Part of our major and unexpected life events series
House hunting? Take a look at this financial checklist first
You’re tired of renting. Your job’s stable and you’re itching to put down roots. Your Pinterest board is packed with pictures of the daffodils growing around your dream porch, a king-sized bed in a serene bedroom all your own, and swatches of the perfect shade of “greige.”
You’ve put a lot of thought into what you want in a home. Now take a little time to plan how you’ll make that dream come true.
1. Do the math to see how much house you can afford.
Most lenders want your monthly housing costs to be no more than 28% of your pre-tax income. For example: If you have a household income (the combined yearly income of the wage earners who’ll be contributing) of $75,000, that means keeping your monthly housing costs at or under $1,750.
Try this mortgage calculator from Bankrate. It helps you figure out how much house you can afford and what the approximate payment will be.
2. Check your credit score and fix any errors.
Then try to improve your score. It’s the primary driver of what interest rate you’ll get for your mortgage. Good scores are generally over 700. Here’s how to request your free copy.
3. Pay down debt.
It helps your credit score and monthly cash flow for your new mortgage. Most lenders want your total monthly debt payments (including your mortgage) not to exceed 36% of your pre-tax income. Continuing the example above: With a household income of $75,000, aim for your total monthly debt payments to be less than $2,250. Read more about managing debt.
4. Build your emergency fund.
It’s more important than ever when you become a homeowner. Houses have upkeep and unforeseen expenses. Be prepared to replace your central air, repair the leaky roof, and replace the noisy dishwasher at least once during the time you own the home. Maybe twice.
Not super handy with fixing a garbage disposal or leaky pipes? Look into whether a home warranty might be a worthwhile investment. (Or get used to watching YouTube videos and learning on the job—which doesn’t always work for nuanced things like electrical and plumbing repairs.)
5. Keep stashing cash for a down payment.
How much you can put down may determine the kind of mortgage you qualify for. Plus, a 20% down payment means you can avoid paying private mortgage insurance (PMI) each month. PMI is insurance that protects the mortgage company if you default on your loan, and typically costs .05%–1% of the entire loan amount on an annual basis. You’ll continue to pay PMI until the total equity in your home reaches 20%.
6. Research your mortgage financing options and get pre-approved.
Fixed rate, adjustable rate—decide what’s best for you. Start checking with lenders about their interest rates, fees, closing costs, and services. If you do it now, you might be able to lock in a rate for a while. Lenders include mortgage brokers and national and local banks and credit unions. A good place to comparison shop is bankrate.com. (Heads up: There’s market volatility in the mortgage market!)
7. Start shopping for homeowner’s insurance.
See if bundling it with your auto insurance gives you a discount.
8. Make sure you have adequate disability and life insurance.
You want your mortgage paid even if you become injured or too sick to work, or if you were to pass away. If you’re not sure how much you need, use our calculators.
9. Update your budget.
Adjust your budget to cover a new mortgage, homeowner's insurance, higher utilities (compared to renting an apartment), and property taxes. If the property is part of a homeowner’s association, budget for monthly fees and possible assessments for shared spaces like a community pool or landscaping.
10. Button down your spending and credit use.
During the home buying process, try not to go crazy with your spending. Lenders check your account balances when you submit your initial paperwork for a loan. They’ll check them again before you close.
If a lot of money is moving in or out of your accounts, or you’re taking out more loans or credit cards, it could be a red flag. Need help? Read 5 questions to ask before you take on debt.
11. Talk to a financial professional.
If you don’t already have a financial professional, consider getting one. (We can help you find one near you.) A financial professional can help you juggle new life stages like this one and thinks of things you may have forgotten when it comes to financing new ventures in your life.
12. Gather your paperwork.
When you buy a home, you’ll need quick access to:
- your 2 most recent state and federal income tax returns
- 2 months of pay stubs
- 2 months of bank statements
- the last quarterly statement for IRAs, investment accounts (stocks and bonds), and CDs
- the last quarterly statement for your 401(k) showing the vested balance
Gather a list of all debt payments, making note of contact information for the creditor, your account numbers, loan balance, and minimum payment amount.
If you’re self-employed, a freelancer, or independent contractor, you usually need a year-to-date profit and loss statement and 2 years of records, including the Form 1099s you use to report income and file taxes.
- For a good primer on the whole process, read the Consumer Financial Protection Bureau’s site about buying a home.
Disability and life insurance have limitations and exclusions. For cost and coverage details, contact your Principal representative.
Insurance from Principal® is issued by Principal National Life Insurance Company (except in NY) and Principal Life Insurance Company, Des Moines, IA 50392.
Reference of checklist is not an exhaustive list of what you should do. It and this communication are provided as education only with the understanding that Principal® is not rendering legal, accounting, investment advice, or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment, or accounting obligations and requirements.