Whether you are a first-time homebuyer or a current homeowner looking to trade up to a larger home or downsize for retirement, the process can be challenging to navigate without a roadmap.
Step 1: Establish How Much Home You Can Afford
A key step in the homebuying process is determining your price range. Here’s a simple way to approach it: start by adding up your total monthly take-home income and then subtracting all of your non-housing monthly expenses. Consider that what money is left could be applied toward the down payment for your new home, but understand that you may need to save more.
Next, determine your debt-to-income ratio. This is an important factor for mortgage lenders in determining your eligibility for a home loan. To do this, add up your monthly debt payments and divide them by your gross monthly income.1 If your debt-to-income ratio is higher than 25%,2 lenders may deduce that you’re carrying an unsustainable amount of debt. In this case, they may be less likely to extend you a mortgage loan, or they may require a higher down payment amount and/or charge you a higher interest rate.
Remember, there are many costs associated with homeownership that should be factored into your price range for a new house. These include:
- Mortgage payment — The principal and interest you pay to your lender.
- Property taxes — The money you may have to pay to your city, county and state to support schools and public services.
- Homeowner association fees — The fees you may have to pay if you live in a condo, co-op or home with a neighborhood association.
- Utilities and maintenance — The costs to maintain and repair your home, as well as fees for utilities like water and electricity.
- Closing costs — The additional fees paid to cover the legal costs of buying your home.
- Homeowners insurance — The cost of insurance to help you cover costs of property loss and damage in the event of theft, fire, storm and other potential covered risks to your home and possessions.
Home insurance costs will depend on factors like where the home is located, its age and condition. Remember to include insurance premiums when you estimate the monthly cost of the home you wish to buy.
Step 2: Define Your Needs and Wants
Understand the difference between needs and wants when looking at potential homes:
- “Needs” are the deal-breaker attributes that you can’t live without, such as a particular layout, location or essential characteristics that would be difficult to change after you move in. For example, a family may need a certain number of bedrooms and a neighborhood within a good school district, while a retiree may need a one-level layout.
- “Wants” are attributes that could be achieved after you move in. For example, you may want a home with a fenced-in yard. As long as you don’t move into a neighborhood with a homeowners association that prohibits fencing, you can meet that “want” later on.
Separating your needs from your wants can help you save time in the house-hunting process. It also helps keep emotional thinking from steering you toward a home that may not be the best fit.
Step 3: Start Your Official Search
Do your research. Go to open houses, look at listings online, and learn about the neighborhoods and homes in your price range. Buying a home can be a significant commitment with life-changing implications. Putting in the time and effort at the beginning to identify your needs (and the range of home listings that meet them) can be well worth it in the end when you have found the perfect home.
In addition to finding listings that suit your needs, a professional real estate agent can serve as an objective advisor and sounding board. They also can guide you through the negotiation process. If you’re unsure where to find a good real estate agent, ask friends or family members for recommendations. A study from the National Association of Realtors® shows that more than half of all homebuyers found their realtor through a personal recommendation.
Once you’ve found that dream home and purchased it, make sure you insure it! Homeowners insurance is an essential part of the homebuying process. The right coverage can help protect you from the potentially devastating costs of damage caused by things like fire, theft and extreme weather.