Getting Started: Ready to Buy a House? Key Steps to Prepare.

So, you've made the decision to buy a house. Before you dive headfirst into browsing listings and envisioning your dream home, there are some important things to think about first. This upfront investment won't take long and will be well worth it. It might even be a little fun. As you go, we'll prompt you with practical questions that, when broken down, are easier to tackle that if you went at it alone or all at once. We highly recommend you actually do them.

Now, let's get started!

1. Assess Your Financial Situation

Arguably one of the most critical aspects of buying a home is understanding your financial readiness. Start by reviewing your credit score and financial health. Calculate your total income, expenses, debts, and savings. This is all important to know as you start making more financial decisions in the next couple steps.

Keep in mind your credit score will determine what kind of loans and rates you can get. So if it doesn't look very good right, don't worry, but it may be worth focuses on improving your score before you start applying for loans. It may save you money in the long run. Higher credit scores typically get better interest rates.

Exercise: What's your credit score?
Your first exercise is an easy, but important one. If you don't know how to find it, your bank or credit card might offer this service. 

This is "soft pull," which means it won't impact your credit score (as opposed to a "hard pull," which we'll talk about later). But if you're in doubt about what that means or how do be sure you're doing one versus the other, please ask someone, read the fine print, do your due diligence. You do not want any hard pulls on your credit right now.

Now go do it. For real.

2. Determine Your Budget

Now that you have a better idea of what you can afford, let's set a budget. It is so important to be honest with yourself about what you can really afford. You do not want to end up in a situation where you can't pay your mortgage or have to scrimp in other areas to pay the bills.

In addition to paying the down payment upfront, you'll pay a mortgage, so you'll need to think about your budget from both angles. How much can you afford to put down now? How much can you afford to pay on a monthly basis?

If you're a renter, you may be surprised to learn that you will now need to pay property taxes every year, even if your house is fully paid off. And that property insurance can be significantly more expensive than renter's insurance. So while a monthly mortgage might feel a lot like the rent you are used to paying, factor in these other costs.

Exercise: What's your maximum budget?

What's the top of your budget? This is not a dream budget or a stretch budget. This should be the highest amount you can realistically afford. Don't push it!

We're getting ahead of ourselves a bit, but while we're on the topic, when you actually start looking at houses, do not start at the top of your budget. Start at the low end. Why pay your max if you can be happy in something that costs less. Many buyers find themselves pushing to push our price point up as we search (including us), so starting at the top of your budget is a dangerous move. So with that in mind...

Exercise: What's your minimum budget?
What's the lowest reasonable amount you're willing to spend? Look at local listings on Zillow or Redfin to get a general idea of what you can get for your money. 

Exercise: How much should you save for a down payment?
Determine the down payment by multiply the high end of your budget by 20%. If you know for sure you're using a different loan type with different down payment requirements, you can adjust accordingly. If you're unsure stick with 20% for this exercise.

3. Plan for Closing Costs

You're not quite done with budgeting yet. In addition to the down payment, you'll have to pay closing costs and some other expenses out of pocket right away when you buy your new home. So this is money you must have available in order to close the deal. Your list may differ than this one based on the type of loan you get and where you live, but it's a good place to start for estimating costs. Don't worry too much about the definitions of these things yet, just know that they could be 2%-5% of the homes total cost or more, paid on top of the homes listed price.

• Closing fee
  

• County recording fees

• County transfer tax

• Earnest money

• Home inspection

• Home insurance

• Home owner’s association (HOA) monthly dues

• HOA initiation fee

• Home warranty

• Owner's title insurance

• Recording services

• Title exam

• Wire protection fee

Exercise: How much should you save for closing costs?
You already determined the maximum total home cost budget. Multiply that by 5%. If you're nervous about not having enough, increase 5% by as much as you want. To 8%, 10%, 15%, etc. Whatever you are comfortable with. 

Exercise: How do you need saved total?

Add your down payment estimate and closing cost estimate together. This is a good guide for how much you should have saved before you buy a house. 

