One of the most incredible milestones to reach in life is buying your first home. Purchasing real estate is no easy task. There are many steps to take in the process of becoming a homeowner. If you take those steps out of order, you could find yourself having a very different experience than that which you’ve imagined. Work a professional real estate agent for step-by-step guidance. In the meantime, here’s an overview of the six steps to buying a house.
Step One: Preparing Your Credit and Debt-to-Income Ratio
To qualify for a home mortgage loan, you’ll need to have a good credit history, as well as a healthy debt-to-income ratio.
Your home mortgage lender wants to know that you’ve got a solid work history, so don’t change jobs, if possible, at least two years prior to buying. And, don’t finance anything or take out loans. This could indicate that you’re overextended financially.
Your debt-to-income ratio, or DTI, is your total monthly expenses divided by your gross income. Your DTI shouldn’t be higher than 43 percent. You may get approved easier if your DTI is 36 percent or lower.
Your credit score, to qualify for a home mortgage loan, should be no less than 620. The higher your score, the greater chances you have of your home mortgage loan approved, and may also qualify for lower interest rates.
You can raise your credit score and lower your DTI by paying off credit cards and loans, and by taking care of any derogatory marks on your credit report.
Step Two: The Cash You’ll Need to Buy a House
Many first-time buyers are gobsmacked when they realize how much money they’ll need, cash-out-of-pocket, above and beyond their down payment, when purchasing a house.
Most conventional loans require a twenty percent down payment on the amount that you’re borrowing. So, if you’re looking at a $350,000 home, your cash down payment is $70,000. However, if you meet the requirements for an FHA loan, VA loan, USDA loan, or first-time buyer programs, you may be able to reduce or even eliminate your down payment.
The drawback to a low or zero down payment is that your monthly payments are higher, and you pay interest on that money for the life of the loan, which is usually 30 years.
One cost first-time buyers are often unaware of is closing costs. When you purchase residential properties, many professionals get involved in handling different tasks throughout the transaction.
For example, there are lender fees, escrow fees, attorney fees, appraisals, inspections, title check and transfer, and more. You can estimate about two to eight percent of the loan’s value for closing costs, although five percent is a good average. So, on that same $250,000 home, you’ll pay an additional $17,500.
Usually, lenders don’t cover closing costs in the home mortgage loan. You are responsible for paying those costs at closing. There are some lenders who make allowances, but you’ll have a higher interest rate and will pay that interest on those funds for the life of the loan.
The final piece of the financial puzzle is an earnest money deposit. An earnest money deposit is about one to three percent of the sales price of the home. You submit the earnest money deposit with your offer, which is then held in an escrow account until closing. The earnest money deposit that you pay signals to the seller, as well as the lender, that you’re committed to your offer.
Step Three: Get Pre-Approval on Your Home Mortgage Loan
Applying for a home mortgage loan is a timely process. It also requires a mountain of paperwork. Be prepared to supply tax documents, bank statements, credit card statements, and proof of any other expenses. You’ll also need verification for all of your income and assets. The longer it takes you to gather your paperwork, the longer the loan process takes, so try to have your documents in order.
Pre-Approval helps you in many ways. It alleviates the stress of wondering whether or not you’ll be able to buy the house. Second, it lets you know precisely what your home-buying budget is. Third, it lets the seller know that you are ready to buy now.
In the event of multiple offers on the house, a seller will often choose a buyer who is already through the lengthy loan application process and has funds guaranteed.
Step Four: Search for the Right House
The real estate agent you hire will advise you in refining your wish list to match your home-buying budget. It’s not uncommon for first-time buyers to misgauge how much house their money can buy.
The price of real estate increases the closer you are to good schools, parks, shops, restaurants, public transportation, and other amenities.
Likewise, the farther out you go, the less expensive the homes are. You may have to compromise your location to get the other items on your list or sacrifice some of the features so that you get your desired location.
Look beyond the surface to see if there are any issues you can spot with the property, such as cracks in the interior walls, or in the driveway and cemented areas. Notice if there are musty smells or standing water anywhere.
The house will be inspected, so any major issues will be revealed, but seeing the signs of problems could inspire you to keep looking for a more suitable, move-in-ready home.
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Step Five: Submitting and Negotiating Offers
You’ll rely heavily on your agent to help you draft, submit, and negotiate an offer on the house you want to buy. But submitting an offer does not mean the deal is done. First, the seller has to accept your offer.
Try not to invest emotionally into any one property. There’s always a possibility that your offer won’t get accepted, or that the deal might fall through in the closing process.
Step Six: The Closing Process
After the seller accepts your offer, there may still be upcoming events that could complicate or nullify the deal.
Your lender requires that the house get appraised and inspected.
The appraisal verifies that the property is valued at as least as much or more than the amount of money that you’re borrowing. If the house doesn’t appraise at the loan amount, then you may find yourself re-negotiating the contract.
The inspection verifies that everything about the property is in good working condition, such as electrical, heating and air, plumbing, roofing, the foundation, and will look for pests like termites.
In most cases, the inspection goes off just fine. If it doesn’t, you can ask the seller to make repairs, ask for an allowance so that you can fix any problems, or, if all else fails, terminate the contract.
Once the appraisal and inspection are finished, you can relax; you’re on your way to the closing table.
The closing table, in real estate, is when you sign the final documents, pay your closing costs, and, at long last, get the keys to your new home.
Before you look for a house to buy, make sure your credit history and debt-to-income ratio are in good standing. Next, ensure that you have enough cash on hand for deposits and closing costs.
Get pre-approved for your home mortgage loan. Be realistic about your budget and wish list, and be patient with the closing process. Ask your real estate agent what you need to know about buying your first house.