Home buying basics: How many bedrooms and bathrooms?

Your first step is todetermine what your long-term goals are and how home ownership fits in withthose goals. Perhaps you’re simply looking to transform all those “wasted” rentpayments into mortgage payments that give you something tangible: equity. Ormaybe you see homeownership as a sign of independence and enjoy the idea ofbeing your own landlord. Also, buying a home can be a good investment. Narrowing down yourbig-picture homeownership goals will point you in the right direction. Here aresix questions to consider:

1. How’s Your Financial Health?

Before clicking throughpages of online listings or falling in love with your dream home, do a seriousaudit of your finances. You need to be prepared for both the purchase and theongoing expenses of a home. The outcome of this audit will tell you whetheryou’re ready to take this big step, or if you need to do more to prepare.Follow these steps:

Look at your savings. Don’t even consider buyinga home before you have an emergency savings account with three to six months ofliving expenses. When you buy a home, there will beconsiderable upfront costs, including the down payment and closing costs. Youneed money put away not only for those costs but also for your emergency fund.Lenders will require it.

One of the biggestchallenges is keeping your savings in an accessible, relatively safe vehiclethat still provides a return so that you’re keeping up with inflation.

• If     you have one to three years to realize your goal, then a certificate deposit CD) may be a good choice. It’s not     going to make you rich, but you aren’t going to lose money, either (unless     you get hit with a penalty for cashing out early). The same idea can be     applied to purchasing a short-term bond or fixed-income portfolio that     will not only give you some growth but also protect you from the     tumultuous nature of stock markets.
• If     you have six months to a year, then keep the money liquid. A saving account ould be the best option. Make sure     it is (FDIC) (most     banks are) so that if the bank goes under, you will still have access to     your money up to $250,000.3

Review your spending. You need to know exactlyhow much you’re spending every month—and where it’s going. This calculationwill tell you how much you can allocate to a mortgage payment. Make sureyou account for everything—utilities, food, car maintenance and payments,student debt, clothing, kids’ activities, entertainment, retirement savings,regular savings, and any miscellaneous items.

Check your credit. Generally, to qualify for ahome loan, you’ll need good credit, a history of paying your bills on time, anda maximum debt to income (DTI) ratio of 43%.4 Lenders generally prefer to limit housing expenses (principal,interest, taxes, and homeowner's insurance) to about 30% of the borrowers’monthly gross income, though this figure can vary widely, depending on thelocal real estate market.

Paying down some of yourdebt or looking for ways to generate extra income before applying for amortgage could help to improve your debt-to-income ratio.

2. Which Type of Home Will Best Suit Your Needs?

You have a number ofoptions when purchasing a residential property: a traditional single-familyhome, a duplex, a townhouse, a condominium, a co-operative, or a multifamily buildingwith two to four units. Each option has its pros and cons, depending on yourhomeownership goals, so you need to decide which type of property will help youreach those goals. You can save on the purchase price in any category bychoosing a fixer-upper, but be forewarned: The amount of time, sweat equity,and money required to turn a fixer-upper into your dream home might be a lotmore than you bargained for.

3. Which Specific Home Features Do You Want?

While it’s good to retainsome flexibility in this list, you’re making perhaps the biggest purchase ofyour life, and you deserve to have that purchase fit both your needs and wantsas closely as possible. Your list should include basic desires, like size andneighborhood, all the way down to smaller details like bathroom layout and akitchen fitted with durable appliances. Scanning real estate websites can help you get asense of the pricing and availability of properties offering the features thatare most important to you.

4. How Much Mortgage Do You Qualify for?

Before you start shopping,it’s important to get an idea of how much a lender will give you topurchase your first home. You may think you can afford a $300,000 home, butlenders may think you’re only good for $200,000 based on factors like how muchother debt you have, your monthly income, and how long you’ve been at yourcurrent job. In addition, many real estate agents will not spend time withclients who haven’t clarified how much they can afford to spend.

Consider getting pre-approved for a loan beforeplacing an offer on a home. In many instances, sellers will not even entertainan offer that’s not accompanied by a mortgage pre-approval. You do this byapplying for a mortgage and completing the necessary paperwork. It isbeneficial to shop around for a lender and to compare interest rates and feesby using a tool like our mortgage calculator or Google searches.

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