How to Buy a Home
Buying a house is a huge decision that requires a lot of planning and hard work, but that doesn't mean the process has to be a hassle. We strive to make the home purchase process fun and stress-free. We prepared a step-by-step guide of what you can expect to go through and how to prepare when you decide to buy a home.
Check Your Credit Score
The first step you should take toward homeownership is checking your credit score. Your credit score plays an important role in the type of mortgage you can obtain and the interest rate you will be given. If your score is rated as "good" or above 700, you will likely not have trouble getting the best rates and loans. However, if you fall into the "poor" or "fair" credit scores, you may have some work to do.
If you have too low of a score you may be required to put down a larger down payment amount and be charged a higher interest rate. If you find that your credit isn't where it should be, you should make a plan to pay down debt on time each month. Making sure payments are on time and that your debt is lower than 30% of the credit line is the easiest way to increase your credit score.
For example, if your credit card has a limit of $10,000, you need your balance under $3,000. Increasing your credit score takes dedication and discipline. The good news is that the new skills you will acquire will help you manage your finances once you become a homeowner.
Create a Budget
While you are working on increasing your credit score, you should also create a budget for your mortgage. This budget should include property taxes, homeowner's insurance, and HOA fees, which are usually paid monthly.
Owning a home comes with some extra expenses you are not responsible for when you are renting. Be mindful of the maintenance costs of owning a home when creating your budget. Try to have enough of a cushion in your budget if something needs to be repaired.
Calculate How Much House You Can Afford
Before you can get the home buying process going, you should figure out how much house you can afford. It is also a good idea to look at what percentage of your pre-tax monthly income goes to paying debts. Your debt-to-income ratio (DTI) is something your lender will look at when determining if you qualify for a mortgage. Debts include student loans, credit cards, and car loans, plus your mortgage payment. Typically, a lender will want your DTI to be less than 43%, which means your monthly debt isn't more than 43% of your monthly income.
Keep in mind that the amount you can afford and the amount you are comfortable paying may be two different numbers. Make sure you won't have to give up too many things you like to do, like traveling or dining out, so that you can afford a mortgage payment.
Save For A Down Payment
Hopefully, you've already been doing this, but you must have money saved up for a down payment, closing costs, and maybe even some for home projects once you move in. The typical minimum down payment amount for a first-time homebuyer is 3.5% of the purchase price, but the amount depends on the type of mortgage loan you get if you can put more money down, even better.
That will help you lower your monthly mortgage payment and may even be enough to help you avoid private mortgage insurance (PMI) by putting 20% or more down, which adds more money to your monthly payment.
What comes as a surprise to many first-time home buyers is that you also have to bring money to the table to cover your closing costs. Depending on the real estate market, you can ask the seller to help you cover those costs so you won't have to pay as much out of pocket. Closing costs are typically another 3.5% of the purchase price and cover things like your funding fee, escrow fees, prorated taxes, HOA dues, and the title insurance.
Before you start the house-hunting process, you need to get prequalified for a mortgage by a lender or mortgage broker. This will help you get ahead of the game once it's time to make offers on a home and provide you with more real numbers and clarity about how much you will be spending. The lender will look through your financial statements and credit report to determine how large a mortgage loan you are approved for.
Once you have your prequalification letter, you will be able to determine your home search criteria based on size, location, and price range. Your real estate agent will submit your prequalification letter along with your purchase offer when the time comes. There are too many risks involved with a buyer who has not taken the time to start a working relationship with a lender. Most sellers won't accept an offer from a buyer who is not prequalified.
If you are able, getting direct underwritten approval is best. It will help simplify the escrow process once you reach that point.
Find a Local Real Estate Agent
At this point, you've done most of the hard work, and it's time to start the fun part of the home search process. You will need to commit to a real estate agent to help guide you through the homebuying process. There are so many real estate agents out there, and while most are amazing, some are not. It is important you interview a few agents before agreeing to work with one. When interviewing real estate agents, look for someone who has recent experience in the area you are hoping to move to.
Real estate markets change, so having a real estate agent familiar with today's conditions is extremely important. They should be able to educate you on whether the market favors buyers or sellers and what that means. Having experience in today's market will also be important when it comes time to strategize about making an offer. An experienced agent will know how to negotiate on your behalf and will be able to identify any pitfalls or hold-ups that may become an issue. One of the best things about working with a real estate agent is that they are paid for by the seller. So, even if you plan to purchase a new construction home, it is a good idea to have a real estate agent represent you and guide you through the process.
Start Searching For Homes
Now that you have your finances in order, a prequalification letter in hand, and a real estate agent by your side, it is finally time to start looking at homes! You can use your favorite home search site to look for homes that match your criteria and ask your real estate agent to set up showings. Your real estate agent will also send you listings that they think you will like. Some real estate agents may be able to get you into homes before they even hit the market.
You can also visit open houses, but if you fall in love with an open house, make sure to let your real estate agent know so they can still represent you in the home purchase. When you set out to start looking at homes, make sure to take notes or take pictures at each house of what you like and what you don't. After a long day of house hunting, there is a good chance that the houses will blend together in your mind.
