Inflation is at its highest in over 4 decades with one of the most affected sectors being real estate. The situation is not expected to change, at least not in the short term, with the Federal Reserve looking to continue raising short-term interest rates, indirectly raising rates on mortgages.
The grave reality is that to buy a home in the current environment, you need to be financially savvy. And since this is a huge undertaking, a 6 to 12-month plan is the way to go. This is enough time to work on your credit, grow your equity, and shop for the right mortgage.
Below are the steps to follow:
Step 1: Know your Budget (month 1)
Start by talking to listing agents and lenders for a glimpse of what you can afford. The idea is to know which neighborhoods to target and the size of your potential mortgage.
Ask for a prequalification letter at this point to help you estimate other home-buying costs including closing and insurance costs.
Step 2: Estimate the Downpayment (month 1-2)
One of the main costs when buying a home is the down payment. Basically, the more money you can pay upfront, the lower the interest rate. To offer the best industry rates, lenders ask for a 20% down payment. If not, the loan attracts private mortgage insurance that increases the overall cost.
Step 3: Increase your Savings (month 1-12)
While the monthly repayments usually come from your monthly income, the down payment is an out-of-pocket cost. Boost your savings fast to meet the cost and cushion your finances that are sure to take a hit after the monthly deductions kick-off. To put aside more;
- Get a second job
- Start a side job
- Automate savings
- Sell redundant assets
Step 4: Improve your Credit Score (month 1-12)
Depending on how low your credit score is, you might not even qualify for a conventional mortgage and if you do, the monthly payments will be high. Review your credit report to know which items may be lowering your rating. Speak with a credit expert for a complimentary credit audit.
Tips to improve your scores include:
- Resolve errors in your credit report
- Pay off outstanding debts
- Maintain low credit card balances against high credit limits
- Avoid new debts
Aim for your score to be between 670 and 740 which is considered “good” or more than 800 which is “exceptional”.
Step 5: Get Pre-approved and Start Shopping (month 9)
Ask your preferred lender to make a preliminary evaluation of your loan prospects. The lender/bank gives you a prequalification letter showing the principal amount and loan terms they could offer if you were to apply for the mortgage there and then.
The letter is valid for up to 3 months and is one of the documents that make real estate agents take you seriously. Have it ready when looking for a house, knowing that the loan terms it proposes are a true reflection of your income, employment history, credit score, and debt-to-income ratio.
Step 6: Know your Living Expenses (month 10)
By the 10th-month, you can realistically tell what your savings will be by the time you make the mortgage application. This means you can estimate the repayment terms to expect and how the deductions will affect your budget.
If the future looks bleak, it’s time to ask the hard questions:
- Is a smaller house ideal?
- Do I really need 2 cars?
- Are my monthly subscriptions justified?
- Must I live in my dream neighborhood?
Be truthful to yourself when answering these questions knowing too well that most mortgages go for around 10 years before refinancing.
Step 7: Inspect the House and Make an Offer (month 11-12)
Are you ok with the offers on the table? Decide on the best home for you and your family. Also, ensure that your choice leaves room for expansion. If satisfied, make an offer. Note, this is the point at which to bargain the price by pointing out any flaws in the design and the resulting repairs in the future.
Above are 7 steps whose timeline intertwines as you near closing a home over a period of 1 year. From the time you decide to buy a home up to the actual signing of the mortgage paperwork, there is much to be done. Due diligence requires that you are well prepared to sustain the monthly payments while maintaining the best living standards you can afford.