5 To-Do's When Preparing to Buy a Home

Jerevie Canlas, Ph.D, CFLE
Empowering Financial Wellness Program Coordinator

While buying a home can be a very exciting process, it is more than just touring homes and driving through neighborhoods. The average time it takes to buy a home is around 6 weeks, but that only accounts for the time between getting pre-approved for a mortgage loan and when you finally get the keys to your new home. Before you start, you need to have done your homework, namely; evaluate your financial situation, choose the right neighborhood, and pick a realtor who has your best interest; in that order. One of the most common mistakes homebuyers make is looking at a home they can’t afford. Here’s a few things to consider when evaluating your financial situation in preparation for probably the biggest purchase you’ll ever make in your life:

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1. How are you going to afford the down payment? According to the National Association of Realtors, first time home buyers typically put down 7%. If you’re purchasing a $300,000 home, your down payment can range from $0 if you qualify for a particular loan program, to anywhere between $9000 for a conventional loan and $60,000 if you want to avoid private mortgage insurance. Saving for this considerable amount of money may take some time and effort, but can be done if you know where to start. First, make sure to check for home buyer programsthat may qualify you for a lower down payment or some form of assistance. If you need to come up with a down payment, set a target amount and create a strategy for how you will come up with that money in a specified amount of time. This could mean cutting down on expenses, downsizing, fast-tracking debt repayment, or increasing your income. 
2. Does your budget have room for the cost of owning a home? Review your budget so you can make an informed decision about how much house you can realistically afford. You do not want to be house poor. Aside from your monthly mortgage payments, consider the cost of maintenance, repairs, landscaping, as well as other dues and fees such as Homeowners Insurance and Homeowners Association Fees. Experts estimate that the annual cost of owning a home is about 1% of the home’s value. Also, moving from a rental to a home usually means higher utility cost especially when you’re moving to a larger living space. 
   
3. Do you know your debt-to-income ratio? Your debt-to-income ratio tells lenders how likely you are to default on the loan. To lenders, the more income you have tied to debt, the more likely you are to default. If you don’t know your debt-to-income ratio, add up all your monthly debt payments and divide the total by your gross monthly income. Your goal is to have a debt-to-income ratio of 36% or lower, but not higher than 43%. If your debt-to-income ratio is high, try lowering your debts or increasing your income if possible. Use the free PowerPay Debt Elimination tool on PowerPay.org to create a strategic debt repayment plan that can cut the time you’re spending on paying off debt and save money in interest.  
4. Have you reviewed your credit report? Lenders will check your credit report to understand your financial history - lenders basically want to know if you are a responsible borrower. You can check your credit report as many times as you want without hurting your credit score, because a self inquiry is a soft inquiry. As of this publication, the three major credit reporting agencies have extended their offer of free weekly credit reports to consumers until April 20, 2022. To get your free credit report, go to AnnualCreditReport.com. Check your credit report, make sure it is accurate, and clean it up if you need to. This will also give you insight into how you can improve your credit score, as lenders use this information to determine the mortgage loan and interest rates you can qualify for.
   
5. How much house do you realistically need? Home prices are on the rise, especially in Utah. The median home price in Utah as of December 2020 was $354,580*. Home prices vary depending on size, features, and location among other factors. When determining which home you should buy, go back to the basics first and determine your needs and wants. Make a list of negotiable and non-negotiable features of the home you need. Do you need separate home offices for you and your spouse? Is it necessary that the basement be completely done? Do you really need a fourth bedroom? Do you really need the upgrades your builder is offering, or are these features just nice to have? Are you willing to add 10 minutes to your commute for a $10,000 less home? Are you willing to pay an extra $5,000 to be in your desired school district? Are you willing to buy in a different city to get more house for your budget?  

In the end, the money you spend on the home you buy has to have value. Money reasonably spent on anything that doesn’t bring you true joy is wasted money. USU Extension’s Empowering Financial Wellness program has resources and tools to guide and prepare you for your financial goals. Make sure you are an informed buyer. Owning a home is a big commitment and whenever you’re ready, Utah State University Extension’s Home Buyer Education Program can provide you with the tools and information you need to make a wise financial decision before, during and after purchasing your home. Completing the online course may qualify you for loan programs and financial assistance in your local area. 
 
*Since the original publication of this article, Utah’s median home price has risen to $405,000 
 This article was previously published on finance.usu.edu, March 25, 2021

References:

1. Home Advisor. (2021).True cost report. https://www.homeadvisor.com/r/true-cost-report/
2. National Association of Realtors. (2021). Highlights from the profile of home buyers and sellers. https://www.nar.realtor/research-and-statistics/research-reports/highlights-from-the-profile-of-home-buyers-and-sellers
3. U.S. Department of Housing and Urban Development. (n.d.). Homeownership assistance: Utah. https://www.hud.gov/states/utah/homeownership/buyingprgms
4. Utah Association of Realtors. (December 2020). Real estate statistics. Local market updates by county. https://utahrealtors.com/consumers/resources/statistics/