{"id":134489,"date":"2021-01-24T09:30:27","date_gmt":"2021-01-24T16:30:27","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=134489"},"modified":"2024-02-14T15:38:14","modified_gmt":"2024-02-14T22:38:14","slug":"prepare-buy-home","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/prepare-buy-home","title":{"rendered":"8 Steps To Take Now To Prepare To Buy a Home in 2021"},"content":{"rendered":"<p><iframe loading=\"lazy\" src=\"https:\/\/playlist.megaphone.fm?e=BIGPOC9662322263&amp;light=false\" width=\"100%\" height=\"200\" frameborder=\"0\" scrolling=\"no\"><\/iframe><\/p>\n<p>Is 2021 the year you become a homeowner? Or make that long-overdue trade up to a larger home that fits your growing family?<\/p>\n<p>Buying a home is the largest financial transaction and the largest asset most Americans ever own. It\u2019s usually a long, tedious journey with plenty of twists, turns, and delays along the way\u2014which means you should start now.<\/p>\n<p>Begin with these steps to start laying the groundwork immediately, because some of them take time to complete!<\/p>\n<h2>1. Improve Your Credit<\/h2>\n<p>The <a href=\"https:\/\/www.biggerpockets.com\/blog\/credit-score-buy-house\" target=\"_blank\" rel=\"noopener\">credit score needed to buy a house<\/a> matters. It often means the difference between a 3% and a 5% interest rate, or a 20% down payment and a 3% down payment. It even impacts your ability to remove mortgage insurance from your monthly payment \u2014 more on that later.<\/p>\n<p>It can take months or even years to <a href=\"https:\/\/www.biggerpockets.com\/blog\/improve-your-credit-score\" target=\"_blank\">improve your credit<\/a>, so start now. Begin by pulling your free credit report from <a href=\"https:\/\/www.annualcreditreport.com\/\" target=\"_blank\" rel=\"noopener\">AnnualCreditReport.com<\/a>, the official site designated by federal law. Look for any errors and contact the credit bureaus to remove them.<\/p>\n<p>Then focus on paying down your rotating credit balances, if any. Get each of these down below 30% of their credit limit. Better yet, pay them off entirely so you stop blowing money on high-interest consumer debt.<\/p>\n<p>If your problem stems from not having built enough credit yet, try a credit builder loan. These aren\u2019t actually loans per se, but rather you agree to make regular monthly payments to a \u201clender,\u201d who simply sets the money aside for you each month. They report the payments as loan payments to the credit bureaus, and at the end of the loan term, you get your money back. Try <a href=\"https:\/\/www.self.inc\/\" target=\"_blank\" rel=\"noopener\">Self<\/a> as a reputable example (I\u2019ve used them myself).<\/p>\n<p>With stronger credit, you position yourself for lower interest and lender fees, a lower down payment, and more options for mortgage loans.<\/p>\n<h2>2. Save a Boatload of Money<\/h2>\n<p>If you want to buy a house this year, then this is the year you need to get serious about savings.<\/p>\n<p>Ditch the cigarettes and $5 lattes. Stop ordering take-out or delivery and learn how to cook like a grownup. Quit blowing money on new clothes every season. Cut your cable subscription.<\/p>\n<p>Beyond those obvious ones, look at <a href=\"https:\/\/www.biggerpockets.com\/blog\/ways-to-save-money\" target=\"_blank\">ways to save money that you haven\u2019t tried before<\/a>. Get creative with it, and consider even <a href=\"https:\/\/www.biggerpockets.com\/blog\/extreme-budgeting-tips-save-payment-faster\" target=\"_blank\">extreme budgeting ideas<\/a>.<\/p>\n<p>My wife and I <a href=\"https:\/\/www.biggerpockets.com\/blog\/6-tips-live-income-invest-rest\" target=\"_blank\">save over half our income each month<\/a>. And no, we don\u2019t earn massive salaries. We\u2019ve just gotten really creative in eliminating our housing and transportation costs.<\/p>\n<p>You can <a href=\"https:\/\/www.biggerpockets.com\/blog\/save-money-median-salary\" target=\"_blank\">save $50,000 in two years on the median U.S. income<\/a>. But not if you live like the average American.