How to Buy a House
The home buying process can seem overwhelming, particularly when you are a first time home buyer. There are a lot of documents to review, finances to assess and steps to take. When you want to know how to buy a home, prepare to hurry up and wait as the process unfolds.
After you receive pre-approval for a loan, a loan estimate will spell out the particulars for your potential mortgage. Once you find a home, inspections and other necessary details like a title search can add to the time needed before closing. There may also be an extra time window allotted for those who encounter bumps in the road while attempting to secure a mortgage and need to work on credit repair or saving additional funds for a down payment.
When all is said and done, though, the process will be worth it because you can finally put a key into the front door of your new home and start focusing on building equity and paying down your mortgage.
The Home Buying Process
“First, we need to get started with finding you a lender,” Caldwell Banker realtor Marla McIntyre said regarding advice for potential home buyers.
She said this piece of advice helps gently steer buyers to obtaining pre-approval, as some may have the cash needed for a home but a minimal credit history, or they may have credit history but no down payment. For buyers who need a bit of help, the realtor or bank can offer suggestions for how to build a credit history and improve scores or straighten out negatives.
After preapproval is obtained, the realtor can direct you to homes in your price range and that meet your needs. Your lender will provide a preapproval letter and a loan estimate detailing the terms of your loan, such as interest and closing costs.
The logistics of how to buy a house vary from state to state when it comes to the final days of closing. A typical closing will have the buyer, realtor, the seller and an escrow agent at the table as paperwork is signed in a title office, law office or bank conference room. In some states, who exactly has to be in the room varies.
Closing costs can also vary by state based on the tax requirements for mortgage transactions. Some states require payment of mortgage transaction taxes while others do not charge a tax on mortgages. The fees charged by lenders for originating your loan also vary based on where you live, which makes it important to shop around for the best bargain.
If you are planning to invest in a home through a short sale or foreclosure, your process is slightly different and can be more complicated. Short sales must move through an approval process with the original lender while foreclosures can be difficult to obtain financing for through a traditional lender. When your dream home requires this type of sale, plan for a longer closing period and some bumps in the road along the way.
Steps for Buying a House
1. Check your finances
Pull a credit report from Experian, Equifax and Transunion, or pull onee from all three credit reporting agencies. Review your monthly debt payments as seen on the report and check for any negative items, such as collection accounts or judgments. Dispute any incorrect information noted on your reports.
2. Contact lenders
Use online services and visit local banks and credit unions to review your mortgage options and obtain preapproval. When you are preapproved for a loan, a bank provides a loan estimate showing the interest rate of a loan and the long term and closing costs. Always check the interest rate to see if it is locked for a period of time while you shop around.
3. Find a realtor
McIntyre said it is important to contact a local real estate office and work with a realtor to review homes. She said realtors listed on properties on real estate aggregation websites are not always the realtor assigned to a particular listing, so you may not be receiving the best information about a property if you go through them.
4. Start reviewing homes
Have a checklist in mind of what you want from a property and have your realtor show you places that meet your basic requirements and price range. Take pictures and notes while looking at homes to help you narrow the field as you review options.
5. Make an offer
Consider factors like the asking price for the home, investments or repairs you will need to make in the property to improve its condition or aesthetics, and the market in your local area. After a price is negotiated, the home moves into an escrow period.
6. Start your inspections
You need to have your potential home inspected as part of the mortgage process. An inspector checks for structural damage, electrical issues and other hidden problems that could lower the value on the home. If an issue is found, you can ask the seller to fix it before closing and inspect the property again to verify that repairs were made.
7. Wait for your appraisal
The appraisal is coordinated with the lender and provides verification to all involved that the home’s selling price is fair and that the loan is a good investment for the bank. The lender also traditionally handles a title search process to verify the ownership of the home.
8. Finalize your mortgage terms with the lender
Your loan needs to move through underwriting despite being preapproved. Lenders will check your credit again to make sure you have not incurred new debt and still meet the basic requirements for the loan.
9. Obtain mortgage insurance
Mortgage insurance may be required for loans when the buyer doesn’t have a 20% down payment. You can shop around for mortgage insurance to secure the best rate possible.
10. Prepare for a final walk-through of the home
Check for new issues or changes in the home on a final walk-through. Verify that necessary repairs were completed and ask any last questions before closing.
11. Close on the home
Funds for your down payment and any additional closing costs are required at this time. When all the paperwork is signed, you will leave with the keys to your new home.
When to Buy a House?
Before buying a house, you need to make sure that your finances are in order. The Consumer Financial Protection Bureau recommends a credit score of about 750 for the best interest rates. However, loans are available to borrowers with a credit score as low as 500 when backed by the Federal Housing Administration if other debt-to-income requirements are met. A score of at least 620 is recommended for conventional loans, but you will not qualify for the best mortgage rates without a higher score.
According to the New Jersey Housing & Mortgage Finance Agency, your monthly mortgage costs, including mortgage insurance and taxes, should not exceed 36% of your gross monthly income. Your total debt-to-income ratio should not be higher than 43% to qualify for most mortgages. Total debt includes the potential monthly cost of a mortgage. To calculate your debt-to-income ratio, add all of your monthly payments on recurring credit and fixed loans and divide by your gross monthly income.
Start shopping around with lenders to review your options after you meet or exceed the qualifications for buying a home and feel ready to take the plunge.
Is Home Ownership Right for You?
Buying a house is often seen as a rite of passage for young adults and families. It is also viewed as a logical financial investment for many due to the ability to build equity in the home over time and potentially sell at a profit in the future. However, purchasing a home requires a pragmatic approach. You need to assess your finances and see if you are able to purchase a home and you should decide if you have the time frame needed to see a return on the investment.
For example, you may qualify for a mortgage on an excellent home but your job will require relocation in a few years or less, limiting your ability to build equity. In these situations, saving money for a future purchase may make more sense. You can then buy a home when you have the opportunity to do so.
When you are living in a place you plan to stay at for a period of time and meeting a high monthly rent payment, review the costs of homeownership. You may find that a mortgage payment is in the same ballpark as your monthly rent. If you are able to meet the various financial requirements to obtain a mortgage and can afford the additional costs of homeownership, such as upkeep, opting for a long-term investment instead of rent payments is probably a good idea.
The Bottom Line
Homeownership is an emotional topic for many due to its connection with lifelong dreams and plans. It is okay to be emotional while searching for a home, but you must be aware and take charge of the more practical aspects. Get preapproved for a loan and shop for homes in your price range. When you find the house you want to call home, keep your credit clean and invest your time and effort in obtaining the necessary inspections. A home is an investment and you want a closing and purchase free of worries.