Purchasing that first home is an important milestone, but for many first-time buyers, knowing how to buy a house can feel daunting. Here is what to look for when buying a house, listing step- by- step to help you prepare to begin on your path to homeownership.
Before prospective homeowners should begin the process to buy a house, they need to do research to understand all that the process will entail and what to look for specifically that aligns with their location, finances, and credit score.
Find out your debt-to-income ratio. Determining your debt-to-income ratio (DTI) helps evaluate your overall financial health. When applying for credit, your lender will take your DTI and determine the risk involved and whether you can be relied upon to make that payment.
Understand your credit score/health. Before you can move forward to determine how much house you can afford, you will need to check your credit score and understand your financial situation. In order to get a conventional loan, you will need to have a FICO score of 620 or higher. Depending on your finances and credit history, mortgage lenders will vary on their interest rates. Buyers with high credit scores usually receive better interest rates, so having that higher score is important before moving forward.
Another step that’s useful before speaking to a mortgage lender is to calculate how much house you can afford on your own. In general, it is recommended to spend no more than 30% of your gross monthly income on housing expenses. Some of those expenses include:
After determining how much house you can afford, take lifestyle into account, ensuring that you will have enough emergency funds as well.
Down payment: The general suggestion is to save 20% off the price of the house for the down payment. However, that amount is negotiable. Some loans allow for a down payment for as low as 2.5% - 5%, depending on the type of loan you are approved for. If you are able to put down a larger sum for the down payment, you will have more equity in the home, and your monthly mortgage payments will be lower as well. If you are able to pay more up front, assuming you put down the standard 20% for a down payment, that will also mean you do not have to pay private mortgage insurance (PMI). It all depends on what you are able to do with your finances at this point. Paying more in the down payment is great, but many home buyers do not want to drain their savings up front to do so.
Closing costs: The amount in closings costs will vary, but in many cases, depending on the amount of the loan and property taxes, you can expect closing costs to range from 2-5% of the purchase price of the home.
Finding a Mortgage Lender: Now that you know where your finances stand and feel that you are ready to own a home, the next step is finding the right mortgage lender for you and getting pre-approved for a loan. In order to ensure you are getting the best deal, comparison shop for lenders and ask each one to give you a loan estimate. This will detail terms of the loan, payments, and closing costs for their potential plan.
Getting Pre-approved: Getting pre-approved for a loan entails a lender looking into your finances to verify your income, assets, DTI, and credit score. By obtaining this pre-approval, you are guaranteed you can obtain the loan in the case that your finances remain the same through closing on a house. Getting pre-approved is helpful because it spells out how much the lender will let you borrow and details the costs involved with the loan. It also informs potential sellers that you are serious buyers, and may give you an advantage in a competitive market.
Your real estate agent is the person who will walk the rest of the home buying process with you to make sure you find your perfect home. They ask important questions, make fair offers, and have the ability to negotiate. Once you find the right agent, they will go over your approval letter and finances, and help you decide your priorities in home buying and how best to proceed.
After you have found your real estate agent, and they know what your priorities are, together you will start house hunting. It is unlikely that a house will have everything on your list, so keep your priorities and what is really important to you in mind. You will want your real estate agent to run a comparative market analysis on sales of similar homes in the area to help determine what an agreeable price may be. The longer a home has been on the market, and the less interest there is in it, the more negotiating power you and your agent will have.
Step 7: Home inspection
Once you have made an offer on a house, the home inspection is the next important step. It will reveal what major repairs or renovations may need attention, as well as what may need to have work done in the future. You will want to hire a professional, third-party home inspector to inspect the house you want to buy. If there are significant repairs that require immediate attention, you can negotiate with the seller to complete them before closing. If the seller refuses to take care of the repairs and you are unable to come to terms, you will be able to withdraw your offer.
Step 8: Appraisal
After the home inspection, your lender will require a home appraisal on the house you are buying before they will agree to release funding. A home appraisal will estimate how much the home is really worth based on other homes in the area, market trends, public records, and an inspection of the whole property. Bear in mind that the lender will only cover the appraised value of the house with their funds, so if the appraisal comes back below the price of the house, you will need to negotiate with the sellers on price or come up with the difference.
Step 9: Homeowners Insurance
Homeowners insurance protects your home and finances. It is not legally required, but most lenders will want you to have an insurance policy on the home before they will give you a loan. Homeowners insurance covers things like damage to your house and property, as well as any stolen property. There are different types of coverage, and you will want to do research on all the different options before deciding which insurance policy is best for you.
Step 10: Close on new home
Final Walkthrough: Just before closing on your new home, you will want to do one last walkthrough of the house and property to ensure the seller made all necessary and agreed-upon repairs after the home inspection, and to ensure everything is in order. The final walkthrough will usually take place a day or two before closing day and after the seller has moved out of the house.
Closing Responsibilities: During closing, the buyer has two principal responsibilities: signing legal documents and paying closing costs. Signing legal documents can include but is not limited to the closing disclosure, deed of trust, promissory note, and certificate of occupancy. The other responsibility is of paying closing costs may involve fees for the mortgage, appraisal, title, survey, real estate agent fees, and paying the down payment.
Once you close on your own home, enjoy and celebrate your achievement!