Most Important Things You Need Before Buying a Home Part One
In my line of work, I meet people every day looking for a home. The ones looking for their first home are always the most fun since they are the most excited. What always shocks me is how unprepared they are. I meet people who have no money, low/no credit, and they still believe that they can buy a home. Worse though are the ones with no jobs (I’m not kidding; this has happened several times). So, I thought that we could take a week or two to go over the most important things about buying a home:
You Need to Have Stable Income
This one I used to think was a no brainer, but I have learned that for many it is not. You need to have a stable income to qualify for a mortgage. Most lenders will want you to have two years in your position, but some require less if you are salary and/or are in the same line of work as you were in your previous job. So, if you just started a position (especially in a different field than you worked in previously) you will need to speak to a lender to see if you can qualify.
It is even harder for those of us (myself included), that work, or make most of their money from, commissions, bonuses, or your own business. For most lenders, you will need to have a two-year minimum history of making commission/bonuses/profit in your business to get a loan. I was making commission for 1.5 years when we under contract for a new construction home. The only reason it worked was because our home closed after my two-year anniversary of making commission. I have seen very few lenders make an exception for this.
So, why is this a rule? The lender is loaning you a large sum (normally well over $250K) to allow you to buy a home. If your income is not stable, there is no confidence in your ability to pay it back. If you were going to loan someone $250K, you would want to make sure they were in a position to pay you back, right?
You Need to Have Good Credit
This can be a difficult obstacle for a lot of people. If your credit is lower than 640, you may want to put your house search on hold until you can bring up your score. While there are programs that can qualify you as low as 580 (sometimes even lower) you will be paying for it in the form of either your interest rate being higher or needing a larger down payment. A 640 credit score tends to be the lowest that most lenders are willing to work with without you being overly penalized.
Why is credit important? Your credit score is a quick snapshot of how reliable you are with money and with paying back your debts. Having a low score means that you have been historically unreliable and that makes it appear that you are a high risk to the lender. If you had to look at someone with a 600 credit score and someone else with a 725 credit score, you would pick the 725 every time. It means they are better with money.
Another big thing about your credit score is that determines how low your interest rate is. When you have high/good credit, you get the best interest rates. While going from 4.625% to 5.125% may not look like much, it’s a difference of about $65 a month, with all else being equal. You can have a 600 credit score, but you will be paying more over time than someone with a 725 credit score for the same home.
You Need to Know What You Can Afford
I cannot tell you how many people I meet who want to look at homes, but have no idea what they can afford. This just leads to heartbreak as you find out that the home that you fell in love with is well outside what you can manage.
So how can you find out what you can afford? When D and I were buying our home, we looked at how much we made, how much we owed (our debt), and decided on what we would be comfortable with. For us it looked like:
We didn’t want to sacrifice our normal activities (we spend a lot on food) to be able to buy a home; house poor is never the goal. With that math, we decided that we would not go over $1700 (even if the home was so perfect we cried when we saw it). That was with everything: principal, interest, taxes, insurance, and community fees (i.e. HOA/POA, CDD, etc…). This still left a good amount for the unexpected costs of owning a home, saving up for retirement, and vacations. We also had to factor in that since my job is tied to the real estate market, there is a possibility that we could go months without my paycheck. Our monthly payment ended up being $1600 when we bought. 😊
You would want to do something similar for your own situation. Set your max and stick to it. Ideally, go for lower than your max, but your max should still be a comfortable number. Then, you only look at homes that would put you at or below that monthly payment.
And that’s it for Part One. Part Two next week. 😊
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