4. Daydream About Your New Home (In a Practical Way)

Let's take a break from the money stuff to do something fun. What do you want in a house? This will help you narrow down the vast array of options and keep you from getting distracted. Your list may change as you starting looking at homes, and that's OK. In fact, that's great. You'll learn more about yourself, see what was available, and get advice from your realtor.

Exercise: Where do you want to live?
You can change almost anything about a house except where it's located. Decide what city, neighborhood, or even street you want to live on. Be as specific as is helpful to you. Talk to people, research online, drive around. Even if you don't know specifically where, consider things like if you want to live in an up-and-coming area or in a part of town that is already fully developed. What about safety, amenities, school districts, or proximity to your workplace? Is walking important to you or do you prefer to drive? Do you want to live in a quiet community or do you enjoy the noise of the city? Do you want the convenience of living on or near a main road or do you prefer to be further off the beaten path? List the places you are considering.

Exercise: What are your "must-haves?" 

These  are the things a house absolutely has to have for you to even consider it or it's a deal breaker. Remember these are critical items like number of bedrooms, your commute time from work, or need a house without stairs. It's up to you to determine what's critical for you personally, but keep in mind too few "must-haves" probably isn't an accurate representation of your needs and too many can quickly become unattainable. List 5-10 "must-haves." Keep in mind if your "must-haves" aren't available in your desired location, you're going to have to re-evaluate.

Exercise: What are your "nice-to-haves?" 

These are the things that would make it much easier to say yes to a house, but aren't critical. List them.

Exercise: What things would be the "cherry-on-top?" 
This is where you can really dream. They are things you can live without, but would be amazing to have. This isn't an invitation to push your budget, rather think about these as tie breakers when deciding between two otherwise equal properties.

3. Get Pre-Approved for a Mortgage

Back to the money talk. Before you start house hunting in earnest, it's advisable to get pre-approved for a mortgage. We already talked about making sure your credit score is healthy because that will make you more appealing to lenders. You should also avoid opening new lines of credit or making any big purchases like buying a car before getting pre-approved. Banks look at all of this when deciding to loan to you and at what interest rate. Big changes can impact your credit score and/or make you look riskier to lend to.

The pre-approval process involves a lender reviewing your financial information to determine how much they are willing to lend you for a home purchase. Being pre-approved not only strengthens your position as a serious buyer but also helps you focus your search on properties within your budget.

You'll want to get pre-approved by multiple lenders so you can compare between them. Pre-approval requires a "hard" credit score pull, which can lower your score, but all pulls of the same kind within 45 days are lumped together and only counted once. This means you should have all of your potential mortgage lenders pull within 45 days of the first pull. This takes planning on your part to plan who you want quotes from and to seek preapproval from all banks back-to-back-to-back.

Note that pre-approved and pre-qualified are not the same thing and pre-approval is better. Pre-qualified means they will likely loan you the money; pre-approval means they will loan you the money. If you go all the way through underwriting you can move faster when the time comes to make an offer. Discuss your options with your realtor and lender.

5. Find a Realtor

Partnering with an experienced realtor can streamline your home buying journey significantly. A knowledgeable real estate professional will guide you through the intricate process, offer insights into the local market, negotiate on your behalf, and ensure a smooth transaction.

Realtor and real estate agent are not the same thing. If you have options, get a realtor; they have a higher level of certification.

Exercise: Interview multiple realtors before hiring.
Make sure they have experience working with your budget, desired home type, desired location, and are a good fit for you personally.

Exercise: Share your "must-haves." 
Avoid sharing your full list as it might become a distraction. At least to start, you want your realtor to stay focused on your deal breakers.
 

Exercise: Share your minimum budget.
Realtors work on commission. It's OK to share a price range, but we personally made the choice not to ever share our max budgets with our realtors. As you look you at houses, you may find yourself naturally pushing up toward the higher end of your pre-determined budget, which is exactly why recommend against starting your search at the top of your range. You do not want to start at your max budget or who knows what kinds of unaffordable homes you may end up looking at.

You did it. Now you're ready to start looking at houses.