Start Making Offers
Once you find a house you like, it is time to work with your real estate agent to put together an offer. Your real estate agent will help you decide on a price to offer based on recent sales and other homes for sale in the area. Keep in mind, it is entirely normal to have to submit offers on more than one house before your offer gets accepted. That is especially true when you are looking for a home in a busy seller's market. Don't get discouraged, eventually, your offer will be accepted.
Your offer will include more than just a purchase price as many other areas are negotiable when purchasing a home. You will be able to negotiate who pays for closing costs, the close of escrow date, and contingencies like needing to sell a home before being able to buy. Again, your real estate agent will be able to help guide you through all of this and will come up with a game plan to make your offer stand out.
Offer Accepted! Now the Real Work Starts
The seller has accepted your offer, and now you are "in escrow." There is a lot of work to be done during what is most commonly 30 days. As part of the purchase agreement, you have a 17 day inspection period. During this time, you will have a home inspection and review any documents pertaining to the home, like your CC&Rs. If you find anything that you find unacceptable during this time, you can back out of the transaction without penalty or re-negotiate with the seller to solve the issues.
Your next contingency is the appraisal contingency. You will have 17 days to have an appraisal conducted to verify the home value, which we will discuss later.
Lastly, you have 21 days to get final underwritten loan approval. If you cannot get loan approval during that time, you can cancel the transaction with no penalty. This is why a prequalification is so important since most of this process will be done beforehand.
Get a Home Inspection
Getting a home inspection is so important and not just on older homes. Even newer homes may have damage that you should be aware of. Your real estate agent should be able to recommend a trustworthy home inspector who will thoroughly check your home for any damages. A licensed home inspector will take the time to look at the roof, plumbing, all major systems of the home like the air conditioner and heater. If there is a pool, they will make sure the pool is in working condition. Sometimes the home inspector may find things beyond their area of expertise. An example could be finding moisture under a sink. The home inspector could then recommend you hire a specialist to come in to assess the damage.
The home inspector will give a detailed report of their findings and some suggestions on moving forward. With the help of your real estate agent, you can ask the seller to either fix the items, give you credit to fix them on your own, or, in some rare cases, reduce the purchase price of the home. Keep in mind that the home inspector has to include anything that does not appear to be functioning for informational purposes and not everything news to be repaired or replaced.
Small items could include a light that doesn't turn on because the light bulb is burned out. Something that small should not be included in what you ask the seller to fix. You also should shy away from asking the seller to upgrade items that are either in working order or that need to be repaired.
Have Your Lender Schedule the Appraisal
During the escrow process, usually after your home inspection is completed, your lender will order an appraisal. An appraiser determines the fair market value of the home. They will look at homes similar in size and amenities which have recently been sold in the area to determine how much the home is worth. The appraisal contingency states that the home needs to appraise the amount offered or more. If appraisal determines that the value is less than the amount you offered, the buyer and seller renegotiate or cancel the transaction.
In a sellers' market, some buyers may be asked to waive the appraisal to win the bidding war. If the appraisal is waived and the home appraises for less buyer's lender will only approve a loan for the amount the home appraised for. You will have to come up with the rest of the money in cash before the transaction can close.
Receive Final Loan Approval from Underwriter
You're almost to the finish line! Before your loan can be approved, your lender will request documents from you. It is important to send over the documents as quickly as possible to avoid any delays.
Sometimes they may ask for the same document multiple times, don't argue. Just send it over. Usually, the final approval will come prior to funding conditions. You may need to send over another bank statement, employer verification, or other simple items. Don't hesitate to ask questions if you are concerned. Your lender will be able to explain what they are looking for and how you can help move the process forward.
Once your lender gets the clear to close, it's time to remove all your contingencies and take that leap. There's no going back now. I guess you could, but you would lose your earnest money, which could be up to 3% of the purchase price.
Time to schedule the movers!
Final Walk-Through Before Closing
Before you sign all of your closing documents, you will complete a Final Verification of property condition to ensure the property is in the same condition as when the offer was made. If you asked the seller to make any repairs as part of the inspection period, this is when you will verify those repairs have been made.
More often than not, the final walk-through consists of the buyer measuring spaces and trying to decide what color to paint the walls.
Sign Your Loan Documents
A couple of days before escrow officially closes, you will sign your loan documents in front of a notary. You will need proper IDs present and any paperwork for power of attorney etc. Be prepared. This is a big stack of papers, and your hand will probably get tired from signing. Keep your eyes on the prize because you are almost a homeowner.
Congratulations!! Escrow is Closed, and Now You Get the Keys Escrow officially closes once the title has been recorded and the loan has been funded. This means you're officially the owner of your new home! If possession was negotiated for a later date to accommodate sellers' needs, be patient. Easier said than done, I know. But you can still break out the champagne and celebrate. Purchasing your own home is a big deal! You should feel very proud.
Ready To Get Started?
The home buying process sounds stressful, but it won't be with the right professionals by your side. If you want to get the ball rolling, the team at Ardent Real Estate Group will be here for you every step of the way. Give us a call to get an idea of current market conditions and to put together a plan of approach. We would love to help you take this huge step into homeownership.