What To Do Before Buying A Home
What To Do Before Buying A Home. What are the requirements for first-time house buyers in order to purchase their ideal property? You may be tempted to start going to open homes right once, but you must first get your finances in order.
To secure financing, speak with a mortgage lender, then negotiate with a real estate agent to have your offer approved before proceeding to closing.
Continue reading to get your first-time homebuyer checklist and put out a strategy for purchasing your first house.
1. Buying a Home? Make Contact with a Mortgage Lender
Even if you aren’t ready to apply for a loan, talking with a mortgage lender should be the first step in your home-buying process. A mortgage lender can tell you if you’re financially ready to buy a home and what price range you should be looking at. The lender can inform you what measures you need to take if you aren’t in a good position to secure a mortgage yet.
“Talk to a mortgage person first, even if it’s from a local credit union,” says Mary Snyder, director of operations for the Selling With the Snyder Group in Cypress, Texas. “Looking at homes you might not be able to buy isn’t as beneficial.”
Why should you start with a mortgage lender? Rather of making assumptions about what you should do, it’s better to get professional counsel from the start. It’s easy to make a mistake and misdirect your efforts.
“You may think you have a lot of debt, but that may not be the truth from a mortgage aspect,” says Dave Krichmar, a mortgage banker in Houston. “Be careful not to overthink your position until you’ve spoken with a lender.”
You could, for example, spend months paying off debt that wouldn’t have prevented you from getting approved — money that could have gone toward your down payment or closing fees instead. A mortgage lender can examine your financial status and lay out a path to approval for you. Read on to learn more about What To Do Before Buying A Home.
2. Get Your Finances in Order for a Mortgage
If a lender has given you advice on how to get your finances in order for a mortgage, stick to it. You might have to:
Boost your credit score.
To be qualified for a conventional loan, you’ll typically need a FICO score of at least 620. However, certain government-backed loans allow applicants with credit ratings as low as 500 to be approved. The lower your mortgage interest rate, the better your credit score, thus it pays to have strong credit when applying for a mortgage. By challenging mistakes, addressing important difficulties such as credit usage rate and collection accounts, and avoiding opening new accounts while making on-time payments on existing ones, you can repair your credit.
Pay off your debts.
Your debt-to-income ratio has an impact on whether or not you can get a mortgage. When lenders determine how much of a monthly mortgage payment you can afford, the percentage of your income that goes to debt payments is important. Lenders often want a debt-to-income ratio of no more than 43%. That is, no more than 43% of your monthly income should be spent on debt payments, including your mortgage. If your debt exceeds that limit, be prepared to pay it off first.
More money should be set up for a down payment or closing charges.
At the end of the day, you’ll need to bring cash to the table. Expect to put down at least 3% on a home, however 20% is preferable if you want to avoid paying private mortgage insurance. Don’t forget about closing expenses, which will range from 2% to 5% of the purchase price of your home, or $6,000 to $15,000 on a $300,000 home.
3. Examine Your Mortgage Alternatives
The mortgage alternatives available to you will be determined by your financial condition. While some first-time homebuyers may be scraping by and seeking for the smallest down payment possible, that isn’t necessarily the greatest option, according to Krichmar. He suggests speaking with a mortgage provider to determine the best loan for you, which isn’t always the deal that gets you into a house with the smallest down payment.
You might be eligible for a conventional loan, which may include first-time homebuyer programs. Other alternatives include loans from the Federal Housing Administration, Veterans Affairs, or the United States Department of Agriculture, all of which need little or no down payment.
You should also look into assistance programs that provide non-repayable down payment and closing fee funding at this time.
“Your down payment may be reimbursed if you qualify for an assistance program,” Snyder adds. “Perhaps you’re closer to your goal than you realize.”
You can even use presents for your down payment or closing costs, according to Snyder. “You’ve got closing and down payment if mum and dad can help you out with $10,000 to $15,000,” she explains. “With that present, you can buy a house if you make enough money to sustain the monthly mortgage.” Read on to learn more about What To Do Before Buying A Home.
4. Buying a Home? Get a Mortgage Preapproval
A mortgage preapproval letter can answer a lot of questions regarding your financial situation when it comes to purchasing your first house. It will inform you how much you can spend, which mortgage programs you qualify for, and provide you with a preapproval letter that gives your homebuying bids more weight.
