- Decide Whether You’re Ready to Buy a Home – Buying a house is a major commitment. Before you begin shopping for properties or comparing mortgage options, you need to make sure you’re ready to be a homeowner. These are some factors that you should consider, some of which a lender may also consider.
- Income & Employment: Your lender will want to see how much money you make, as well as your work history to ensure your income source is stable and reliable.
- Debt-to-Income Ratio: Your lender will use your debt-to-income ratio (DTI) to see how much of your monthly income goes to debt so they can evaluate the amount of mortgage debt you can take on.
- Liquid Assets: Even with the help of a mortgage, you’ll still need liquid assets to fund the purchase of a home, specifically:
- Down Payment: The amount of money you’ll need for a down payment depends on your loan type and how much money you borrow. You can buy a home with as little as 3% down (though there are benefits to putting down more).
- Closing Costs: You’ll also need to pay closing costs before you move into your new home. Closing costs are fees that go to your lender and other third parties in exchange for creating your loan. The specific amount you’ll pay in closing costs will depend on where you live and your loan type.
- Credit Health: Better credit means better loan options with lower interest rates. Most lenders require a credit score of at least 620 to qualify for the majority of loans. A score above 720 will generally get you the very best loan terms.
- Willingness to Live in One Place: A mortgage can be a 30-year-long commitment. Though you don’t need to live in your home for the entirety of your mortgage term, it’s still a big decision.
- Timing: You’ll want to not only take into consideration the aforementioned personal factors, but you’ll also want to consider current market conditions such as economic health and current mortgage rates.
- Calculate How Much You Can Afford on a Home – Calculating your debt-to-income ratio is a good place to start determining how much you can afford on a home. Keep in mind that there are other costs associated with homeownership that you don’t have to worry about while renting, such as property taxes and homeowners insurance. You can also use Rocket Mortgage’s online Home Affordability Calculator to help you get an idea of how much you can afford.
- Save For a Down Payment and Closing Costs –
- Down Payment: Your down payment is a large, one-time payment toward the purchase of a home. Many lenders require a down payment because it mitigates the loss they might suffer in the event that a borrower defaults on their mortgage. Many home buyers believe that they need a 20% down payment to buy a home. This isn’t true. Plus, a down payment of that size isn’t realistic for many first-time home buyers. There are advantages, however, to making a larger down payment. For one, it typically means you’ll have more mortgage options. It also usually means you’ll have a smaller monthly payment and a lower interest rate. Plus, if you put at least 20% down on a conventional loan, you won’t need to pay for private mortgage insurance (PMI).
- Closing Costs: You’ll also need to save money to cover closing costs – the fees you pay to get the loan. There are many variables that go into determining how much you’ll pay for closing costs, but it’s usually smart to prepare for 3 – 6% of the home value. The specific closing costs will depend on your loan type, your lender, and where you live. Almost all homeowners will pay for things like appraisal fees and title insurance.
- Decide What Type of Mortgage Is Right For You – Before you can apply for a mortgage, you’ll need to decide what the best type of loan is for you and which one you’ll qualify for. Check out some common loan types here, and some uncommon loan types here.
- Get Preapproved For A Mortgage – When you apply, your lender will give you a pre-approval letter that states how much you’re approved for based on your credit, assets, and income. You can show your preapproval letter to your real estate agent so they can help you find homes within your budget. To get pre-approved, you need to apply with your lender. The preapproval process typically involves answering some questions about your income, your assets, and the home you want to buy. It will also involve a credit check.
- Find The Right Real Estate Agent For You – Your real estate agent is your representative in the home purchase transaction. Your agent will look out for your best interests by finding homes that meet your criteria, get you showings, help you write offers, and negotiate. As a buyer, you can usually work with a real estate agent for free. In most cases, the seller will pay the buyer’s real estate agent’s commission. The buyer’s agent commission is usually 3% of the purchase price. A real estate agent represents you and helps you understand how to buy a house. Your agent will show you properties, write an offer letter on your behalf and assist in negotiations. Real estate agents are local market experts and can also advise you on how much to offer for each property.
