What Should I Do Before Buying a House?
Hey all! It's been a minute, but I want to do a post today about buying a house. This is a topic that seems to come up often in my job as a financial professional. People are always asking me "do I qualify for a mortgage?" or "What do I have to do to get a mortgage?" Today, I'm going to try to keep it simple for you with my personal checklist of what you should do to be prepared for buying a house and what banks are going to look for when it is time to get that pre-approval.
Ok, so first of all, how can you tell if you are actually ready to buy? There are a few basic rules that I tell my clients:
1) The most basic thing of all is to make sure you have a budget, a written or typed document that details ALL of your expenses, including average estimates on variable costs like groceries and gas. You need to know what % of your income you have left after everything.
2) Once you know your % of income remaining after all expenses, you can do the math in terms of how much house you can afford. There are numerous mortgage calculators online and most of them are good. Use one of these tools and play with the numbers; figure out what the maximum price is you are comfortable with before you even talk to the bank.
3) As a general rule, your mortgage payments should not exceed 30-35% of your total income. Additionally, in a perfect world, your total debts (including mortgage) should not exceed 50-60% of your income. In the beginning it will be tighter, but have a plan to get down to 50% or lower ASAP.
4) Most banks want you below 50% debt-to-income ratio NOT including mortgage, so think about this when you do your budget. If you are over 50%, you are not ready. Even if you get a bank to approve you, adding the mortgage to that situation is likely to make finances too tight.
5) Now, make sure your credit score is 630+. The higher the better. You may get approved at below 630+, but your interest rate will be higher and it will cost you a lot more money. Spend a year or two saving money and building credit first. trust me, it will be better in the long run.
6) Down payment: generally speaking, first time home buyers should have at least 3% of the purchase price to put down. Again, the more the better. In addition, closing costs, taxes, and escrow will be another 3% of the purchase price. Then, you need to factor in moving expenses and some extra money for things you will need when you move in. So, for example, if you are looking at a $200,000 house, that's $6,000 down, plus I would say $3,000 more for moving and getting your essentials. Things always come up, too, so don't skimp on that extra money. You don't want to go into this with only the down payment.
So, to summarize, you are ready to buy a house when you have:
- 6% or more to put down
- 3% or more in reserve for other expenses/moving
- 630+ credit score
- Known budget that you stick to
- 50% or less debt-to-income ratio
I hope this post helps to clarify things for you all. Again, this is my opinion, but as a financial professional, I have found it to hold up. You CAN get a house without some of these things, but it won't be optimal.
Until next time,