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Much of buying a home is in the preparation. Actually making an offer and down payment doesn’t come until later, once you’ve gone through some important hurdles. Your journey through the home buying process should roughly follow this order.
Consider Your Readiness
Before buying a home, you should consider whether or not you are financially and personally ready to move forward. A mortgage can be up to a 30-year investment, so you need to factor in your:
- Income and employment level
- Current and past debts
- Ability to commit
Having cash savings (also known as liquid assets) is essential to affording a house’s down payment and closing costs. Depending on where you live and your income level, you’re expected to make at least a 3.5% down payment. However, it’s more ideal to put down up to 20-30%.
You typically also need savings to cover closing costs. These are fees that go into the loan process as well as paying the lender.
These could add up to thousands of dollars (around 4-5% of the purchase price). In some cases, you may have the option to roll your closing costs into your mortgage. But in the long run, it’s more affordable and better to pay them upfront.
Income and Employment Level
Your employment makes up a big part of getting preapproved for a mortgage. If you’re self-employed, you need to show taxes and records of your income for the past couple of years. If you’re employed by a business or company, though, you’ll just need to provide work history documentation.
Lenders want to take on clients who pull in a steady income consistently. They also want to see that you’re working full-time and not bouncing between jobs.
Creditworthiness is essentially your credit score, combined with your record of paying off credit debts. Credit affects your mortgage rate and the terms of your loan. You typically can’t get approved for a mortgage unless your credit score is upwards of 620 (the 700s are better).
Your credit record also needs to show that you don’t have delinquencies or missed/late payments. Your ability to pay debts, keep credit usage low, and accrue credit files will help you get a better mortgage.
Current and Past Debts
Your debt-to-income ratio is a measure of your monthly gross income that goes toward paying off your debts. Your DTI ratio should be no more than 28% for the front-end and no more than 36% for the back-end. By keeping it low, you increase your credit score and improve your mortgage opportunities.
Ability to Commit
And finally, you need to decide if you’re mentally and emotionally ready to commit to buying a house. Are you willing to live in the same place for at least five years or so? Can you take on the maintenance duties? Are you ready to pay the same monthly mortgage price for years to come?
Increase Your Savings and Credit Score
If your savings are too low for the down payment/closing cost you’re expecting, you need to wait. Take some time to save several thousand dollars and create a monthly budget to help you. You may need to cut back on spending for a bit, but it will pay off.
You also may want to work on improving your credit score by a few points. The better you can get that score, the better the possible interest rate, loan terms, etc.
Estimate Your Home-Buying Budget
Next, you need to figure out what’s the maximum you can ideally pay on a mortgage per month. This, combined with the down payment you’re able to produce, will key you in to your house budget.
There are lots of tools online that can calculate an estimate based on your income, DTI, and expected down payment. Keep in mind that mortgage estimates don’t include other monthly expenses, like utilities.
Consult with Lenders and Prequalify for a Mortgage
Many new home buyers make the mistake of going to tour houses before they’ve even spoken with a lender. You need to meet with lenders to find the type of mortgage you’re looking for first. They can assist you in prequalifying for a loan based on your finances and needs.
Once you prequalify, you’ll have a figure you can use to establish your final house-buying budget. This number will tell you what kind of houses you can filter for when you start browsing through Zillow.
Find a Real Estate Agent and Start Touring Homes
For new home buyers, a real estate agent will be extremely helpful in finding you the property you want. They will also be able to answer your questions when touring homes and help you negotiate with the seller.
You can provide your agent with your pre-qualification information, budget, and features you want in a home. They’ll have first access to new listings so you can jump on offers when the time comes.
As you figure out what you want in a potential home, consider the following:
- Neighborhood and neighborhood fees
- Crime rate
- Flood risk
- Proximity to conveniences like gas and groceries
- Proximity to high-quality schools (if you have children)
- Square footage
- Type of utilities (these will affect monthly costs)
- Condition of the home (is there mold, etc.?)
- Amenities such as a backyard, fence, patio, pool, etc.
- Property taxes
- Property value over time
Make an Offer
Once you’ve found the house you want, you can make an offer. This is the most exciting part of the home buying process! The key here is not to put all your eggs in one basket because even good offers can fall through. You might have a good loan and a decent down payment. However, if another offer comes through in cash, the seller will likely turn you down.
You’ll first submit a written offer that details your intended price and when you want the seller to answer by. You might even have to provide a cash deposit at this point to show the seller you are serious.
The seller will either accept your offer, reject it, or counteroffer. If they reject your offer, you must decide whether you’ll make a second offer or find another house. If they counteroffer, you must decide whether to reject it, counteroffer again, or accept the counteroffer.
Keep in mind that the longer you spend negotiating, the longer you may be missing out on a better home.
Make Sure Appraisals and Inspections Are Complete
An inspector will scope out the home for bad electrical systems, mold problems, asbestos, roofing problems, etc. Once you close on the house, you’ll be responsible for those repairs.
This is why it’s essential to quickly get the inspection done before you close and negotiate with the seller. They may be willing to make a deal where they handle necessary repairs.
You also should get the house appraised so your mortgage loan can properly process.
Close on the Home
Finally, once all repairs get done, you can do a final walkthrough and pay closing costs. You’ll meet to pay your down payment and closing costs, sign the settlement statement, and sign the mortgage note. You’ll also sign the official mortgage to finalize the process. Once all this gets done, you are ready to start moving into your new home.
Buying a home is a multi-step process that comes down to much more than just making an offer. You should have your finances in order, including debts, income, savings, and credit, before you start looking for a home.
Hopefully, our step-by-step guide has helped you learn a bit more about the home buying process.