Finance Question #12 - I want to buy a house, now what?

You have been renting for years and you have now decided that you want to buy a home. So now what? To answer this question I am going to share some money principles that will help you be well on your way to buying a home.

Make sure your credit score is in great standing

Checking your credit score is a good place to start when preparing to buy a home. Ideally, you already have a pretty good idea of your credit standing because you are checking your credit score on a monthly basis. Notice I said monthly and not annually. It is even more critical for you to start with your credit score if you are not checking it regularly. You want to make sure that your credit score is high enough to qualify you for the lowest available interest rates because a high score will save you a ton of money in the long run.

If your credit score is in bad shape you can forget about buying a home for now, and you will need to direct your attention to improving your score.

Know how much house you can afford

The key here is to figure out how much of a monthly mortgage payment you can afford without blowing up the budget. Start by looking at your current monthly budget, and then calculate the dollar amount you can comfortably pay out each month on a mortgage. You will then be able to calculate the amount of house you can comfortably afford based on the monthly payment that fits into your budget. There are lots of free online mortgage calculators you can use to calculate monthly payments based on the amount of house you want to buy. I recommend aiming for a 15-year mortgage instead of a 30-year mortgage because again, you will save a ton of money in the long run on interest payments.

Set aside funds for down payment & closing costs

Now that you know how much house you can afford, you should begin saving for a down payment and closing costs. Down payments are typically 20% of the total cost of the home. Your real estate agent should be able to inform you of the average closing costs based on the current market. Speaking of real estate agents, be sure to do your homework on them and be very selective. For many of us buying a home will be the largest purchase we ever make, therefore you must make sure that your chosen real estate agent has a solid background with an honorable reputation.

Establish a healthy nest egg

Buying a home is a major financial undertaking. With that said, the best practice is to establish a healthy savings account that will consist of at least 6 months worth of take-home pay. Property taxes, upkeep, and home repairs are major expense items you will be responsible for in addition to the mortgage payments. Establishing a healthy nest egg will help keep your head above water.

Get pre-approved

Get pre-approved for a mortgage before you contact any real estate agents, and before you go look at any homes. Often times real estate agents will not take you seriously without a pre-approval already in hand. Additionally, you cannot make any offers on a home without first being pre-approved. Do yourself a favor and avoid wasting your time, or anyone else's time by first obtaining pre-approval for a mortgage.

The last point I want to add to the pre-approval process is very important so take note.

Shop around for interest rates when you are at the pre-approval stage. My rule of thumb is to apply for a mortgage with at least 6 different lenders, and then compare interest rates among them. Keep in mind that they are all competing for your business, therefore you should never settle on the first lender that approves you. In a 30 day period, the credit bureaus allow you to apply for a mortgage with as many lenders as you want without hurting your credit score because the credit bureaus recognize that you are shopping around for interest rates when they see this activity on your credit report.

Close the deal, get the keys & move in!

The last step of this process is the fun part. Your credit score is great, you know exactly how much of a home you can afford without blowing up the budget, your down payment/closing cost funds are in place, your 6 months of take-home pay savings are stashed away, and you have been pre-approved for a low-interest rate. All that is left for you to do now is select the home you want, make an offer, and then close the deal!

Take charge of your money!

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Disclaimer: Hudson Wealth Management, LLC (HWM) is a FINRA registered investment adviser firm. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Before investing, consider your investment objectives and HWM's fee schedule. The information provided herein is for illustrative purposes only and does not constitute personalized investment advice, recommendations or solicitations to hold, buy or sell any investment or security of any kind. All images and return figures shown are for illustrative purposes only and are not actual customer or model returns. Past performance does not guarantee future results.

Prior articles in this Series

MONEY QUESTION #1 - Do you live for today, or live for tomorrow?

MONEY QUESTION #2 - Should I "loan" money to friends and family when they are in need?

MONEY QUESTION #3 - Did grade school (K-12) teach you anything about money?

MONEY QUESTION #4 - Why do I need an emergency fund?

MONEY QUESTION #5 - Is it better to pay off my entire balance, just the minimum, or somewhere in between?

MONEY QUESTION #6 - What is the difference between financial security & financial freedom?

MONEY QUESTION #7 - How can I improve my chances of getting a credit limit increase?

MONEY QUESTION #8 - How much emergency money is needed?

MONEY QUESTION #9 - When Should I Start Saving for Retirement?

MONEY QUESTION #10 - I am working on eliminating debt. Should I cancel my credit cards after paying them off?

MONEY QUESTION #11 - How do I get paid what I am worth?