideally your housing costs should be around 25% of your net monthly income. If you bring home $4,000 per month then your total mortgage payment (with escrow) should be around $1,000.
Obviously housing costs can be more expensive depending on your area and you may have to adjust your numbers to match.
As you run your numbers keep in mind the old adage – “Don’t be house poor!”
I’ve got a lot of friends who have a beautiful home, but it literally eats up all their income and they can’t afford to do anything. Personally I’d much rather have a slightly older, not as nice house and the lower mortgage payment to go with it.
4. Begin saving for a down payment
The more you save, the more you can afford! Hopefully you’ve been following my other financial advice and are working your way out of debt and have a nice emergency fund set aside.
If so you are ready to go a bit crazy for the next six month and save a lot of money for your down payment.
I’ve written a specific post about how to save for a house down payment in six months, so I’m not going to go into details in this post, but start saving every single penny you possibly can towards your down payment.
One of my little cheater methods of saving a bit of extra money is using the Digit App. It is a great online tool that links to your bank account and transfers small chunks of money to an online bank. I’m constantly amazed at how much money I’m able to accumulate in my account with just these small transfers. I never even notice the money is gone.
Why having a large down payment for a house is so important.
One of the reasons your down payment is so important is because of a little known insurance called Private Mortgage Insurance (PMI). This insurance protects the bank from default if you don’t have enough skin in the game.
You are typically responsible for PMI insurance if you take out a loan for more then 80% of the value of the home. PMI rates vary, but you can safely assume that for every $100,000 of home, you’ll be responsible for $100 per month of PMI insurance.
For example, if you purchase a home for $300,000 with a loan of around $270,000 which is 90% of the home’s value then you will owe around $300 per month in PMI insurance until you pay the home down below the 80% mark.
PMI insurance can get really expensive which is one of the reasons I always recommend large down payments.
5. Shop for a mortgage lender
A good mortgage lender will literally save you thousands of dollars. They can save you closing costs, title fees, appraisal fees and most important, they can help you get a good interest rate.
Don’t underestimate the help that a really good mortgage lender can give you.
I recommend asking around for referrals, in my opinion they are the best recommendation. Typically your real estate agent can give you a great referral as well. Since they work closely with a variety of bankers, they always seem to know the best ones.
It is also possible to use some of the more well known online mortgage lending banks. I’ve never used one and have gotten mixed reviews on them from friends.
If you are a first time home buyer and want a bit of extra hand holding I would recommend finding a local agent. If you feel pretty confident in your ability to handle financial matters, then you may get a better deal with an online company. One of the ones with better reviews is Lending Tree or Quicken.
6. Begin working through the pre-approval process
Once you have chosen a mortgage lender it is time to begin the pre-approval process. The pre-approval process, is the banks way of pre-qualifying you for a home purchase.
The bank will review your financial situation and determine the amount that they are willing to lend you.
The pre-approval process quite frankly sucks.
This is where the bank is going to require you to hand over literally ever shred of paper related to your personal finances. It isn’t quite as bad as I’m make it out to be, but it isn’t fun.
Depending on your personal situation the bank will typically require the following:
- Last four to six payroll statements
- Last two years of tax returns
- Last two years of W2’s or 1099’s
- Verification of down payment (copies of the last few months of bank statements)
I recommend that you gradually begin collecting this information as you being to work through the other steps in the home buying checklist.
Keep in mind that you won’t be able to make an offer on a home until you have completed the pre-approval process.
7. Find a good real estate agent
As with a mortgage lender a good real estate agent can save you thousands of dollars. When you are trying to find an agent, don’t just go with your friend who just got their license as a favor to them.
I know it sounds nice, but if they don’t know what they are doing it could be a very costly mistake.
As with a mortgage broker, ask around for recommendations.
When you speak with a potential real estate agent, remember that you are the boss and are essentially hiring a new employee.
8. Compile your house wish list
Personally this step is my favorite. Sit down and write out your wish list. This is your chance to dream big.
Honestly you probably won’t get everything on your wish list, but you definitely won’t get the stuff you don’t write down.
Some of the things to consider before writing up your house wish list could include:
- Number of bedrooms? Bathrooms
- Do you need an office/Den?
- Large or small kitchen?
- Separate dinning room?
- Mud Room?
- Do you want a yard, what about a pool?
- Do you need an RV gate?
- How many bays do you need in your garage?
Once you have the basics determined it is time to start digging into the smaller details.
For example, having a large walk in pantry is a must for me, but may not be important to you. I want me next house to be one level (I hate two story homes). Do you need lot of storage space? What about bedroom closets? Do you need an area for hobbies or crafts?
Your goal at this point is to write out everything you possibly can. This will help your realtor narrow down the search and help you decide what is really important.
9. Start looking at homes
Now comes the really fun and yet super frustrating part. Looking at houses can become all consuming. You’ll spend hours on Zillow and the MLS looking at pictures and reading descriptions.
Finding the perfect home is kind of like finding a needle in a haystack. It takes a lot of time to dig through all of the information and find a home that meets your needs.
It can be tempting to settle when you find something your like, but I encourage you to take the time to find exactly what you want.
If at all possible avoid setting a deadline and give yourself plenty of time to hunt, particularly if you have some specific requirements.
My husband and I have been searching for a new home for months. We have some very specific requirements and even though it is frustrating and time consuming I’d rather wait and get it right then end up in another home that is okay, but not great.
I’d need to write another blog post on what to look for when searching for a new home, but one thing I do want to mention is location, location, location.
There is a reason that some property is more valuable than others and 99% of the time it is all about location. Choose a home that is reasonably close to your work, friends and social life. If you have kids always look at school districts.
I highly recommend taking some time and driving through the neighborhood to get a feel for the location. Are their people out and about living life? Is it easy to get in and out of the neighborhood? What are the parking restrictions? Is there an HOA? If so, how much does it cost and what type of restrictions do they impose.
Spend a lot of time finding a location that will work for your needs. Hopefully this home will be yours for the next 20-30 years.
On a side note, if you live in an area of the country with HOA’s, I highly, highly, highly recommend reading through their CCNR’s. You need to know what you can and can’t do within their guidelines. I also recommend asking some of the neighbors about their experience with the HOA. Our current HOA is very poorly managed and is 80% of the reason that we want to move. Don’t underestimate how crazy HOA’s can be.
10. Make an offer
Once you find the perfect home it is time to make an offer. Your real estate agent and mortgage loan agent will be able to walk you through this process. It can be a bit daunting and scary to know that you are signing a legally binding document, that could lead to a very expensive loan. However, if you’ve done all the steps above, then at this point you should be ready to go.
I haven’t had time to write a detailed post on what happens once you have made an offer, but recommend checking out some of these posts for additional information.
Buying a Home Checklist
Buying a home doesn’t need to be an overwhelming task. Review this home buying checklist and follow each of the steps outlined above and you’ll be surprised at how easy the process can be.
Just remember to take your time though the process and don’t rush into any decisions. Be very analytical as you look through each home and make sure that it has the items that are non-negotiable for you.
It is super easy when looking at a home to get excited and make decisions based on “housing fever”.
Don’t do it. Take you time and enjoy the process.