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Home Buying 101

Home Buying 101: 12 Steps to Success
Part 1

The dream of home ownership can seem to some, an anxiety inducing proposition. But it doesn’t have to be. In this 2-part blog, we’ll give you all the info you need to make a well informed decision, as well as steps you can take right now, that will have your stress levels back to normal, and your excitement level sky-high! Let’s get started.

Most home sales involve the following 12 steps:

Decide Whether You’re Ready to Buy A Home
Calculate How Much House You Can Afford
Save For A Down Payment And Closing Costs
Get Preapproved For A Mortgage
Find The Right Real Estate Agent
Begin House Hunting
Make An Offer On A House
Get A Home Inspection
Get A Home Appraisal
Ask For Repairs Or Credits
Do A Final Walkthrough
Close On Your New Home

In part 1 of this blog, we’ll go through the first 6 steps, and continue to the following 6 steps in part 2 next week.

Step 1: Decide Whether You’re Ready To Buy A Home

Buying a house is a major commitment. Before you even go down the rabbit hole of shopping, scrolling, consulting a mortgage lender, and finding a Realtor, you need to decide if you’re truly ready to be a homeowner.
Let’s look at some of the factors that lenders and homeowners alike should consider.

Income And Employment Status

Your lender won’t just want to see how much money you make. They’ll also want to see a work history (usually about 2 years) to make sure your income source is stable and reliable.
Preparing your income is all about pulling the right documentation together to show steady employment. If you’re on payroll, you’ll likely just need to provide recent pay stubs and W-2s. On the other hand, you’ll need to submit your tax returns and other documents the lender requests if you’re self-employed.

Debt-To-Income Ratio

Debt to income ratio (DTI) is another financial instrument mortgage lenders use to evaluate your loan application. Your DTI helps your lender see how much of your monthly income goes to debt so they can evaluate the amount of mortgage debt you can take on.
DTI is calculated by dividing your monthly debt by your gross monthly income. For example, if your monthly debts (credit card minimum payments, loan payments, etc.) total $2,000 per month and your gross monthly income is $6,000, your DTI is $2,000/$6,000, or 33%. Your lender will use the debts shown on your credit report to calculate your DTI.
It’s smart to review your DTI before you apply for a loan. In most cases, you’ll need a DTI of 50% or less to qualify for a mortgage, although this number varies based on your lender, loan type and other factors.
Liquid Assets
Even with the help of a mortgage, you’ll still need liquid assets to fund the purchase of a home, specifically your:
Down payment: Buying a home with no money down is possible, but most homeowners need to have some cash for a down payment. A down payment is the first major payment you make on your loan.

The amount of money you’ll need for a down payment depends on your loan type and how much money you borrow. You can buy a home with as little as 3% down (though there are benefits to putting down more).
Closing costs: You’ll also need to pay for closing costs before you move into your new home. Closing costs are fees that go to your lender and other third parties in exchange for creating your loan.

The specific amount you’ll pay in closing costs will depend on where you live and your loan type. It’s a good idea to be prepared for 3% – 6% of your home’s value as an estimate of your closing costs. In some situations, part of closing costs can be rolled into your mortgage or paid by the seller using seller concessions.

Credit Health

Your credit score plays a huge role in what loans and interest rates you qualify for. Your credit score tells lenders how risky you are to lend money to.
Taking steps to improve your credit score and reduce your debt can pay off big as you prepare to get a mortgage. Better numbers mean better loan options with lower interest rates.
Your credit score is based on the following information:
Your payment history
The amount of money you owe
The length of your credit history
Types of credit you’ve used
Your pursuit of new credit
What score will you need to qualify for a home loan? Most lenders require a credit score of at least 620 to qualify for the majority of loans. A score above 720 will generally get you the very best loan terms.

Willingness To Live In One Place

A mortgage can be a 30-year-long commitment. Though you don’t need to live in your home for the entirety of your mortgage term, it’s still a big decision. When you own a home, it’s more difficult to move. Unless you’re buying a second home, you might need to sell your current home first, which can take time.
Decide whether you’re ready to live in your current area for at least a few more years. Consider your career goals, family obligations and more. Each of these factors will play a major role in the type of home you buy and where you set up your primary residence.

Timing

Deciding whether it’s a good time to buy a house or not depends on a variety of personal factors (such as financial readiness and lifestyle preferences) and market conditions (such as economic health and current mortgage rates).
Ultimately, the right time to buy a home comes down to your own unique situation. Be sure to consult a financial expert before making any big financial decisions such as buying a house.

Step 2: Calculate How Much House You Can Afford

Once you decide you’re ready to buy a home, it’s time to set a budget. A good place to begin is by calculating your DTI ratio. Look at your current debts and income and consider how much money you can reasonably afford to spend each month on a mortgage.

Homeownership comes with several costs you don’t need to worry about while renting. You’ll need to pay property taxes and maintain some form of homeowners insurance. Factor these expenses into your household budget when you decide how much house you can afford.

Step 3: Save For A Down Payment And Closing Costs

There are many ways to save for your home purchase, including through investments and savings accounts. If you have relatives who are willing to contribute money, you may be able to use gift money toward your down payment (in which case, be sure to provide your lender with a gift letter).

But how much do you need to save before buying a home? Let’s look at some of the major expenses related to the purchase, and how much you might want to save for them.

