You've decided it's time to buy a home. You start searching for listings online, excited at the prospect of being able to find a place to finally call your own. You revel in the thought of never having to deal with nosy, unresponsive landlords again, and you can't wait to finally own property of your own and start building equity.
Sometimes, it's hard to keep that excitement going once you really dig into the reality of buying a home. The process can be long, complex and filled with nuances you might not be aware of. Follow this guide to ensure buying your dream home runs as smoothly as possible so that come move-in day, you'll be able to breathe easy.
Be realistic about your budget
Don't begin scouring the internet for dreamy homes with floor-to-ceiling windows and a scenic walk to the local cafe before you know exactly what you can afford.
"What you don't want to do is fall in love with something that's out of reach and make financial commitments that will not be sustainable," said Lisa Wise, the owner of three real-estate companies in Washington, D.C. "It's much better to create the parameters for what is possible before you start doing your shopping."
This advice might seem elementary, but Wise says people make unrealistic financial commitments more often than you'd think. Wise recommends either working with a financial planner or using an online tool to identify your budget. "There are a lot of mortgage calculators online and different tools like Mint that can help you understand what your monthly cash flow is so you can understand what kind of mortgage commitment you can make."
Have a healthy down payment ready to go
When calculating your budget, you also want to identify the amount you will need for a down payment. Though the common lore is that putting 20% down is optimal, research from The National Association of Realtors found that over 70% of first-time home buyers in the last five years put down less than that.
That being said, it really depends on how competitive your housing market is. Buyers are likely to need to bring more money to the table to stand a fighting chance in some hot markets.
Your down payment is all you need to save for, warns John Danaher, the president of consumer interactive at TransUnion, a consumer credit reporting agency.
Be prepared for additional costs
"In addition to saving for a down payment, there are additional factors - such as closing costs and taxes - to consider when developing a budget," he said.
Closing costs include lender fees, such as an origination fee, your home appraisal and your real estate attorney's fees.
Beyond the cost of your mortgage and closing costs, consider adding your moving, furniture and decorating costs to your calculations as well. If you're moving from a 500-square-foot bedroom apartment to a 2,000-square-foot bedroom house, you could need three times as much furniture.
Practice living with your new mortgage payment
Mark Raskin, a senior loan officer and branch manager at PrimeLending in Dallas, says that when prospective homebuyers tell him they'd like to buy a home in one year, he recommends they have their loan officer calculate what their monthly mortgage payment would be.
Then, they can put aside the difference between what they're paying in rent now and what their monthly payment would be to get used to the payment increase. "By doing so, they'll either have a larger down payment or more money to spend on a washer, dryer, furniture or what have you," Raskin said.
Check your credit score
Both Wise and Danaher also recommend prospective homebuyers know what their credit score is before applying for a mortgage. Wise says that in order to qualify for the most competitive mortgage rates, you will need a credit score in the 720s or higher. For a conventional mortgage, you will typically need a minimum credit score of around 620, however, there are loan options for people with poor credit, too.
"People should check their credit every three to six months depending on what's happening in their lives," Wise said. "If you feel like in the next year you're going to start considering buying, you want to start making sure you have that credit attractiveness and that you're able to qualify."
Protect your credit score
Before beginning the homebuying process, you should make sure your finances are in tip-top shape. Aside from paying your bills in full and on time each month, one of the most important ways you can ensure you have an optimal credit score before applying for a mortgage is by keeping your credit utilization ratio low, which means you're not using too much of the credit that is available to you.
Raskin offers this example: Someone who owes $1,000 on a credit card with a $1,000 limit will have a credit score that is much more negatively impacted than someone who has $10,000 outstanding on their credit card, but has a $50,000 credit limit. Lowering your credit utilization, "is a common way for folks to get their scores up," Raskin said. Danaher says the sweet spot for a credit utilization ratio is using around 30% of your available credit.
You can improve your credit utilization ratio by better tracking how much you're spending on credit cards, increasing your credit limit and not waiting until the credit card bill is published to pay it. "For folks who use their credit cards a lot, paying it before the bill cycle instead of after the bill prints significantly improves scoring," Raskin said. He says this is because whatever is on the monthly published statement stays reported for the following 30 days.
Keep debt at bay
In addition, prospective homebuyers should be aware that having large amounts of debt - such as student loan debt - isn't a problem, so long as you've demonstrated your ability to pay that debt off regularly.
"They are looking for your ability to manage your debt well," Wise said.
You also want a good debt-to-income ratio. Your DTI is the sum of your monthly debt obligations divided by your monthly gross income. When a lender calculates your DTI, they will add the cost of your monthly mortgage payment to see if you could reasonably afford your payment. In most situations, prospective homebuyers need a debt-to-income ratio - which is that amount of your income that goes toward debt each month - that is lower than 43% to get a qualified mortgage.
Get preapproved for a mortgage right before you start shopping
In saturated markets, having a preapproved mortgage application will help you stand out among the competition. Danaher says your likelihood of getting preapproved for a mortgage is higher if your credit is in good shape before you apply.
"Paying bills on time and in full each month, and retaining a low credit utilization ratio are some of the most important things a consumer can do before applying for a preapproved mortgage," he said. "And of course, taking the time to ensure credit is in a good place before applying can only help the likelihood of loan approval."
Getting pre-qualified is different from getting preapproved. When you are preapproved, a lender will ask for financial information, job history, etc., and run your credit. So long as you apply with several lenders in a short period of time (think 45 days or less), you don't have to worry about it hurting your credit.
Choose your lender wisely
The most important way to ensure you successfully close your loan is to put in the effort upfront and be thorough when applying for a mortgage. "Look at rates and brokers exhaustively before committing to anything," Danaher said. Assuming you've made an informed selection, the closing process should run smoothly.
Raskin says everyone - particularly those who might not be as financially savvy - should use a lender who's based locally. He says the biggest contributor he sees to delayed closings is when homebuyers use a lender based in another state who is cheaper.
"People go out and they'll find somebody who is $50 cheaper out of Omaha, Nebraska, that they've never heard of," Raskin said. "And they may or may not be dealing with an experienced person on the other end of the line, which may or may not be overpromising what can or can't be done to make it to closing properly."
Putting in the legwork upfront will ensure that homeownership is as smooth, enjoyable and successful as possible for you. Now that you're equipped with all of the tools you need, you can be well on your way to buying your dream home in one year.
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