<\/p>\n<p>As a homebuyer, you\u2019re going to need money for three huge categories. First, you need to save a down payment, which could cost you tens or even hundreds of thousands of dollars. Second, you need money for closing costs, which often exceed $10,000.<\/p>\n<p>Finally, you need money for cash reserves. You need an <a href=\"https:\/\/www.biggerpockets.com\/blog\/how-much-money-reserve-fund\" target=\"_blank\">emergency fund<\/a> as a responsible adult, but even if you think you can cut corners and skip it as an irresponsible adult, lenders still require you to have <a href=\"https:\/\/www.biggerpockets.com\/blog\/the-essential-importance-of-cash-reserves\" target=\"_blank\">cash reserves<\/a> at settlement.<\/p>\n<p>Plus, as a homeowner, you\u2019ll incur plenty of surprise repair bills. More on that shortly.<\/p>\n<h2>3. Explore Less Expensive Markets<\/h2>\n<p>If you want to buy a home in San Francisco, you need to save a <i>lot <\/i>more money. The median home price there is $1,385,625 according to <a href=\"https:\/\/www.zillow.com\/san-francisco-ca\/home-values\/\" target=\"_blank\" rel=\"noopener\">Zillow<\/a>.<\/p>\n<p>Meanwhile, the median home price in Cleveland is 1\/17th of that, at $79,166. It literally costs you 17 times as much to buy a house in San Francisco as Cleveland.<\/p>\n<p>Besides, who wants to pay California\u2019s absurd income taxes, property taxes, and sales taxes?<\/p>\n<p>Stop thinking so rigidly, and start exploring other places to live than where you live now. I grew up in Baltimore, but I got sick of the high taxes and high crime rates, so I moved overseas. I not only enjoy a far cheaper cost of living, but lower taxes and lower crime rates to boot.<\/p>\n<p>Nor am I alone, at least in crossing state lines. More <a href=\"https:\/\/www.biggerpockets.com\/blog\/americans-flee-high-tax-states\" target=\"_blank\">Americans are leaving high-tax states<\/a>, and looking for lower cost of living in general. As a fun exercise, check out this interactive map of property taxes by county:<\/p>\n<p><iframe id=\"datawrapper-chart-aQqRR\" style=\"width: 0px; border: none; min-width: 100% !important; --darkreader-inline-border-top: initial; --darkreader-inline-border-right: initial; --darkreader-inline-border-bottom: initial; --darkreader-inline-border-left: initial;\" title=\"Property Taxes by County\" src=\"https:\/\/datawrapper.dwcdn.net\/aQqRR\/2\/\" height=\"569\" frameborder=\"0\" scrolling=\"no\" aria-label=\"Map\"><\/iframe><\/p>\n<h2>4. Reframe Your Affordability Calculations<\/h2>\n<p>The average person calculates affordability by asking themselves \u201cWhat\u2019s the most I can afford to spend on housing?\u201d They have it backwards.<\/p>\n<p>A clever person more interested in building wealth than appearing wealthy to their friends approaches it from the other direction. They ask \u201cWhat\u2019s the least I can spend on housing and still be happy?\u201d<\/p>\n<p>I spent far less on my first house than I could technically have afforded, and far less than lenders offered me. I bought an outdated \u201cugly\u201d house that needed work, and slowly improved it over time. And I brought in a housemate to cover most of the mortgage, to boot.<\/p>\n<p>Now I don\u2019t pay anything for housing. But that\u2019s another story.<\/p>\n<p>And don\u2019t forget maintenance and repair costs, either. First-time homeowners always think like renters, ignoring the other costs of homeownership beyond the monthly payment. But homeowners get hit with expensive repair and maintenance bills all\u2026 the\u2026 time. For a little while they tell themselves fairy tales like \u201cWell, this year my budget got thrown off track because I had that unexpected $3,000 HVAC repair bill. But next year I\u2019ll get back on track!\u201d<\/p>\n<p>No they won\u2019t. Next year it will be the roof. The year after that it will be the wiring. And so forth, until they figure out that what\u2019s broken is their budget, not their house.