Many sellers want proof of preapproval before accepting an offer. Sellers may reject your offer if you don’t have a preapproval letter. After all, a preapproval assures them that you have the means to purchase the property. Your offer will be worthless without this promise.
To get preapproved for a mortgage, you’ll usually have to supply a lot of paperwork. Prepare to submit the following:
- Returns from the previous two years.
- Pay stubs from the last few months.
- Statements from the past few months’ bank accounts.
If you’re self-employed, lenders may require additional proof such as business bank records and tax returns.
5. Select a Mortgage Provider
Before you commit to a loan, you should apply for mortgage proposals from at least three lenders. You may then compare quotes to determine which choice is best for you. To compare apples to apples, make sure you’re applying for the same type of loan with each.
Worried about damaging your credit by applying for multiple jobs? Don’t. If you submit all of your mortgage applications within 45 days, they will only count as one inquiry.
If you’re working with a real estate agent, inquire about a preferred mortgage partner with whom the agent has worked and that he or she recommends.
Each lender should give you a loan estimate so you can compare your options based on the interest rate, monthly payment, closing costs, and other factors. Read on to learn more about What To Do Before Buying A Home.
6. Start looking for a home.
You’re ready to get serious about home searching now that you have a preapproval letter in hand and a budget in mind. If you haven’t already done so, find a real estate agent and work with him or her to determine your goals for your house hunt.
“We’ll figure out what your must-haves and non-negotiables are against what your wishes and concessions are,” Snyder adds. “Main bedroom downstairs, not less than 2,500 square feet, pool preferred but prepared to compromise for the appropriate house.”
7. Buying a Home? Make a proposal
When you’ve located a home you want to buy, you’ll need to make an offer.
“Be aware that the market is not the same as it was for your parents or even your friends a few years ago,” Krichmar advises. “Pay attention to the aspects of your offer that make you appear strong.”
Your real estate agent and lender can help you figure out what makes a solid offer, but Krichmar says cash is king: Prepare your down payment, closing costs, and reserves ahead of time.
According to Krichmar, you may be persuaded to take out a loan that isn’t necessarily the greatest loan for you, but gets you into the house. He claims that while an FHA loan may give a lower interest rate, a conventional loan is what gets your offer accepted.
When you make an offer, Snyder advises you’ll need to have “as soon as possible money.” The earnest money you put down when you make an offer is known as ASAP money. Your option cost, inspection charge, and sometimes an appraisal fee are all included. According to Snyder, the timing of the inspection cost is crucial, as you should anticipate to pay for it within three to five days of making an offer. Read on to learn more about What To Do Before Buying A Home.
8. Evaluate and Inspect the Property
Appraisal and inspection, according to Snyder and Krichmar, are critical steps in the home-buying process, especially in today’s competitive housing market, when you may submit an offer that is more than the home’s appraised value.
You want to do an inspection as soon as possible since it can discover severe faults in the home that could determine whether you want to move forward or adjust your offer. You’ll be given a list of items that are damaged or need to be upgraded in terms of safety.
A third-party appraiser will estimate the home’s fair market value based on the home’s qualities as well as the market. You can proceed to closing if the appraisal comes in at or above the amount you offered. However, if the appraisal comes in lower than what you’ve given, you’ll run into a problem with your lender: You can’t borrow more than the house is worth.
In this case, according to Krichmar, you have three choices:
- The difference is paid by the buyer.
- The difference is shared between the buyer and the seller.
- The seller reduces his pricing.
“Buyers must be aware that the home may not appraise in this market,” adds Krichmar. “They might think they just need $20,000 for closing, but after the appraisal, the seller won’t move on the price, so they suddenly need $30,000.”
If you’ve offered more than the appraised value, your real estate agent’s help is essential since you’ll need to negotiate the price.
“You don’t want to pay $275,000 for a house that appraised for $250,000,” Snyder explains. “Your real estate agent should approach the seller again to work out a win-win situation for everyone.”
9. Make your way to the Closing Table
You’re set to close with a mortgage approval, accepted offer, inspection, and appraisal. According to Krichmar, you’ll need to bring the following items to the closing table:
- You’ll need money for a down payment as well as closing charges.
- Documents related to your loan, such as your closing disclosure.
- Proof of home insurance is required.
- Identification such as a driver’s license or a Social Security card is required.
Image by Kuohatti via Wikimedia Commons.