BUYERS GUIDE

Buying a house is a major commitment. Before you begin shopping for properties or comparing mortgage options, you need to make sure you’re ready to be a homeowner.

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 (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.

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 at closing. 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. 

Credit Health

Your credit score plays a huge role in what loans and interest rates you qualify for. Your credit score tells lenders how much of a risk you are to grant a loan.

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. You can qualify for an FHA or VA loan with a 580 median FICO® Score. However, to qualify for these with a median score below 620, you’ll need a housing expense ratio of no more than 38% and an overall DTI no higher than 45%.

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.

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.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. Federal Housing Administration (FHA) loans have a minimum down payment of 3.5%. Department of Veterans Affairs (VA) loans and United States Department of Agriculture (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 (depending on the market, you can ask the seller to contribute) – 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.

Before you can apply for a mortgage, you’ll need to decide what the best type of loan is for you and which one you’ll qualify for.

Conventional Loans

Conventional loans are mortgages made by a private lender and not backed by the government. The most common type of conventional loan are loans that are backed by Fannie Mae or Freddie Mac, sometimes called conforming loans. The majority of mortgages in the U.S. are conventional loans. Conventional loans are always a popular option for home buyers, 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, eligible reservists or National Guard members and qualifying surviving spouses. The most popular benefit of VA loans for home buyers is no down payment required.

The VA also has no set credit requirement, though most lenders do. Some VA loans require a minimum credit score of 580. 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.

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 pre-approval 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 a lender (your realtor has a few). The pre-approval 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.

There are multiple parties involved in a mortgage and buying a house. Your 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 buyer’s agent 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. 

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 your dream home and what type of home you are looking for. 

Here are some things you might want to consider when shopping for a house:

• Price
• Square footage
• Home condition and possible need for repairs
• Number of bedrooms/bathrooms
• Backyard/swimming pool or other outdoor amenities 
• 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. Once you find a property you like that fits your needs and budget, it’s time to make an offer. 

Most offers also include an earnest money. An earnest money deposit is a small amount of money, typically 1% of the purchase price. Your earnest money deposit goes toward your down payment and closing costs if you buy the home. If you agree to the home sale and later cancel, you typically lose your deposit.From here, the seller can respond in one of three ways:

• Accept the offer: If the seller accepts the offer, you can move onto the next step
• Reject the offer: If the seller rejects your offer, the ball is back in your court. You can choose to submit another offer or move on to another home.
• Give you a counteroffer: The seller can also come back with a counteroffer of their own. They may change the purchase price or the terms of the sale. You can accept the counteroffer, reject it, or make another counteroffer.

Negotiations may go on for some time after you submit your offer. Let your real estate agent help you manage negotiations – don’t be afraid to walk away if you can’t reach an agreement. Once you and the seller agree to an offer, it’s time to move on to the appraisal and inspection. 

It’s common for homebuyers to include a home inspection contingency in their purchase offer. An option period gives buyers the option to back out of a purchase (or negotiate repairs) without losing their earnest money deposit if the home inspection reveals major issues with the home. 

A home appraisal s a review that gives the current value of the property you want to buy. You must get an appraisal before you buy a home with a mortgage loan. 

You should do a final walk-through in your new home before you close, even if you’re 100% committed to the property. Walk through the home and make sure the seller hasn’t left any belongings. You may also want to double-check your home’s systems one final time to make sure everything is in working order. If everything looks good, it’s time for you to confidently move toward closing. 

Your lender is required to give you your Closing Disclosure, which tells you what you need to pay at closing and summarizes your loan details, 3 business days before closing. Once you’ve reviewed your Closing Disclosure, it’s time to attend your closing meeting. Bring your ID, a copy of your Closing Disclosure and proof of funds for your closing costs. You’ll sign a settlement statement, which lists all costs related to the home sale. This is when you pay your down payment and closing costs. You’ll also sign the mortgage note, which states that you promise to repay the loan. Finally, you’ll sign the mortgage or deed of trust to secure the mortgage note. After closing finishes and funding is granted, you’re officially a homeowner! 

How long does it take to buy a house from start to finish? On average, 30-45 days.