- Begin House Hunting – Your real estate agent will help you hunt for houses within your budget. It’s a good idea to make a list of your top priorities, some of which might depend on whether you’re looking for a starter home or a forever home and what type of house you are looking for. Rank your priorities from most to least important and show this list to your agent. Your agent will then show you homes that fit your criteria. You may need to spend some time searching for the perfect home, so don’t get discouraged if your hunt takes longer than you expected. Here are some things you might want to consider when shopping for a house:
- Price
- Square footage
- Home condition and the possible need for repairs
- Access to public transportation
- Number of bedrooms
- Backyard/swimming pool
- Local entertainment options
- Local school district ranking
- Property value trends
- Property/real estate taxes
- Make An Offer On A House – Your offer letter includes details about yourself (like your name and current address), the price you’re willing to pay for the home, and more. It will also include a deadline for the seller to respond to your offer. Most offers also include an earnest money deposit. An earnest money deposit is a small amount of money, typically 1 – 2% of the purchase price. Your real estate agent will be able to tell you what’s common in your market. Your earnest money deposit goes toward your down payment and closing costs if you buy the home. If you agree to the home sale and later cancel, you typically lose your deposit. Your agent will almost always write the offer letter on your behalf, but you can write it yourself if you choose. Your agent will then get in contact with the seller or the seller’s agent to submit the offer. From here, the seller can respond in one of three ways:
- Accept the offer: If the seller accepts the offer, you can move on to the next step.
- Reject the offer: If the seller rejects your offer, the ball is back in your court. You can choose to submit another offer or move on to another home.
- Give you a counteroffer: The seller can also come back with a counteroffer of their own. They may change the purchase price or the terms of the sale. You can accept the counteroffer, reject it, or make another counteroffer. Negotiations may go on for some time after you submit your offer. Let your real estate agent help you manage negotiations – don’t be afraid to walk away if you can’t reach an agreement.
- Get A Home Inspection – Lenders usually don’t require a home inspection to get a loan, but you should still get an inspection before you buy a property. During a home inspection, an inspector will go through the home and specifically look for problems. They will test electrical systems, make sure the roofing is safe, make sure appliances are working, and much more. After the inspection closes, the inspector will give you a list of problems they found in the home. If a home has a serious health hazard (like lead paint or mold), ask the seller to correct the problem before you close. If you can’t reach an agreement, you may want to move on and consider other options. Read over your inspection results with your agent and ask whether they noticed any major red flags. Bear in mind that you’ll be liable for any major repairs after your sale closes. A clogged toilet or a sink that won’t drain aren’t major issues. However, if your home inspection reveals an expensive problem (like cracks in the foundation or poorly installed windows), you may want to reconsider the purchase. It’s common for homebuyers to include a home inspection contingency in their purchase offer. A contingency gives buyers the option to back out of a purchase (or negotiate repairs) without losing their earnest money deposit if the home inspection reveals major issues with the home.
- Get A Home Appraisal – A home appraisal is a review that gives the current value of the property you want to buy. You must get an appraisal before you buy a home with a mortgage loan. Lenders require appraisals because they can’t lend out more money than a home is worth. If the appraised value comes back lower than your offer, you might have trouble getting financing. Be thoughtful about your offer and consider contesting the results of the appraisal if you believe the appraised value is too low. Home buyers should also include an appraisal contingency in their offer. Appraisal contingencies are often drawn up to allow buyers to back out of a purchase (or negotiate a lower price) without losing their earnest money deposit if the home appraises for less than the offer amount.
- Ask For Repairs Or Credits – You may want to ask the seller to correct any issues found in the inspections. Your real estate agent will submit your requests to the seller’s agent. If you’re buying a house that’s for sale by owner (FSBO), your agent will negotiate with the seller directly. The seller might accept your request, or they might reject it. If you have an inspection contingency in your offer letter, you can walk away from the sale and keep your earnest money deposit. You can request repairs or credits in one of three ways:
- Ask for a discounted purchase price considering the results.
- Request that the seller give you credits to cover some of your closing costs.
- Ask that the seller have the problems fixed before you close.
- Do A Final Walkthrough – You should do a final walkthrough in your new home before you close, even if you’re 100% committed to the property. This time allows you to check and make sure that the seller has everything in order. Walk through the home and make sure the seller hasn’t left any belongings. Check your repair areas if you requested them and keep an eye out for pests. You may also want to double-check your home’s systems one final time to make sure everything is in working order.
- Close On Your New Home – Your lender is required to give you your Closing Disclosure, which tells you what you need to pay at closing and summarizes your loan details, 3 business days before closing. Read through your Closing Disclosure and make sure the numbers don’t vary too much from your Loan Estimate, which you would have received no more than 3 business days after your initial application. Once you’ve reviewed your Closing Disclosure, it’s time to attend your closing meeting. Bring your ID, a copy of your Closing Disclosure, and proof of funds for your closing costs. You’ll sign a settlement statement, which lists all costs related to the home sale. This is when you pay your down payment and closing costs. You’ll also sign the mortgage note, which states that you promise to repay the loan. Finally, you’ll sign the mortgage or deed of trust to secure the mortgage note. Congratulations, you’re officially a homeowner!
Source: https://www.rocketmortgage.com/learn/how-to-buy-a-house
Homer Real Estate 