<\/p>\n<p>Spend less money on housing, and stop letting your emotions make your largest financial decision for you.<\/p>\n<h2>5. Consider House Hacking<\/h2>\n<p>No one says you have to pay for housing at all.<\/p>\n<p>In the <a href=\"https:\/\/www.biggerpockets.com\/blog\/newbie-house-hack-duplex\" target=\"_blank\">classic house hacking model<\/a>, you buy a multifamily, move into one unit, and rent out the other(s). But that\u2019s not the only way to house hack; my business partner Deni Supplee has found many ways to <a href=\"https:\/\/www.biggerpockets.com\/blog\/suburban-house-hacker\" target=\"_blank\">house hack single-family suburban homes<\/a> over the years.<\/p>\n<p>My wife and I score free housing through her employer. And believe you me, that was very much by design. We\u2019ve built our entire lives around both building wealth quickly through low expenses and adventure, and we achieve both by living overseas.<\/p>\n<p>Get creative, and stop thinking like the \u201caverage\u201d person and more like someone who knows there\u2019s always a cheaper, more creative way to achieve the same result.<\/p>\n<h2>6. Pull Together Your Loan Paperwork<\/h2>\n<p>Your lender will ask you for endless paperwork, some of which won\u2019t even make any sense. But some of it does make sense, and remains standard across the industry, so you can get a head start by pulling that together.<\/p>\n<p>Pull together your last three years\u2019 tax returns, your last three months\u2019 paystubs, and your last three months\u2019 bank statements. Your lender may also ask for your W-2s, your brokerage account statements, your life insurance policies, or proof of any other assets that you claim in your <a href=\"https:\/\/www.biggerpockets.com\/blog\/2014-12-09-investors-guide-successful-loan-application\" target=\"_blank\">loan application<\/a>.<\/p>\n<p>Read up on the <a href=\"https:\/\/www.biggerpockets.com\/blog\/applying-for-mortgage-loan\" target=\"_blank\">process of applying for a mortgage loan<\/a> to familiarize yourself with it before you start calling lenders.<\/p>\n<h2>7. Start Researching Loan Programs &amp; Lenders<\/h2>\n<p>First of all, I recommend looking into conforming loan programs, assuming you\u2019ve worked hard at improving your credit. \u201cConforming\u201d means loans that fit government loan programs, such as those outlined by Fannie Mae and Freddie Mac. In particular, check out <a href=\"https:\/\/singlefamily.fanniemae.com\/originating-underwriting\/mortgage-products\/homeready-mortgage\" target=\"_blank\" rel=\"noopener\">Fannie Mae\u2019s HomeReady program<\/a> and <a href=\"https:\/\/sf.freddiemac.com\/working-with-us\/origination-underwriting\/mortgage-products\/home-possible\" target=\"_blank\" rel=\"noopener\">Freddie Mac\u2019s Home Possible program<\/a> \u2014 both offer 3% down payments for borrowers with strong credit.<\/p>\n<p>There is an alternative low-down-payment program for borrowers with bad credit. While <a href=\"https:\/\/fhalenders.com\/fha-credit-requirements\/\" target=\"_blank\" rel=\"noopener\">FHA loans do allow lower credit requirements<\/a>, they also come with an enormous downside: you can\u2019t remove mortgage insurance. Borrowers must keep paying it every month until they pay off the loan in full, regardless of their equity in the property.<\/p>\n<p>In contrast, conforming loans allow you to remove it once you pay your loan balance below 80% of your home\u2019s value.<\/p>\n<p>Start shopping around among local lenders and brokers for rate quotes. Be sure to ask about points and other lender fees, as some lenders offer cut-rate interest rates and make up their profit margin with high fees.<\/p>\n<p>When you find a lender you like, get a <a href=\"https:\/\/www.ownerly.com\/mortgages\/how-to-get-pre-approved-for-a-mortgage\/\" target=\"_blank\" rel=\"noopener\">pre-approval letter<\/a>. Note that pre-approval is not the same as <a href=\"https:\/\/listwithclever.com\/real-estate-blog\/pre-approval-vs-pre-qualification\/\" target=\"_blank\" rel=\"noopener\">pre-qualification<\/a>, which is far less meaningful.