- Buying a house can be a long and tedious process.
- Before you’re ready to start home shopping, financial experts recommend getting your credit score in good shape, saving for a down payment in a dedicated fund, and figuring out how much you can afford to spend.
- You should always get a home inspection, factor in costs beyond the sticker price, and make sure you’re not buying a home only because it seems like a good investment.
Purchasing a home is a huge accomplishment for many people, and the financial commitment is not to be taken lightly.
To help you avoid making the process any costlier than it already is, Business Insider has gathered some of the best homebuying advice from real estate experts, bestselling authors, and financial planners that could save you money and time.
Below, check out seven pieces of homebuying advice you simply can’t afford to ignore:
1. Make sure your credit is in order well before you start shopping
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When you apply for a mortgage, your interest rate for paying back the loan will depend partially on your credit history.
“Think about it: If you’re going to have this loan for the next 15 to 30 years, you’re going to be paying a ton of interest, tens of thousands if not hundreds of thousands of dollars on that loan,” she said. “So a difference in interest of a quarter of a percent or half a percent or one percent makes a huge difference over the life of the mortgage.”
While you can monitor a close approximation of your credit score throughout the year on sites like Credit Karma and Credit Sesame, Bera says it’s worth paying a small fee to get your exact FICO score when you’re preparing to buy a house. FICO scores are credit measures widely used by lenders to determine interest rates, and a high FICO score can help you secure the most reasonable ones.
“Really pay attention to credit, especially in the six months leading up to getting ready to buy a home,” Bera says. “This is not just a month before, scrambling and then realizing, ‘Oh my gosh, I have something old in collections!’ Once you take care of that it usually takes a couple of months to be reflected on your credit score.”
2. Don’t use your emergency savings for a down payment
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When it comes to buying a home, the more you have in savings, the better. But the money you’re putting away for a down payment – typically 20% of the price of the home – should remain completely separate from your emergency fund, which is three to nine months of expenses earmarked for when something goes wrong.
Instead, it’s best to keep your home savings somewhere else safe and liquid, self-made millionaire and bestselling author David Bach told Business Insider, particularly if you’re looking to purchase in about three years.
“I’d tell you, put it in a money-market account, and the reason is this: There’s nothing more painful than saving for a down payment for a home and having the market go down,” said Bach, who has spent 25 years in the wealth management industry.
“When it’s a short-term time horizon, which is what three years is – three years is almost like tomorrow – you’re better off to have safety and liquidity and see yourself making progress every month and not be losing sleep over it,” he said.
In addition to security, a money market account could earn an interest rate of 1%, compared with the much lower 0.01% on a traditional savings account. These accounts can offer a higher interest rate because they usually require a minimum balance, which can vary widely depending on the bank (and if you dip under the minimum, you may incur a monthly fee).
A high-interest, online savings account yields a similar return.
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3. Plan to spend no more than 30% of your income on housing
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Personal finance experts say a good rule of thumb is to make sure your total monthly housing payment doesn’t consume more than 30% of your take-home pay.
“Any more than that, and your finances are going to be tight, leaving you financially vulnerable when something inevitably goes wrong,” write Harold Pollack and Helaine Olen in their book, “The Index Card.” “To be fair, this isn’t always possible. In some places such as New York and San Francisco, it can be all but impossible.”
Scott McGillivray, a real estate expert and the host of HGTV’s “Income Property,” suggests calculating what a realistic mortgage would cost and putting the equivalent of that into savings each month before you plan to buy.
“The truth is, if you can’t do that – if you can’t put that money aside and you can’t actually keep those savings every month – you may not be prepared to make your consistent mortgage payment,” he says.
It’s not a perfect model for what it would be like to pay a mortgage each month, since you’re likely still forking over money for rent, but it proves that you’re dedicated to the process and willing to make financial sacrifices in order to afford homeownership.
4. Pay for a home inspection
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Some contracts will require a home inspection as a contingency in your purchase offer, meaning you could back out of the offer if there’s anything seriously wrong with the home. If it’s not required, get one anyway. Not only will it give you peace of mind, but it will ensure that you’re not walking into a bad deal.
A typical home inspection lasts only a few hours and costs the average homeowner $315, but it all depends on the size, location, and age of the home. Inspectors will usually look at all the unseen, but most important parts of the home’s infrastructure, including foundation, electrical, plumbing, heating and A/C, and roofing.
Discovering problems with these systems down the road could cost you a fortune, so it’s best to get them taken care of at the outset. Some sellers will be willing to cover the cost of any repairs, while others expect the buyer to pay, so make sure you have a written agreement stating who’s responsible for footing the bill.
And if you’re buying a home that’s several decades old, you may also want to pay extra to test for mold, asbestos, or lead.
To make sure your home inspector is qualified – and working in your best interest – ask these questions suggested by the US Department of Housing and Urban Development.
5. Factor in costs beyond the sticker price
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Along with a home inspection, you’ll have to pay other closing costs including lawyer’s fees, title insurance, home appraisal fees, property survey fee, local property taxes, and a homeowners insurance premium. These typically amount to 3% to 5% of the sale price.
And don’t forget about moving costs. The average cost of an in-state move is $1,170, US News & World Report reports, and if you’re moving between states, it’ll cost you about $5,630.
“The actual purchase price is not the most important cost,” says Alison Bernstein, founder and president of Suburban Jungle Realty Group, an agency that assists suburb-bound movers.
“What’s important is how much it’s going to cost to maintain that house,” Bernstein said. Indeed, Zillow estimates that homeowners spend thousands every year covering hidden – or simply forgotten – costs, like utilities, house cleaning, yard maintenance, and renovations, so don’t forget to factor that into your budget.
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6. Don’t pay the agents’ commissions
- Dave Kaup/Reuters
The rules for paying brokers and agents can get confusing, but there’s one piece of advice you won’t want to forget: The seller, NOT the new homebuyer, always covers the commission for both the seller’s agent and the buyer’s agent, which is typically between 5% to 6% of the home’s sale price.
For example, if someone sells their home for $250,000, they’re responsible for paying $15,000 (if the commission fee is 6%) to their listing agent, who will then pass along a cut to the buyer’s broker.
Often sellers account for the fee they’ll be paying and incorporate it into the listing price of the home. And while the buyer doesn’t have to pay the commission fee, they still pay closing costs, which can include paying the agent for their time.
7. Don’t buy a home because it seems like the right thing to do
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If someone asks why you want to buy a house and your first answer is something along the lines of “Because I’m wasting money on rent” or “Because it’s a good investment,” you might not be mentally prepared for all the responsibilities that come with homeownership. At the end of the day, buying a home isn’t a means of getting rich.
“When you look at the average price increase of a home across the country over the last 100 years, it’s only about 3%,” Eric Roberge, CFP and founder of Beyond Your Hammock, told Business Insider. “If you take away extra costs plus inflation, you’re not really making any money on average on a single family home.”
It’s smarter to look for an affordable house that meets non-monetary goals: It’s in your dream neighborhood or it’s a good place to start a family.
“A home is a utility, not an investment,” Roberge says.
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Emmie Martin and Kathleen Elkins contributed reporting.