Buying a home is a great moment, it’s an opportunity to have something that’s yours. The security of your personal space, the way you want it.
There are a few key things that we can do in order make the goal achievable before we even get there. This pre-home buying checklist should help you prioritize steps you can take today to get to your goal of owning your home faster.
Step 1 - Understanding Your Motivation and Goal
It’s helpful to start with some internal reflection around your goal for home ownership, to ensure that you’re internally aligned with the goal.
Why do you want a house? Is this a short term “starter” house or a forever home?
Decide where you want to live and the kind of house you want. How much does it cost?
Build out a Vision Board for your house so you can see the goal clearly.
Where do you ideally see yourself in 1, 3 and 5 years? (This is how long it might take to build up your finances for a down payment).
Are there any other goals that are a priority in the short-term?
Step 2 -Understand Home Ownership
Do you research, speak to friends and family, and others who are home owners to understand the pros and cons of home ownership.
Ownership Costs: You’ll be responsible for all maintenance, repairs, taxes and other costs - include this in your calculation.
Transaction Costs: Buying a home can be a process, and there are costs and fees associated with the transaction - include this in your calculation.
Asset vs. Cost: On the other hand, home ownership means that you are building equity and investing in an asset vs. a pure living cost such as rent.
Location & Affordability: Sometimes this means that your choice of location and house will depend on how much you can afford to spend - rental properties can seem cheaper in the short-term.
Step 3 - Get Financially Organized
Let’s get organized, and prepared on the financial front to make the buying process easier.
Make sure you have a fully funded Emergency Savings account
Check your Credit Score, and Credit History. In order to qualify for a loan, you’ll need a good credit score, and history of paying your debts on time. You can also request a report to review and dispute any errors.
Improve your credit score by working with your coach
Maintain Low Credit Utilization: Pay down any credit cards or personal loans, maintain a low balance on credit cards to show that you’re in control of your finances. Don’t close any unused credit cards, though.
Debt to Income Ratio: An important metric that your bank uses to calculate the amount of money you can borrow is the
, you may be qualified at a higher ratio, but generally, housing expenses shouldn’t exceed 28% of your monthly income.
Step 4 - Determine How Much You Can Afford
This will depend on what you’d like your monthly payments to be - which will include your mortgage payment, as well as any other maintenance costs, as well as utilities etc.
28%/36% Rule: Most financial advisers agree that people should spend no more than 28 percent of their gross monthly income on housing expenses and no more than 36 percent on total debt — that includes housing as well as things like student loans, car expenses and credit card payments. The 28/36 percent rule is the tried-and-true home affordability rule that establishes a baseline for what you can afford to pay every month.
Example: To calculate how much 28 percent of your income is, simply multiply your monthly income by 28. If your monthly income is $6,000, for example, your equation should look like this: 6,000 x 28 = 168,000. Now, divide that total by 100. 168,000 ÷ 100 = 1,680.
Depending on where you live and how much you earn, your annual income could be more than enough to cover a
that’s too expensive for your budget, even if you can find a lender willing to underwrite the mortgage.
Step 5 - Saving for Your Down Payment
Once you’ve identified how much you can afford, and it’s now time to start saving towards your goal.
How Much Down Payment: The more you put down in down payment, the better mortgage rates you might get as the bank and lenders are taking less risk on you. But that doesn’t mean you always have to put 20% down. Depending on circumstances you might get good enough deals for less.
Consider Your Monthly Payments: Again, the more you put down, which means you’re borrowing less and therefore this will also affect how much you need to pay each month.
Typically Consider 10%-20%: This is a reasonable amount a bank might request you to put down for your home purchase, so helpful to have this saved up.
Example: So, for a house costing $250,000, this means it’s prudent to have saved up $25,000-$50,000 as your down payment.
Closing Costs: These are administrative and borrowing costs associated with the home purchase, and can be anywhere from 2%-5%
Example: So, for a house costing $250,000, this means you’ll need an additional $5,000-$12,500
Start Today: Start saving towards your home ownership goal, by setting aside an auto transfer each month to a high-yield savings account. Additionally, also consider a certificate of deposit (CD) if you’re not going to be needing that money for at least a year or so.
Step 6 - Getting Pre-qualified and Pre-approved
Once you’ve started saving, and have improved your credit score, you can actually get pre-qualified to see how much you’d be able to borrow and on what terms.
When Organized - Pre-qualify: When you pre-qualify for a home loan, you’re getting an estimate of what you might be able to borrow, based on information you provide about your finances, as well as a credit check.
Pre-qualification is also an opportunity to learn about different mortgage options and work with your lender to identify the right fit for your needs and goals.
First-time homebuyers are more likely to find that getting pre-qualified is helpful, especially when they are establishing their home buying budget and want an idea of how much they might be able to borrow.
When Ready to Buy - Get Pre-approved: Pre-approval can be extremely valuable when it comes time to make an offer on a house, especially in a competitive market where you might want to stand out among other potential buyers. Again, a seller will be more likely to consider you a serious buyer because you have had your finances and creditworthiness verified.
Copies of pay stubs that show your most recent 30 days of income
Basic information about bank accounts
Bank account numbers or two most recent bank statements
Down payment amount and desired mortgage amount
Down payment amount and desired mortgage amount
No tax information required
W-2 statements and signed, personal and business tax returns from the past two years
There are no rows in this table
Pre-qualification vs. Pre-approval
You can start house-hunting knowing how much you might be able to borrow
You’ll be ready to make an offer with confidence—and gain a competitive advantage
Provide basic information to a lender and quickly get a prequalification amount
After submitting documentation to a lender, you should receive a decision within 10 business days
Answer questions for this process, plus a credit check
Provide proof of financial details, plus a credit check