Have you been saving for a down payment for a while but have no idea how the homebuying process actually works? Or perhaps youâve been too đˇoverwhelmed to begin? Youâre not alone.
Few first-time homebuyers know exactly how to buy a house, but itâs something you can learn. This guide will show you everything you need to know toęĻ prepare for the process anđŗd successfully close the deal.
4. Save your money for a down payment
5. Get pre-approved for a mortgage
1. Do your research
Youâre already on the first step: doing yoęĻur research. This is the time to gather information on the home-buying process, from the neighborhoods youâd like to live in, to the real cost of owning a home.
Itâs also a gđšood time to reflect on your goal for getting a house and to make a plan for how and when you intend to achieve that goal. Set your timeline so you have an idea of when you could have your fuđnds saved up and begin shopping.
2. Budget for your house
Buying a house will cost you more than just the mortgage. Youâll need to make sure you can cover the interest on your loan, plus private mortgage insurance (for down payments under 20%), homeowners insurance, property taxes, and perhaps a homeowners association fee, all of which can add a significant amount to your monthly payment. Whenđ youâre budgeting for the home you want, be sure to take those costs into account.
Closing costs can also add up; these are the one-time fees and expenses associated with closing the deal and transferring ownership of the home from the seller to you. They incluđde title insurance, inspection and appraisal fees, document and paperwork fees, and other costs.
Expect to pđay between 2% and 5% of the purchase price of the home in closing costs. You might need to have this amount in cash, or you may be able to roll it into your mortgage â just remember that if you do, youâll pay interest on that amount, as well.
3. Check your credit score
Your credit score is also a critical factor in determining your budget because it can affect the mortgage inâterest rates youâll qualify for.
âItâs very important to check your credit scores and clean up any discrepanciesđ˛ before you purchase if you plan to take out a mortgage,â said Svetlana Choi, a broker with ColęĻŦdwell Banker Warburg.
âBanks check your score several times during the purchase process, not only when you apply for the loan, but also before you close, so maintaining a good score is đessential,â she said.
If your score isnât yet in the âgoodâ range â usually defined as a FICO score of 670 or higher â donât panic. You can work on improving it, starting today, and start to seeęĻ positive results in the coming months. Start with some of these moves:
- Get current on your bills
- Make more than the minimum payment toward your credit card debt
- Set your payments to autopay so you never miss a due date
- Pay off your smallest debts (but leave the account open, as the age of your accounts factor into your credit score)
- Check your credit report for errors and correct them
On-time payments make up as much as 35% of your credit score, so making all of your payments is a great way to make mađjor strides toward better credit.
4. Save your money for a down payment
If you havenât already, start setting aside cash for the down payment. While the rule of tđĨhumb is to put down 20%, you may qualify for a loan program that lets you put dowđ n as little as 3%, which would make it much easier to reach your goal, but would affect how much you need to borrow.
For example: For a $300,000 house, youâd need to save $60,000 for a 20% down payment, and your mortgage would be $240,000. At a 6% interest rate and with a 30-year fixed-rate term, that would make your monthly payment (not including taxes or insurance) $1,439. If you put down 3.5% instead, your down payment would be $10,500, and youâd need to borrow $289,500. That puts your monthly payment at $1,736 (though with a down payment under 20%, youâll likely have to factor in private mortgage insurance). |
5. Get pre-approved for a mortgage
With your cash saved up and your goals in mind, you might be ready to buy. But your first step is not to look at real estate listings â itâs to visit a loan officer. Theyâll help you get pre-approved for a mortgage. A pre-approval will not only show you what price range to shop in, it willđ also let sellers know to take you seriously, because youâre ready and able to buy.
Getting pre-approved entails filling out an application and submitting some personal and financial information. Based on those details, plus a soft credit check, the lender will let you know how much youâre prequalified to borrow.&đnbsp;
While youâre at it, this is a good time to check whether you qualify for loan programs through the Federal Housingđ Administration (FHA), ꊲDepartment of Veterans Affairs (VA), or Department of Agriculture (USDA) loans. These programs provide lower down payment and credit score requirements, making it easier to buy your first home and begin building wealth.
6. Hire a real estate agent
Once youâre pre-approved, hire an agent. The right real estate agent will make home shopping much easier, because they will know your market well. Heather Walton, a Realđtor with Class-Harlan Real Estate in Doylestown, Pa., recommends interviewing real estate agents to find an experienced buyerâs agent.
An agent since 2001, Walton suggests hiring someone âwho listens to your wishes, đ °is knowledgeable on the marketplace, and who can guide you through all the steps of purchasing a homęĻe.â
âđļThey likely will be your âfirst friendâ in your new community,â she said. âSo make sure you are comfortable with their skill set and trust them to steer you in the right direction.â
7. Shop for a house
Your real estate agent will help you find and tour potential homes. Let them know what youâre loāĻoking for, what neighborhoods appeal to you, and whether you want a new move-in ready home or an older home with more character.
After you visit each of the top contenders, make notes of each homeâs pros ađnd cons. This data will help you make your final decision later.
8. Make an offer
When youâve landed on a home that checks off most of your boxes, itâs time to make an offer to the seller. Your agent will help you draw up an offer that provides a proposed price, as well as any contiđ¤Ąngencies or conditions you require. Be prepared for the seller to make a counteroffer; this is part of negotiating the sale. You can counter their counter if necessary.
Ifâ you can both agree to terms, congratulations! But the deal isnât complete until the sale is closeđd, and thatâs the final part of the process.
9. Finalize your mortgage
Youâre almost to the finish line. The final sāšteps are to complete the contract and make sure that everything is in order for your mortgage.
Your lender will need to make sure that your finances are stable and that the home is valued at the right price. If you were prequalified for a mortgage, this part should go a bit more smoothly. Decide on the best mortgage lender for your needs. This is also when youâll decide on your loan specifics. Common mortgage terms are 10, 15, 20, or 30 years.đ Most homebuyers choose fixed-rate loans, but adjustable-rate is an đ ēoption, too.
10. Get a home inspection
While youâre finalizđing things, you should definitely consider getting a home inspection. A professional inspection will give you a heads-up about any concerns with the structure of the home: heating and cooling, floors, walls, windows, basemđent, or foundation. Itâs not required, but you may be glad you had it done if it reveals any problems.
11. Appraise your home
Appraisals, on the other hand, are typically not optional. Your lender wants to make sure the home is actually worth the loan amount. During a hâome appraisal, a professional âappraiser will evaluate your homeâs condition, age, structure, and location and compare it to similar homes nearby. They use this information to create an unbiased valuation of the home.
12. Get homeowners insurance
Finally, make sure you sign up for a homeowners insurance policy. Many lenders wonât let you take out a mortgage without insuring tâ¤he home first. This protects both you and the mortgage company if something happens to the home.
No matter which stage of the home-buying process youâre in, youâve got this. Remember why youâve set homeownership ađs your goal, lean on your trusted real estate agent for advice, and keep goęĻŦing until youâre home.