Most people have to prepare early to buy a home. You have to consider the long-term goals, finances, desires, and necessities. A house is an investment and can generate positive equity, but you also want one that is practical and serves your wants and needs.
You need to have sufficient credit in order to get approved for a mortgage. Most mortgage lenders require at least a credit score of 580, but others may require it to be well into the 600s for approval. Check with the three major credit bureaus (Equifax, Experian, and TransUnion) to make sure there are no surprises. It is best to check your credit at least 6 months before you plan on seeking a mortgage.
Then, if there are any hits on your credit report that may raise questions or if anything is lowering your score, try to settle it before seeking preapproval from a mortgage program. Your credit is a significant factor in your mortgage rate.
Debt-to-income ratio, or DTI, is the percentage of your monthly gross income that goes towards your debt repayments. This will be used by mortgage lenders to gauge your ability to afford the mortgage payments.
Lenders typically do not want a DTI ratio any higher than 43% and some do not want a DTI any higher than 36%. The calculation is monthly debt payments divided by monthly gross income. Some mortgage programs will allow a higher DTI ratio if you have significant savings, a high down payment amount, or excellent credit score.
If your DTI ratio is too high, you may want to pay off as much debt as you can before you seek a mortgage program’s pre approval. Anything on your credit including student and auto loans will affect your DTI ratio.
Nearly all mortgage programs require a down payment of at least 3% with a lot of them requiring 5% down for a conventional loan. For an FHA home loan you may need at least 3.5% down. Refer to this spreadsheet to see 5%, 10%, and 20% down payments for different loan amounts.
If you have less than 20% of the loan amount as down payment, you will probably have to pay mortgage insurance as well. This insurance protects the lender in case of default on the loan. You will also have to take closing costs into consideration which are anywhere from 2% to 5% of the loan amount.
If you are having trouble saving the sufficient amount of money for a down payment, you may be able to use down payment assistance or gift funds to qualify for a mortgage. When you apply for a loan, the lender will look at your bank statements to make sure you are able to afford the down payment and the closing costs. If your funds seem insufficient, some mortgage programs allow you to use gift funds to cover a percentage, sometimes even 100%, of the mortgage related costs.
Every state also has down payment assistance programs (DPAs) that offer loans or grants to homebuyers to assist with down payments. If you are concerned about down payment amounts, then this is definitely a good option to look into.
Type of Home
You have to check out the types of homes that will suit your needs and fit your budget. There are some different options from single-family homes to condominiums and townhouses. There are new construction homes and fixer-uppers.
You need to consider the type of features for what may be the biggest purchase of your entire life. The neighborhood, nearby schools, hospitals, number of rooms, layout of the individual rooms, style, and everything else should fit your budget, needs, and desires.
As far as affordability goes, you always want to make sure you get a preapproval (more about that later). However, sometimes a lender will approve someone for a more expensive house than they actually want to purchase. Just because the lender says that you can afford a 500k house does not mean you should necessarily purchase one. You need to consider your budget, future needs (including children), and anything else so that you have enough income for food, entertainment, vacations, and more. Take homeowners insurance and property tax into your calculations.
There are several types of mortgages available to homebuyers that have different requirements for eligibility. They also have different down payment qualifications.
A conventional mortgage is not guaranteed by the government. However, some are targeted specifically for first time home buyers and may require less of a down payment. In fact, some may only require 3% down.
The Federal Housing Administration insures FHA loans. They often also have lower down payments than other mortgages, possibly as low as 3.5%
USDA loans are for rural home buyers and typically will not require you to put any money down. The United States Department of Agriculture guarantees USDA loans.
The United States Department of Veterans Affairs offers these loans. They are for veterans and current service members of the military. They usually will not require a down payment.
Additionally, you will have more options when it comes to the mortgage term. Typically, people opt for a 30-year fixed-rate mortgage. This means that you will pay off the mortgage in 30 years and the interest rate is locked in for the entire term. A 15-year loan will usually have a significantly lower interest rate than a 30-year mortgage. Though, of course the payments will also be much higher.
It is also a good idea to get estimates for loans on the same type of mortgage from more than one lender. That way, you can compare the costs, interest rates, and any origination fees. Lenders may also offer you the ability to purchase discount points. These are fees that the borrower will pay in order to lower the interest rate. This may be a good option if you have some extra money and plan to live in the home for a while.
Finding a Real Estate Agent
First, it is important to discuss the differences between a real estate agent, a real estate broker, and a realtor. A real estate agent serves the real estate industry by facilitating the transactions. This means they are the ones responsible for bringing the buyer and the seller together. They are typically paid a commission on the sale of the property.
A real estate broker usually has more training than a real estate agent and will handle the more technical aspects of the home buying and selling process. They may work independently or employ real estate agents from their own brokerage.
Last, the term realtor signifies that the person is a member of the realtor’s association. They may be any professional in the real estate industry including appraisers, agents, brokers, and salespeople. They are bound by the code of the association.
Questions to Ask
You want a good real estate agent, but how do you know that someone will work for you? One way is to ask these questions.
What is your experience?
