Even if you’re nowhere near ready to lock down a piece of property, you may want to start planning for the future. Housing prices in December 2012 rose 6.8 percent from the same period in 2011, which is the biggest jump we’ve seen since 2005, according to the latest report from the S&P/Case-Shiller Home Price Indices (the leading measures for the U.S. residential housing market).
“Even though prices have gone up slightly, right now really is the perfect time to buy,” says Danisha Danielle Hoston, financial expert and principal of Hoston & Associates real estate. “Prices are still lower than they have been and interest rates are still lower than they have been in most of our lifetimes.” While that doesn’t mean you should rush out with your down payment in hand if you’re not ready, it’s certainly a wake-up call for anyone who is considering buying a house in the near future. Here, how to get prepared—no matter what stage you’re in:
If you’re at least 5 years away from buying your first home….
Check Your Credit
“Guard your credit fiercely,” says Hoston. That means no late payments, no forgotten bills, and always staying below 25% of your credit limit. In addition to checking your regular credit score, find out your FICO score, too. “FICO scores are the type of scores that most mortgage lenders use,” says Liz Weston, financial expert and author of Deal With Your Debt. Finding out your score early on means you’ll have plenty of time to do some damage control if it isn’t where it should be.
Make a Better Budget
Setting a spending plan for yourself before you actually need it can help you see where all your money is going (and if you maybe need to cut down on your weekend shopping sprees). Weston suggests the 50-30-20 plan (coined by newly-elected Senator of Massachusetts Elizabeth Warren): Take your gross income after taxes and chop that in half, which should account for all your necessities like housing, transportation, utilities, and insurance. Then take 30 percent for the fun stuff (like happy hours, new clothes, and vacations) and the remaining 20 percent goes toward savings and debt repayment. “If you can get that in order before you even start your quest for a house, you’ll already have a balanced budget to help you start saving,” says Weston. For more tips on how to establish a budget, check out The Best Apps for Saving Money.
If you want to buy something in the next year…
Be Strict About Your Spending
Even with a rock-solid budget, you’ll probably need to carve out a little extra savings for things like the down payment, mortgage payments, and closing fees. “Really consider avoiding large purchases right now, because this going to be the most important large purchase you’re going to be making,” says Hoston.
Meanwhile, don’t close a credit card account at this time—even if you never use it. “[Mortgage lenders] like to see a big gap between the credit you have available and the credit you are using,” says Weston. Similarly, try not to open any new accounts just yet either, since it may bring down your score slightly.
Know the Fees Ahead of Time
When saving up for this enormous purchase, it’s crucial to know all the costs you’ll encounter along the way. For instance, your down payment may be anywhere from 3.5 percent to 20 percent of your total cost, says Weston. And while it’s typically good to put down as much as possible, you may also want to put down less if it means jumping on a property you love at a time when the interest rates are low, Hoston says. And don’t forget about the closing costs (they averaged $ 3,700 on a $ 200,000 mortgage last year, according to Bankrate) and broker fees (sellers may end up paying 3% to both their agents and the buyers’ agent, according to Weston). The bottom line: Get educated about the potential costs you’ll encounter, and save up accordingly.
Start Shopping Around
When you’re between six months to a year out, you’ll want to get pre-approved through a lender to find out what you can afford, says Hoston. But like all big purchases, it pays to be a comparison shopper. “Get a few different options. Credit unions typically have lower fees than conventional banks,” says Hoston. Once you’ve been pre-approved at one bank, you can take that information to another one to see if they can beat it—either in terms of price or when it comes to your payment schedule.
Then hit the streets—or at least your computer—to start figuring out which neighborhoods match your price range. Sites like Zillow.com and StreetEasy.com are great for getting an idea of average costs, but a savvy real estate agent will clue you in to how close the asking prices are to the actual selling price, says Weston.
If you want a house—now!
Make Smart Money Decisions
Even though home prices are starting to increase, it’s still a great time to be a buyer. “Think about taking advantage of the lowest interest rates and fixing them for a period of at least 10 years, because inevitably they will go back up,” says Hoston. You’ll give yourself some peace of mind knowing that your rates won’t be crazy-big in the future.
And if you need more help with your mortgage payment, you might want to consider buying a multiple unit home that you can rent out. You’ll end up with an investment property and the income from your tenants may cover some—or even all—of your mortgage payments, says Hoston.
Keep Saving
After you sign on the dotted line, make sure you’ll still have enough money left over to actually enjoy your house—not to mention decorating, maintenance, and your mortgage payments. “One rule of thumb is to make sure you save at least 1 percent of the value of the house every year just to go towards maintenance and repairs,” says Weston. And even though you probably won’t use it every year, it’s crucial to have it saved for emergencies.
Splurge On Inspections
It may seem like just another added cost that you don’t feel like paying, but consider the inspection as a necessary part of the buying process. “Some money that I do recommend spending is on the complete inspection report. Don’t hire your cousin Willy to do a walk through on the property,” says Hoston. “This is very good money well spent.” And that includes things like termite and mold reports, which can all lead to even bigger costs down the line.
Don’t Rush It
Just because the time is right for buyers, that doesn’t mean you should grab the first set of house keys you find. “One thing I worry about is people panicking themselves when they’re not ready to make a decision,” says Weston. “My advice is to buy a house when you’re ready, you can afford it, and you’re going to stay put for a while.” Not only do you want to love your new home enough to stay for a few years, but it also takes 3-5 years for the appreciation of a house to offset the costs of moving again. That said, if you find your dream home while the costs are still low, go for it!
More from Women’s Health:
Money Rules That’ll Make You Rich
Money Help 411
The Money Mistake You’re Probably Making
To find out how to suppress your hunger hormone, buy The Belly Fat Fix now!