Buying a house is one of the most important decisions you ever take in your life as it is going to take a huge fortune and you are going to spend your life in it. Thus, every step of the house-buying process must be planned and executed properly. It may look to some people that how much complicated this can get, you just need to decide which house you want and, then go buy it. Well, let me get this straight, it’s a whole lot complicated process. There are a million of things that you have to take care of in it. As you are reading this blog, I have presumed that you are planning to buy a house, but the problem is you don’t know where to begin with. No need to worry, I have prepared a comprehensive step-by-step pre-planning guide for you. With this, you would get a clear idea about the things you have to do/decide before starting your hunt for the dream home.
Stage 1: Determine What You Can Truly Afford
In every capital decision, the first step is to decide the budget. Keeps it clear in your mind that it is not being about what you can buy, but about what you can truly afford? Here are the steps for you to help you determine your budget:
· The first rule here is that you have to look for houses whose prices are up to three times of what you earn annually. You have to remain on the safe side. Thus, you have to make sure that you would not end up taking a huge mortgage loan which you would not be able to pay back in the future.
· The monthly payment that you make towards the mortgage loan should not exceed more than thirty percent of what you earn monthly. You have to remain realistic about this. If there are other significant monthly expenditures like medical bills, tuition fees, or other similar expenditures, then I would recommend you to further lower the ratio of monthly mortgage payment to the total monthly income. If you think that your financial management situation is kind of complicated and it is difficult to apply these general rules, consider going to a financial management expert. He will help you classifying your expenditures in a reasonable manner and further, will make your mind clearer about how much mortgage payment you can afford monthly.
· So, you have decided your budget by now. Let's move to the next part, i.e. your liquidity situation. You need to have a sufficient amount of cash reservoir in order to make the down payment for the house. In general, down payment is approximately around twenty percent of the value of the house. It is not recommended to take additional loan for making down payment because it will create too much financial burden on you.
· After creating sufficient reserves for making the down payment for the house, the other thing you have to consider while preparing the budget is that there are a number of miscellaneous expenses related to buying of a house that you have to take care of yourself like moving expenditure, cost of first maintenance, the cost of making changes in the interior and exterior of the house, decoration expenses, etc. You have to be prepared for these expenses in advance. The point here is that these are one-time expenditures and can be added to the cost of housing, so remember that you must not use your funds for emergencies (i.e. funds saved for emergency repair and maintenance of house) for these.
Stage 2: Evaluate mortgage options and get yourself pre-approved
· After evaluating all the costs related to purchasing of the home and coming up with a budget, the next step is to start hunting for a good mortgage lender. There are public banks, private banks, private companies and agencies as well as a number of private money lenders provide mortgage services nowadays. While choosing your mortgage lender, you have to be skeptic. There are a number of questions that you are having in your mind related to the mortgage process, such as, how much time the whole process is going to take, what is the qualifying criteria, etc. You have to look for the mortgage lender who answers to all of your questions and who makes sure that you understand every step of the mortgage process clearly, i.e. you have to look for the transparency here.
· There are plenty of different mortgage options to choosing from. Two of the popular options are Fixed-Rate Mortgage (FRM) and the Adjustable-Rate Mortgage (ARM). Under the Fixed-Rate Mortgage, the rate of interest remains constant over the whole duration of the loan. Whereas, under Adjustable-Rate Mortgage, the rate of interest remains constant for a specific period of time, then keep on changing after every certain interval of time. Prefer FRM if you are planning to live is that house for a long period of time (i.e. at least for the whole duration of the mortgage loan), because in ARM, interest rates might increase later which will increase the financial burden on you. Whereas, prefer an ARM if you are planning to live is the house for just the original fixed period of time (i.e. the period for which the rate is constant).
· Prefer longer monthly payment term, i.e. if you have to choose from 30-year payment term and 15-year payment term, go for 30-year. The future is not certain and you have to remain prepared for it. Higher payments mean lower liquidity position. There is always the possibility that some important thing might come up in the future for which you need money. So, lower payment ensures that whatever situation you will be in the future, you will not be facing financial difficulties in making payments. Further, you can always pay fast in the future and end your mortgage debt earlier.
· After deciding the lender and the type of mortgage you are going to take, get yourself pre-approved for the mortgage loan. Under this, the banker/ money lender will audit your financial documents like your bank statement, tax returns, salary slips, etc., on the basis of which he will approve you for a specific mortgage loan amount at a specific rate of interest. If the mortgage lender approves you for an amount higher than your budgeted mortgage amount, do not get persuaded by that, you have to stick to your budget.
Stage 3: Decide what are essential and what are lovely extras
· It is hard to get your dream home within the budget. There are very few people who get lucky enough to achieve this dream nowadays. So before you start looking for the house, I want you to imagine your perfect home and come up with a list of things and features you think are must-to-have in that house and things that are lovely-to-have.
· You have to decide that whether you need an apartment or a duplex. Other things that you have to pre-decide before going house hunting are the number of bedrooms you need in the house, number of bathrooms in the house, the type of surrounding you want around the house, backyard space, gallery and drawing room space you require, etc. The other things to which you should give importance are proximity of the house to the workplace, proximity to the closest supermarket, connectivity to important places airport, railway station, hospital, school, etc., availability of general services in the society like repairman, electrician, etc., quality of nearest hospitals, schools, etc. and availability of public transportation services. There are things to which you need not give importance to such as designing of the house, pool cleanliness, etc. These things you can modify by yourself after buying the house.
So you have properly completed all the steps in the above three stages. Now is the time to do the thing for which you have been waiting, i.e. starting your house hunt. In this, again, you have two options, i.e. to do the house hunting by yourself by searching through the internet, advertisements, magazines, taking help from friends, etc. or hire a real estate agent who would provide his assistance by helping you get access to the best deals available in the local region. Further, as being the expert in the field, a realtor makes sure that negotiation works in favor of you and all the paper formalities are met properly. As home-buying is a big decision, people get sentimental in it sometimes. So unless you are completely sure, prefer hiring an agent.
Thank you. Good luck house hunting!