Down Payment

Your down payment is a large, one-time payment toward the purchase of a home. Many lenders require a down payment, because it mitigates the loss they might suffer in the event that a borrower defaults on their mortgage.

Many home buyers believe that they need a 20% down payment to buy a home. This isn’t true. Plus, a down payment of that size isn’t realistic for many first-time home buyers.
Fortunately, there are many options for buyers who can’t afford a 20% down payment. For example, you can get a conventional loan for as little as 3% down. FHA loans have a minimum down payment of 3.5%. VA loans and USDA loans even allow eligible and qualified borrowers to put 0% down.

There are advantages, however, to making a larger down payment. For one, it typically means you’ll have more mortgage options. It also usually means you’ll have a smaller monthly payment and a lower interest rate. Plus, if you put at least 20% down on a conventional loan, you won’t need to pay for private mortgage insurance (PMI).

Closing Costs

You’ll also need to save money to cover closing costs – the fees you pay to get the loan. There are many variables that go into determining how much you’ll pay for closing costs, but it’s usually smart to prepare for 3% – 6% of the home value. This means that if you’re buying a home worth $200,000, you might pay $6,000 – $12,000 in closing costs.
The specific closing costs will depend on your loan type, your lender and where you live. Almost all homeowners will pay for things like appraisal fees and title insurance. If you take out a government-backed loan, you’ll typically need to pay an insurance premium or funding fee upfront.

Before you close on your loan, your lender will give you a document called a Closing Disclosure, which lists each of the closing costs you need to cover and how much you’ll need to pay at closing. Look over your Closing Disclosure carefully before you close to know what to expect and to catch any errors.

Other Costs Based On Loan Type

Your loan type might require a specialized inspection as well. For example, you often have to get a pest inspection before you take out a VA loan. Most lenders will schedule this inspection on your behalf and pass the cost along to you at closing.
These expenses might seem minor when held up against the other costs associated with buying a home, but they can add up, so be sure to budget wisely.
Take the first step toward the right mortgage.

Step 4: Get Preapproved For A Mortgage

When you’re ready to start house hunting, it’s time to get pre-approved for a mortgage. When you apply, your lender will give you a preapproval letter that states how much you’re approved for based on your credit, assets and income. You can show your pre-approval letter to your real estate agent so they can help you find homes within your budget.
To get pre-approved, you need to apply with your lender. The preapproval process typically involves answering some questions about your income, your assets and the home you want to buy. It will also involve a credit check.

Conventional Loans

Conventional Loans, sometimes called conforming loans, are loans that are backed by Fannie Mae or Freddie Mac. The majority of mortgages in the U.S. are conventional loans. Conventional loans are always a popular option for homebuyers, and you can get one with as little as 3% down.

FHA Loans

Backed by the Federal Housing Administration, FHA loans are less of a risk for lenders because the government insures them if you stop making payments. As a result, FHA loans have credit score requirements that aren’t as strict. You can get an FHA loan with a down payment as small as 3.5%.

VA Loans

VA loans are mortgage loans for veterans, active-duty members of the Armed Forces, and qualifying surviving spouses. The most popular benefit of VA loans for homebuyers is no down payment required. VA loans are insured by the Department of Veterans Affairs.

USDA Loans

Another type of government-backed loan, a USDA loan, helps people in rural and suburban areas buy homes. You can get a USDA loan with 0% down, but your home must be in an acceptable rural area and you must meet income eligibility rules.

Step 5: Find The Right Real Estate Agent For You

There are multiple parties involved when getting a mortgage and buying a house. Your real estate agent is your representative in the home purchase transaction. Your agent will look out for your best interests by finding homes that meet your criteria, get you showings, help you write offers and negotiate.

As a buyer, you can usually work with a real estate agent for free. In most cases, the seller will pay the buyer’s real estate agent’s commission. The commission is usually 3% of the purchase price.

A real estate agent represents you and helps you understand how to buy a house. Your agent will show you properties, write an offer letter on your behalf and assist in negotiations. Real estate agents are local market experts and can also advise you on how much to offer for each property.

It’s possible to buy a house without a real estate agent or broker. This isn’t recommended, especially for first-time buyers. The homebuying process can be complicated and emotional. Having an agent by your side can help you navigate the housing market, submit a legally sound offer and avoid overpaying for your property.
How can you find the right real estate agent? Begin by asking family members and friends for recommendations. Direct referrals are often the best way to get unbiased information on agents in your area.

Step 6: Begin House Hunting

Your real estate agent will help you hunt for houses within your budget. It’s a good idea to make a list of your top priorities, some of which might depend on whether you’re looking for a starter home, or a forever home.
Here are some things you might want to consider when shopping for a house:

Price
Square footage
Home condition and possible need for repairs
Access to public transportation
Number of bedrooms
Backyard/swimming pool
Local entertainment options
Local school district ranking
Property value trends
Property/real estate taxes

Rank your priorities from most to least important and show this list to your agent. Your agent will then show you homes that fit your criteria. You may need to spend some time searching for the perfect home, so don’t get discouraged if your hunt takes longer than you expected.

Only you can decide which property is right for you. Make sure you see plenty of homes before you decide which one you want to make an offer on. Like much of the homebuying process, you can do a great deal of your house hunting online.
Once you find a property you like that fits your needs and budget, it’s time to make an offer.

Easy stuff, right? Relax, enjoy the process. We’ll be back next week with Part 2!

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    THOMAS LEWIS REAL ESTATE