Typically you want to find a real estate professional who has been in the industry for at least 4 years. In addition, it is a good idea to find one that knows the area. If they have been working in the area for 10 years or more, that is even better. Someone that has sufficient knowledge of the area will likely be able to make suggestions. They will know the characteristics of homes and neighborhoods.
As a follow up question to this one, you may also want to inquire about the number of homes they close per year. You want someone that closes more than most of the other agents in the area.
Finally, you may want to check out additional certifications. A Certified Residential Specialist (RS) is the best to look for. Only the very best performing agents get this classification. Accredited Buyer Representatives (ABR) have completed training for buyer representation. Accredited Seller Representatives (ASR) have training in seller representation. Finally, Seniors Real Estate Specialists (SRES) have a specialty in helping those over the age of 50.
How will You Help Me Buy a Home in a Competitive Market?
If there are not many houses for sale in your area and the ones that are for sale sell quickly, then you are in a competitive market. This makes it even more vital that you have a qualified real estate agent. You want someone who knows the area and has significant negotiation experience.
What Are Your Communication Methods?
Communication is important during the home buying process, especially if the market is ultra competitive. Make sure that you and the real estate professional agree on a primary method of communication.
Also, homebuyers will usually want substantial guidance from their real estate agent. If they are overly optimistic, then they probably are not setting realistic expectations. Find someone who will communicate the expectations and tell you the negatives as well as the positives.
Finding a Home
So now is the good part. You get to find the home you want to pursue. Make sure you look at every avenue possible to find the best deal for the type of home that suits your budget, needs, and desires. Obviously it is great to use your real estate agent. However, you should also check online listings yourself. You may even want to drive around neighborhoods that you think you would like to see if there are any for sale signs.
It is a good idea to reach out to your friends, family, coworkers, and anyone else. They may be able to offer references or know of somebody who is selling or will be soon.
Once you find some homes that are suitable, you will want to visit the home. Do not walk into the open house or tour without an agent present. You never want to speak with the seller’s agent before you are in touch with your own real estate professional.
You may want to check out homes that have a lot of potential even if they are cheaper at the moment. A lot of homebuyers adjust their expectations and buy a house that may not be perfect now, but will be brilliant when it is lived in and fixed up. Do not get hung up on minor inconveniences. This will also help you build value into the home to generate positive equity.
Financing and Pre-Approval
You will want to consider all of the possible options for financing. Typically, you will need good credit, a history of paying bills on time, and a debt-to-income ratio no higher than 43%. Nowadays, lenders usually want to limit housing expenses including principal, interest, homeowners insurance, and taxes to 28% or less of the homebuyers monthly gross income. However, this number can vary greatly depending on the market and area.
After you find a suitable lender, you will apply. The lender will have to verify all of the information you provided including credit scores, employment information, debt-to-income ratios, additional expenses, and more. Then, the lender can pre approve you for a certain amount. This is called pre approval because a significant change in your credit could affect your ability to get the actually loan.
It is a good idea to secure a pre approval letter as well. This will show potential sellers and real estate professionals that you are serious about buying a home. It may even give you a step ahead of other potential buyers.
You can also apply for pre approval with more than one lender. As long as they are all done within 30 days of each other, your credit score should not be impacted. It is important that you do not feel bound to your current or long-time financial institution. It is a good idea to look around to assess different fees and interest rates.
Many experts recommend that you secure a back-up lender because you are not guaranteed for loan funding even with qualification. The underwriting guidelines can change or there could be a shift in the risk-analysis. The investor market could also change. If you have a second lender, then these changes will not affect your home buying process.
Making an Offer
Making an offer is a huge step in the home buying process and a good real estate agent should be able to offer guidance for the amount. When you make an offer, you should also ask about some of the possible conditions of the transaction such as closing costs. Your real estate agent will present the offer to the seller’s real estate agent. The seller will either accept the offer or provide you with a counter-offer. Then, you can negotiate back and forth until you come to an agreeable deal or move on.
Before you submit your offer, you want to double, and triple, check it with your budget. You need to make sure that you consider closing costs, repairs, appliances, changes, and anything else before you have a firm offer. The closing costs can vary greatly from 2% all the way to 5% of the purchase price. Property taxes, homeowners association fees, insurance costs, and inspection costs should also be taken into account.
If you reach a suitable offer, then you will have to make a good-faith deposit. This will put the process into escrow which is the period of time where the seller will remove the house from the market with the expectation that you will purchase it. The escrow period is usually around 30 days, but be sure to check.
During this time, you will want to have the home inspected. It is your responsibility as the buyer to pay for a thorough inspection because you are the one taking the most risk with the transaction. Undisclosed defects will give you the ability to rescind the offer and get your good-faith deposit money back. You will also be able to negotiate any repairs or discounts if you still want to purchase the house.
Close or Pass
If you are unhappy with the terms of the transaction, then you should move on and find another home and seller. However, if you are able to come to agreeable terms with the seller then you move on to the close.
Closing will involve a substantial amount of paperwork. This is done rapidly to seal the deal without anything falling through. You will have to pay for the home’s appraisal. This is a requirement of the mortgage companies to protect their interest. You will also perform a title search to ensure that nobody besides the seller has claims on the property. You will secure private mortgage insurance or a piggyback loan for down payments that are less than 20%. After all the mortgage paperwork is complete, you have bought your house.