<\/p>\n<h2>8. Find a Real Estate Agent<\/h2>\n<p>When you have your down payment saved, a market selected, a pre-approval letter from lender, and a better understanding of how the entire process works, you can finally start house hunting.<\/p>\n<p>Start with these <a href=\"https:\/\/www.biggerpockets.com\/blog\/3-steps-find-best-real-estate-agent-for-you\" target=\"_blank\">three steps to find the best real estate agent<\/a> for you personally. You can also try the <a href=\"https:\/\/www.biggerpockets.com\/real-estate-companies\/find-real-estate-agent-directory\" target=\"_blank\">BiggerPockets real estate agent directory<\/a> as well.<\/p>\n<p>Look for an agent who specializes in your precise market, down to the neighborhood level. You also want someone patient and friendly, who\u2019s willing to traipse through dozens of prospective homes with you without making passive-aggressive comments.<\/p>\n<p>Experienced real estate agents also come with a network of trustworthy professionals such as home inspectors, contractors, lenders, and all the other people you need for a smooth transaction. Real estate is a team sport, after all.<\/p>\n<h2>Final Thoughts<\/h2>\n<p>If you want to overspend on housing like most Americans do, then by all means calculate your maximum possible monthly payment and go out and find a house that costs that much. If you\u2019re more serious about building wealth than showing off your wealth, look to spend as little as possible on housing while still meeting your needs and basic wants.<\/p>\n<p>Or better yet, find a way to score free housing such as house hacking.<\/p>\n<p>Regardless, start laying the groundwork today for higher credit and savings, which paves the way for lower interest, fees, and down payments.<\/p>\n<p>Finally, don\u2019t let your emotions rule your homebuying decision. Bigger Pockets is here to help you learn <a href=\"https:\/\/www.biggerpockets.com\/guides\/first-time-home-buyer\" target=\"_blank\" rel=\"noopener\">how to buy a house<\/a> by providing the information and guidance you need to make the homebuying process a success.<\/p>\n<p>&nbsp;<\/p>\n<p><a href=\"https:\/\/store.biggerpockets.com\/products\/sold-every-real-estate-agent-s-guide-to-building-a-profitable-business?utm_source=blog&amp;utm_medium=blog%20ad&amp;utm_campaign=soldlaunch\" target=\"_blank\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-134120\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/01\/SOLD-banner.jpg\" alt=\"\" width=\"700\" height=\"120\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/01\/SOLD-banner.jpg 700w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/01\/SOLD-banner-300x51.jpg 300w\" sizes=\"auto, (max-width: 700px) 100vw, 700px\" \/><\/a><\/p>\n<p><i>What are your plans for buying a home this year? How do you plan to align your home with your larger wealth-building goals?<\/i><\/p>\n<p><strong>Share with a comment below.<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Buying a home is the largest financial transaction most Americans ever make. It can be a long, tedious journey\u2014which means you should start now.<\/p>\n","protected":false},"author":158586,"featured_media":132615,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7119,7396],"tags":[],"class_list":["post-134489","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-biggerpockets-daily","category-budgeting"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/134489","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/158586"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=134489"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/134489\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/132615"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=134489"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=134489"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=134489"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}