Buying a house is a huge financial commitment that involves a mountain of paperwork. If you’re unprepared or unorganized, you could end up facing delays. Let’s review everything you’ll need to do before you apply for a loan.
When Does It Make Sense to Buy?
Before jumping into financing, let’s pause and make sure this is the right time to even buy a home. Everybody is different, so there’s no simple answer to this. Some buyers are persuaded by rising interest rates or low housing prices, while others may not want to start looking until they’ve saved enough for a down payment. To determine if now is the right time for you to buy a house, here are five important factors to consider:
- You have enough saved. Most lenders are going to want you to have at least 10 or 20 percent of the home’s selling price saved for the down payment. FHA loans require less (3.5 percent), but no matter what type of mortgage you’re applying for, you’ll need to prove to the lender that you can save money.
- You have a stable lifestyle. If you just started a new career or your partner just lost their job, now may not be the right time to buy a house. If you move frequently and expect to do so again soon, you may be better off renting for the time being.
- It costs more to rent than to buy. If rent rates are just as high as mortgage payments (or higher) where you live, it might be a good time to consider buying a home.
- You have a good credit score. The better your credit, the lower the interest rate will be on your mortgage loan. If your credit score is low, you might want to work on improving your credit before buying a house. We’ll take a closer look at credit in step three.
- It’s a favorable housing market. Buyers will do better in a buyer’s market (where there are many homes available, driving costs down), but this is a matter of timing and luck. If this is a concern for you, reach out to your real estate agent. Agents are experts on market conditions and the area’s real estate trends, and they can advise you on the best time to list.
How Much Home Can You Afford?
Before applying for a loan, take a long, hard look at your current finances. You will be paying the same mortgage payment for years, so it needs to be one you’re comfortable with. In addition to the mortgage payment, take the following into account:
- The area in which you’re buying a home
- Your annual household income before taxes
- The amount of your down payment
- Your total minimum monthly debt obligations
- Your approximate credit score
Use our mortgage payment calculator to help you determine how much you can afford. Once you’re comfortable moving forward, it’s time to start collecting the paperwork you’ll need to apply for a loan.
How Buying a House Impacts Taxes
Unless you’re a CPA, you may not get very excited about taxes, but homeowners can benefit during tax season. These savings may help offset some of the costs of owning a home. There are five ways that buying a home can put more money in your wallet via your tax returns.
- Mortgage Interest Deduction: The mortgage interest deduction allows a new homeowner to write off the interest on (up to) a $500,000 loan for single tax filers or on a $1 million loan for couples filing jointly. Couples filing jointly can also deduct the interest paid in home equity debt up to $100,000.
- Points Deduction: It’s not uncommon for a home buyer to pay points on their mortgage to get a lower interest rate. One point is equal to one percent of the loan value, and that money is tax deductible, either immediately or over time, depending on how many points are paid up front.
- Property Tax Deduction: When a home is purchased, the amount of property tax that is paid is tax deductible. So, the higher the property tax, the larger the deduction. The only requirement is that the deduction must be claimed the year the payments were made.
- PMI Deduction: Private mortgage insurance, or PMI, is usually required on home loans in which the buyer was unable to put at least 20 percent down. The amount paid to the PMI is typically between 0.5 percent and one percent of the loan’s value and that money can be tax deductible if the buyer’s income qualifies them for the benefit.
- Home Office Deduction: Buyers who are self-employed or work as a freelancer out of the home could be eligible for a home office deduction. The IRS allows a portion of the expenses required to conduct a business from home, like the cost of internet service, electricity, etc. If you’re eligible for this deduction, you’ll need to figure out what percentage of living space the home office takes up.
The Difference Between a Mortgage Lender and a Broker
You’ve considered your budget and you’re ready to buy. Now, all you need to do if find a mortgage lender or a broker. These are not the same thing. A lender is any financial institution, like a bank, that loans money directly to you. A broker serves as a go-between, finding lenders for you. A broker won’t lend money to you directly, but they might work with several different mortgage lenders and can recommend one to you.
If you decide to go through a broker, do your research and select your broker carefully. Not all brokers work in the buyer’s best interest. Some brokers may try to connect you with the lender that promises the broker the highest profit, whether it’s the right fit for you or not. Here are some tips for finding the right lender or broker:
- Research: Before you start talking seriously with lenders or brokers, do your research. Make sure the people or firms you’re considering are reputable and licensed in the state where you’re buying a home. They should be able to provide you with a list of prior clients so you can get in touch with them. You can also ask for referrals from people you trust who have recently purchased homes.
- Three offers: Once you have an idea of the type of loan you want to apply for, get at least three offers from three different lenders. This will ensure the lender offers the type of loan you want, and you can compare offers.
- Compare costs: Buying a home comes with a variety of fees, from the home inspection to survey costs. The interest rate can vary between lenders as well. Compare all the costs presented in your quotes. If a lender is charging more in fees or quoting you a higher interest rate than the others, remove that lender from consideration.
The best way to make sure you get a competitive interest rate and plenty of lenders to choose from is to make sure you are strong financially. In the next step, let’s walk through some questions you may have about credit.