Of all the things you learned in school, how to buy a house is probably not one of them. That's a shame, because for many people it is the biggest financial decision they will ever make. Buying a house is an exciting and often confusing experience, but you will make calmer, more sound decisions if you can approach it as a rational, orderly process.
Central to the process is being able to compartmentalize, which means separating out distinct projects so you can do each one thoroughly while having them both under way at the same time. This is important because you are embarking on two major projects at once: buying a house and obtaining a mortgage. The idea is for them to both come together in the end.
How to Buy a House: You Need a Mortgage
While home buyers tend to think about the house first and then about the mortgage, starting the mortgage process first can help you better understand what you will be able to afford, and then put you in position to pull the trigger when you find the property you want. As you get the mortgage process underway, don't forget these five steps:
- Check your credit record. Do this early so you know if there are any obstacles you need to overcome.
- Run some calculations. Figure out what your budget can comfortably afford in terms of monthly payments, and then sit down with a mortgage calculator to run some simulations for different types of loans. Looking both at monthly payments and total expense over the life of the loan will help you figure out what type, size, and length mortgage loan you want.
- Decide on a target loan. Based on the above exercise, decide what your target loan is. Lenders have different sweet spots in terms of which loans they offer the most competitive terms on, so knowing specifically what you are shopping for will put you in a better position to research lenders.
- Research lenders. You can start by simply comparing advertised rates to narrow the field, but you should soon move on to getting specific quotes on your target loan.
- Get mortgage pre-approval. This is different from pre-qualification, which is just an estimate of your loan eligibility based on general formulas. Pre-approval is an actual commitment based on documented financial information. This will probably involve a fee, so don't move into this phase unless you are certain about buying and have done your research on lenders.
How to Buy a House: The Hunt!
A large part of house hunting depends on your individual tastes and circumstances, and nobody knows those better than you do. However, while accounting for your personal preferences, don't forget to take these five practical steps:
- Research local property markets. Look at area prices, how long residences are taking to sell, and whether there is an abundance of properties on the market. You may get a good bargain if there is a choice of houses available, but be wary of neighborhoods that seem to be emptying out.
- Think ahead. Envision what your needs will be over the next five or ten years, to help you focus on a house with the right size and features. Think also about things that will matter once you live there, such as school districts, commute times, access to services, etc.
- Research any natural hazards. Floods, mudslides, sinkholes -- these are just some of the natural hazards that can strike a neighborhood. Research local news stories to see if the area has a history of such things; an insurance agent might be able to help with this information as well.
- Have your own inspection done. Mortgage lenders will want an appraisal made, but you can head off future problems if you go a step further and hire someone to do a thorough mechanical inspection of the property.
- Negotiate rationally. Let your real estate agent do the talking, but you call the shots. The more research you have done, the better you'll be able to judge just how hard a bargain to try to drive.
Both Step 5s above demonstrate how these two processes can tie together in the end. If you have your mortgage pre-approval in hand, you will have a stronger negotiating position because the seller will know you are in position to act immediately if you reach an agreement. That's how compartmentalizing the distinct processes of obtaining a mortgage and shopping for a house can pay off for you.