Ready to buy your first home? Or your 2nd home?
1. Figure Out If You’re Ready To Buy
Before you begin shopping for properties or comparing mortgage options, you need to make sure you’re ready to be a homeowner.
Lenders generally recommend that people look for homes that cost no more than three to five times their annual household income if the home buyers plan to make a 20% down payment and have a moderate amount of other debt. Your lender will want to see a work history (usually about 2 years) to make sure your income source is stable and reliable. Preparing your income is all about pulling the right documentation together to show steady employment. If you’re on payroll, you’ll likely just need to provide recent pay stubs and W-2s. On the other hand, you’ll need to submit your tax returns and other documents the lender requests if you’re self-employed.
Taking steps to improve your credit score and reduce your debt can pay off big as you prepare to get a mortgage. Better numbers mean better loan options with lower interest rates.
Your credit score is based on the following information:
- Your payment history
- The amount of money you owe
- The length of your credit history
- Types of credit you’ve used
- Your pursuit of new credit
What score will you need to qualify for a home loan? 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.
2. Decide the Timing & Location
A mortgage can be a 30-year-long commitment. Consider your career goals, family obligations and more. Each of these factors will play a major role in the type of home you buy and where you set up your residence.
Deciding whether it’s a good time to buy a house or not depends on a variety of personal factors (such as financial readiness and lifestyle preferences) and market conditions (such as economic health and current mortgage rates).
3. Find Out How Much You Can Afford
Once you decide you’re ready to buy a home, it’s time to set a budget. A good place to begin is by calculating your debt-to-income ratio (DTI). DTI is a financial instrument mortgage lenders use to evaluate your loan application. Your DTI helps your lender see how much of your monthly income goes to debt so they can evaluate the amount of mortgage debt you can take on.
DTI is calculated by dividing your monthly debt by your gross monthly income. For example, if your monthly debts (credit card minimum payments, loan payments, etc.) total $2,000 per month and your gross monthly income is $6,000, your DTI is $2,000/$6,000, or 33%. Your lender will use the debts shown on your credit report to calculate your DTI.
It’s smart to review your DTI before you apply for a loan. In most cases, you’ll need a DTI of 50% or less to qualify for a mortgage, although this number varies based on your lender, loan type and other factors.
Look at your current debts and income and consider how much money you can reasonably afford to spend each month on a mortgage.
Homeownership comes with several costs you don’t need to worry about while renting. You’ll need to pay property taxes and maintain some form of homeowners insurance. Factor these expenses into your household budget when you decide how much house you can afford.
There are many ways to save for your home purchase, including through investments and savings accounts. If you have relatives who are willing to contribute money, you may be able to use gift money toward your down payment (in which case, be sure to provide your lender with a gift letter).
You also need liquid assets to fund the purchase of a home:
• Down payment: Buying a home with no money down is possible, but most homeowners need to have some cash for a down payment. A down payment is the first major payment you make on your loan.
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. However putting 20% down eliminates the need to pay PMI (Private Mortgage Insurance).
Closing costs: You’ll also need to pay for 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. It’s a good idea to be prepared for 3% – 6% of your home’s value as an estimate of your closing costs. In some situations, part of closing costs can be rolled into your mortgage or paid by the seller using seller concessions.
4. Get Preapproval Letter
When you’re ready to start house hunting, it’s time to get preapproved for a mortgage. When you apply, your lender will give you a preapproval 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 preapproved, 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.
5. Find An Agent That Represent You
As a buyer, you can usually work with a real estate agent for free. It is the seller will pay the buyer’s real estate agent’s commission. The commission is usually 2~6% of the purchase price depending which brokerage the listing agent belongs to. 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.
It’s possible to buy a house without a real estate agent or REALTOR®. This isn’t recommended, especially for first-time buyers. The homebuying process can be complicated and emotional. Having an agent by your side can help you navigate the housing market, submit a legally sound offer and avoid overpaying for your property.
How can you find the right real estate agent? Begin by asking family members and friends for recommendations. Direct referrals are often the best way to get unbiased information on agents in your area.
6. Begins 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 such as number of bedrooms, bathrooms, living space, finished basement and sizable yard. If you narrow down your searches, it can reduce the amount of time for house-hunting. Visit open houses is a good idea, however with the current crazy market, it is highly advised to make private showing appointment prior to the open house. If the house is highly desirable, it can go under agreement within a day.
Keep in mind, 70% homes in USA are older than 1970s. A perfect home that meets all of your criteria is hard to come by in reality. Sort what is a must-have and be flexible with others. You can always add on or renovate. Gradually making your house into your liking is also part of the fun as a homeownership!
7. Make An Offer On A House
When you decide to make an offer on a home, you must submit an offer letter in writing. 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 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. 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 onto 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 onto 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. Once you and the seller agree to an offer, it’s time to move on to the appraisal and 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.
When you receive your inspection results, go over each item line by line and look for major issues. 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.
Keep 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.
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.
Homebuyers 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. As with inspection contingencies, appraisal contingencies may vary, so make sure you understand the nature of your agreement.
10. Ask For Repair Or Credit
After you view your inspection results, you might want to ask your seller to correct some of the problems you found. You can do this 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.
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 your seller rejects your request, it’s up to you to decide how to proceed. If you have an inspection contingency in your offer letter, you can walk away from the sale and get your earnest money deposit back.
11. Final Walk Through
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 made the repairs you requested and cleared out the property.
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. If everything looks good, it’s time for you to confidently move toward closing.
12. 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, three 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 three 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. Nowadays this process can be done entirely online, thanks to the Covid-19 pandemic.
After closing finishes, you’re officially a homeowner. Congratulations!