Buying a home is exciting. You’re taking real steps toward creating a better life for yourself. Way to go! In order to minimize the stress (and maximize the excitement), below are some of the most important steps to buying a house.
1. Assess your home-buying readiness
Before you start browsing the internet for your dream home, it’s important to assess if you’re truly ready to buy. Ask yourself the following questions:
- Do I see myself in my current location for at least the next five years?
- Do I really know where I want to live and what I want, in terms of type of home, neighborhood, and commute?
- Is my job situation stable and secure?
- Do I have enough money to make a down payment?
- Do I make enough money to comfortably afford a mortgage payment plus additional home maintenance expenses?
If the answer to all of the above is yes, then the timing is right.
2. Prep your finances
A home is often the most expensive purchase in an adult’s lifetime. To prepare for talking with a lender or mortgage broker, use the following tips:
- Gather income information, including recent pay stubs and W2’s.
- Check your credit score. Your bank or other services may offer this for free. Your credit score will affect what types of loans and terms are available to you.
- Consider paying off as much debt as you comfortably can to improve your debt-to-income ratio, a factor many lenders use in determining how much money to loan you.
3. Determine what you can afford
Before applying to get pre-approved with a lender, try using an online calculator, like this one at Nerdwallet, to get an idea of how much home you’ll be able to afford. The calculator will usually reflect estimated mortgage payments, property taxes, and homeowners insurance.
Be sure to also take into account the expense of any homeowners association payments if the home you’re interested in is part of an association (or if they’re common in your area). Then take the monthly figure and compare it against your current salary, while accounting for other payment obligations, such as a car note or student loan payment
Don’t overlook home maintenance and unforeseen emergency costs that come along with homeownership as well. According to GoBankingRates.com, homeowners spend an average of $14,448 dollars on home maintenance and expenses each year.
4. Get pre-approved
During the pre-approval process, you’ll submit financial information to a lender to assess what loan terms you may qualify for (including loan amount, interest rate, and mortgage points).
Consider shopping multiple lenders, as each one may offer a different terms. Contrary to many assumptions, interest rate shopping usually does not impact your credit score. MyFico.com clarifies that often these multiple inquiries within the same date range are treated as a single inquiry by credit bureaus to protect the credit of the consumer. It’s built into the credit system that you’ll want to be a savvy rate shopper, because finding the best rate can be the best way to save money on the overall life of a loan. With that in mind, aim for at least three offers.
5. Explore the mortgage rates and types available to you.
Many buyers aim for the predictability of a fixed rate mortgage. With this type of loan, the interest rate remains the same for the life of the loan. (Ex: 4% interest for 30 years.) Others look into variable rate loans, which may initially have lower rates, but can increase suddenly and cause payment shock. Loans also fall into two general types:
The standard type of loan that most borrowers opt for.
- Pros: Can be used to buy several different property types (including a second home or rental property), no additional monthly mortgage insurance payment with a down payment of at least 20 percent.
- Con: To qualify, buyers generally must have higher credit scores, lower debt-to-income ratios, and larger down payments.
There are three types: a Federal Housing Administration loan for first-time buyers, a VA loan for veterans and active armed service members, and USDA loans for rural home buyers. These loans are backed by the government, which usually allows lenders to provide lower interest rates to those who qualify.
- Pro: Buyers with lower down payments and lower credit scores may qualify for a mortgage.
- Con: Can only be used for specified property types, and you’ll generally pay private mortgage insurance each month.
For more information on mortgage options, please check out the comprehensive home loans guide of the Consumer Financial Protection Bureau.
6. Decide on the kind of home
Finally, the fun part. With the pre-qualification and financial grunt work complete, you can focus on that future home of yours. But first, you’ll need to get a very clear idea of the type of home you want:
- A single family, condo, or townhome?
- How many bedrooms and bathrooms?
- What part of town?
- Large lawn or little maintenance?
- Do you need good schools for the kids?
- Would you be okay with a fixer upper or older home that needs a lot of maintenance?
Once you have a rough idea of the home you want, you’ll be prepared to put together a home buying strategy.
7. Determine your home buying strategy
In the digital era, there is more than one way to buy a home. A few years ago, buyers could only purchase a home through a realtor, but now they can buy on their own—and directly from real estate companies like Opendoor. Having a variety of options means buyers can choose the strategy that’s right for them, whether they’re looking for someone to provide a lot of one-on-one service, or if they’re looking to save money on fees.
8. Find the home
Home tours can bring excitement, or frustration if you can’t find what you want, but fortunately there isn’t a shortage of ways to find homes for sale. If working with a realtor, they’ll pull together options for you, based on your budget and criteria. Buyers can also search online, generate alerts for when homes appear on the market, and look for open houses both online and in neighborhoods of interest.
9. Make an offer
Once you find a home, it’s time to make an offer. Depending on the market, you may have a few days to think on it, or if the market is extremely competitive, you may have to put in an offer immediately after showing. It’s important to remember that your negotiating a financial asset (for both you and the seller), so try to keep emotions at bay.
If you’ve followed the steps in this guide, your pre-qualification and solid buying strategy will take much of the uncertainty out of making, and negotiating an offer. If the offer is strong and the timing is right, hopefully the seller will accept your offer and you can start preparing for the future in your new home.
10. Conduct a home inspection
Just because a seller accepts an offer doesn’t mean the sale is a done deal. The period between offer acceptance and closing can be the most fraught for both buyers and sellers. Take full advantage of your due diligence period, the time when you can fully inspect the home and ensure you want to go through with the sale—or back out.
Due diligence includes a thorough home inspection by a certified home inspector. During the inspection, they’ll look for any potential issues with the home, note needed repairs, and estimate the age of costly items such as the roof, HVAC, and hot water heater, which will eventually need replacing.
11. Order a home appraisal
During the due diligence period, the bank providing the mortgage loan will order an appraisal to make sure the home is worth what they’re letting you borrow to pay for it. While this doesn’t require any additional work from the buyer, it’s important to pay close attention. If a home doesn’t appraise for sale value, you’ll have to make up the selling price in cash or decide to walk away.
A recent Forbes.com article reports 3.9 percent of home sales fell through in 2016 due to a variety of factors, including home appraisal, so it is important to not get too emotionally invested in a property until closing.
12. Paperwork and closing
Finally, it all becomes official. At closing, both the buyer and seller will sign paperwork, hand over down payments, and write checks for closing costs. As we’ve explained in a separate blog post, closing costs can range between 1 and 3 percent of the home purchase price, illustrating the need to factor this money into your home-buying budget ahead of time.
We hope this clarifies the various steps of the house buying process. Once closing is complete, you’re the new official owner of the home. Congratulations!
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