How to Buy a Home
How to Buy a Home
Have you decided it’s time to buy a home? Maybe you’re tired of renting or you know you’ve saved enough money to take the plunge.
No matter what stage you’re in, you must take the necessary steps to buy a home. It’s not as hard or overwhelming as it seems!
We’ve broken down the steps for you below.
Are you Ready to Buy a Home?
You’ve decided you’re ready to buy a home, but do your finances agree? This is the time to get honest with yourself and take a long, hard look at your finances. Buying a home is one of the largest investments you’ll make in your lifetime and you carry a mortgage for 15 – 30 years.
You’ll know that you’re ready when you’ve done the following:
Saved for a Down Payment
Ideally, you should have a 20 percent down payment. Millions of homebuyers don’t, though, and that’s okay. Many loan programs offer other options, including the FHA and conventional loans which require a 3.5 percent and 3 percent down payment accordingly.
On top of your down payment, you’ll need money for closing costs. Anticipate between 3 and 5 percent for closing costs. This covers the loan costs, title fees, attorney fees, and all loan closing costs.
Fixed your Credit
You don’t need perfect credit to buy a home, but you must prove you can handle your finances. Conventional lenders require a higher credit score, but they also offer the best rates and terms. If you don’t qualify for a conventional loan, which requires, on average, a 680 credit score, there are other options.
FHA loans, which are the most common conventional loan alternatives, require only a 580 credit score. However, the higher your credit score is, the better rates and terms you get.
If you aren’t sure what your credit looks like pull your free credit report here. You won’t get your score, but you’ll see your credit history. You can pull these reports weekly for free until April 2021. As you look through your report, look for:
- Late payments that you need to bring current
- Credit balances that exceed 30 percent of your credit line
- Unpaid collections
- Accounts reporting incorrectly or that aren’t yours
If you find incorrect information, you can file a dispute with the appropriate credit bureau. They have 30 days to respond to your request.
If you have late payments or you overextended your credit line, fix these issues as early as possible. The more time you give your credit score to increase, the better your chances of securing a better loan.
Have your Income in Order
Your income determines a lot too. After lenders approve your credit score, they want to see that you can afford the loan.
They calculate your debt-to-income ratio. This compares your total monthly debts to your gross monthly income (income before taxes). The ‘ideal’ DTI is 36 percent, but lenders realize not everyone can achieve a DTI that low.
At the most, your debts should take up less than 43 percent of your gross monthly income. This includes:
- New housing payment including the principal, interest, taxes, homeowner’s insurance, and mortgage insurance
- Minimum credit card payments
- Installment loan payments
- Any other monthly obligations that show on your credit report
Lenders also look closely at your income when you buy a home. They look for reliability and stability over the last 2 years. If you changed jobs within that time, they may question your new job. Is it in the same industry? Are you making around the same amount of money?
If you have gaps in employment or other questionable income issues, lenders may dig deeper to determine if you can afford it.
Once you get your finances and credit in order and you’re ready to look at homes for sale on a real estate website, it’s time to get pre-approved.
A pre-approval is different from a pre-qualification, so don’t confuse the two. A pre-qualification is just an estimate of what you can afford; it’s not based on any proof.
A pre-approval, on the other hand, is an underwritten approval of your qualifying factors. Lenders pull your credit and look at your income, employment, and asset documentation to determine if you qualify.
If you do qualify, you’ll receive a pre-approval letter. It’s a good idea to get this before you look at homes for sale. Today, many sellers and real estate agents won’t let you see a home unless you have one. The pre-approval letter lets sellers know that you’re a serious buyer and that you can obtain the necessary financing.
Decide if you Want a Real Estate Agent
With your pre-approval letter in hand, you’re ready to look at homes. Now it’s up to you to decide if you want to use a real estate agent. As a buyer, there’s no cost to you. Sellers pay the full commission cost.
You may have a little more wiggle room when negotiating the price of the home if there’s no agent involved, but you’ll often have access to more homes when you use one. Plus, real estate agents are professionals at negotiating the deal and navigating the sales process for you.
If you’ll use a real estate agent, start interviewing them right away. It’s best to talk with at least three agents so you choose the one best suited for you.
Look at Homes for Sale on a Real Estate Website
While you decide whether or not to use a real estate agent, you can peruse homes for sale on a real estate website. Zillow.com, Realtor.com or Real ExpertsRealty.com if your local to Washignton State. If you want access to the MLS listings, though, you’ll need to hire a real estate agent.
Choose a Home and Make an Offer
Now the fun begins! You can shop for a home. This is when knowing how to buy a home comes in handy. You must have all your ducks in a row, especially the pre-approval letter.
I suggest that you have a list of features you require in a home. If you have a list of ‘must-haves’ and ‘would be nice’ features, you’ll know right away which homes are off the table and which may be a good fit.
Shopping for a home is overwhelming, so the easier you can make it on yourself, the better! Once you find your ‘dream home’ you’ll make an offer. Your offer must be in line with what you can afford according to your pre-approval letter.
If you use a real estate agent, this is where he/she can help get you through the negotiating process. Sellers look not only at the price you bid, but at the other requirements you place on the contract, including the closing date, the contingencies you need, and the earnest money you’ll put down.
Once the seller accepts your bid, whether he/she does so right away or after negotiations, the clock starts ticking.
Get a Home Inspection and Finalize Underwriting
After the seller accepts your bid, submit the executed contract to the underwriter right away. The lender will then order an appraisal and get the title search going. Both of these play a big role in your approval and they take a few weeks to complete.
In the meantime, you should consider paying for a home inspection. This is different than an appraisal and lenders don’t require it, but highly recommend it. An inspector looks at all areas of the home, writing up a report on the home’s condition, what needs fixing, and what may need fixing soon. This is more in-depth than what the appraiser looks for, so it’s important that you take this step to avoid buying a home that’s not in good condition.
If the underwriter needs any additional information, he/she will ask during this phase. You may need to provide additional income or asset documentation. The underwriter may also have questions about certain factors that you need to clear up.
Close on your New Home
Once the underwriter clears your loan to close, this means the home passed the appraisal and the title work is clear (there aren’t any liens). Your final step is to review your Closing Statement, which you receive 3 days before the closing and to close on the loan.
Are you Ready to Buy a Home?
It sounds like a lot and to some it may seem overwhelming, but knowing when you’re ready to buy a home is important.
You want to make sure you are getting the best financing possible, which is only available if you do the legwork. Work on your credit, save for a down payment, and make sure you’re pre-approved before you look at homes. With everything together, you’re able to have a much simpler process that leads you to the home of your dreams