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Buying a home can be exciting and fun, but it’s also a serious financial commitment and it’s one you need to be ready for. If you’re planning to purchase a house in 2021, you should get started ASAP.
In particular, here are nine things to check off your to-do list.
1. Save up a down payment
Ideally, you should aim to set aside a 20% down payment for your house. That way, you can avoid paying private mortgage insurance (PMI), which lenders require if you don’t have much equity to protect them in case they have to foreclose.
If you don’t have 20% to put down, you can definitely still buy a home, although you’ll have to incur those added PMI costs. For almost all loans, however, you’re going to need to put down at least some money (3% down is typically the bare minimum). That means if you want to buy a $300,000 house, you’d need at least $9,000 to move forward.
2. Check your credit report and score
Your credit score is going to determine if you can get approved for a mortgage and the rate you’ll pay for your home loan. Your score is based on information in your credit report, so it’s important to check that too.
Check your credit report to see if there are any mistakes that have reduced your score. These can take time to correct and you don’t want your home purchase process held up because you discover an error too late.
If your score is lower than you’d like it to be, you can also work on improving it. For example, you could try to pay down debt you currently owe or ask creditors to remove past derogatory information from your credit history.
3. Set a housing budget
Before you start looking for a home, it’s a good idea to decide how much you’re comfortable spending. In fact, you may want to do this even before you apply for a mortgage. If you’re approved for a larger loan than you want to take on, it may be tempting to take the extra money.
When setting your housing budget, consider both monthly payments and total borrowing costs. Aim to keep your housing expenses below 30% of your income. And decide how much total interest you’re comfortable paying over the life of your loan. Obviously, the more you borrow, the higher your monthly payment will be. And the more total interest you’ll pay over time.
4. Start comparing mortgage lenders
You have many different options for mortgage lenders, including online lenders, local banks, national banks, and credit unions. It doesn’t hurt to start looking into what each lender offers even if you aren’t quite ready to make a purchase.
Many lenders allow you to get pre-qualified online by answering just a few simple questions — and this won’t affect your credit score. You can get an idea of whether you’ll be approved and what rate you’ll pay. This can help you make more informed decisions further down the road.
When you’re ready to look for a home, you’ll also want to get pre-approval, which involves providing more financial documentation. Pre-approval shows sellers you’re a serious buyer, so it’s worth doing before you make an offer on your home. You’ll also want to be confident you can get the financing you need before moving too far into the process.
5. Make a list of your must-haves
For most people, it’s not possible to find the absolute “perfect” house. Indeed, the current high home prices may make it even more challenging to get everything you want. As such, it’s important to define your priorities. That way you’ll know in advance what trade-offs you’re willing to make.
Consider things like location, size, school district, number of bedrooms, energy-efficient features, and other criteria that matter to you. Make a list so you can keep these priorities in mind when looking at homes to buy.
6. Start browsing properties online
Whether you’re ready to start shopping for a home right away or are planning to buy later in 2021, it doesn’t hurt to start looking at what’s available. In fact, browsing properties online can give you more insight into whether you’ll be able to find a home that’s right for you in your price range. Otherwise, you might need to save up a little more money.
7. Research local real estate agents
Most buyers hire a real estate agent to help them in their home search process. As a buyer, you won’t directly pay an agent, but rather the agent will receive a portion of the commission the seller pays. And agents not only help you to find properties but they also assist you with negotiating an offer and getting to closing.
If you’re going to hire an agent, you’ll want one who is focused on your needs. You can start researching local agents and interviewing them so you’ll know exactly who to call when the time comes to start your home search in earnest.
8. Bulk up your emergency fund
Becoming a homeowner comes with a whole host of new expenses, including covering repair costs when something goes wrong. You’ll also need to make sure you have the money to make your mortgage payments even if you experience an interruption in income.
That means it’s extra important to have a large emergency fund. Ideally, you’ll have the cash set aside to cover three to six months of living expenses. That way, you’ll be confident you can cover your payment and pay for any problems that develop after you move in.
9. Begin saving for a move
Moving can be costly, as you’ll have to pay to pack up and transport your possessions (or buy boxes and rent a truck if you plan to handle the process yourself). Start saving now so you won’t have to come up with several thousand dollars to fund a move at the same time as you have to pay closing costs.
By taking these nine steps, you’ll be ready to hit the ground running and hopefully enter into a successful home purchase in 2021.