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 (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.
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.
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:
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.
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).
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 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.
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 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.
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:
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:
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.
The answer to the question is YES! There are tons of reasons why you should talk with a bank and get pre=approved before looking at homes. First and foremost, talking with a bank before looking at homes can help you understand exactly how much you can afford. There is no reason to look at homes that are listed for $250,000 if you can only afford up to $200,000.
If you’re a first time home buyer, talking with a bank before looking at homes is strongly suggested, as there are many first time home buyer programs available. These programs can vary from state to state and county to county, so knowing exactly what’s available to you, is critical.
Another important reason to talk with a bank before looking at homes is so you understand exactly what costs are associated with buying a home. There are many home buyers who don’t understand the difference between a down payment, pre-paid items, and escrows, which can be thoroughly explained by a mortgage professional. A mortgage professional can give you advice on the type of financing you should be looking to obtain and also whether or not you should request the seller to contribute towards your closing costs, also known as a seller’s concession.
Buying a home can be a very solid investment. This being said, renting can also be a better option for some, depending on the circumstances. The current interest rates are incredible. A 30-year FHA mortgage can be locked in at a rate of around 3.5%. Since the interest rates are so low, it actually can be cheaper to pay a mortgage right now than paying rent.
There are questions that you should ask yourself before deciding to buy a home. One of the most important things to consider is the length you plan on staying in a home, if you were to purchase. If the answer is only a few years, it’s likely the better decision is to continue renting. Another question to ask yourself is whether you are ready to take on the additional “responsibilities” of owning a home. When owning a home there will be general home maintenance that should be done, are you ready for that?
Buying a home is a great option in many cases, but not always.
There is truly no concrete “correct” answer to this question. There are pro’s and con’s to buying a home before selling your current home and the same can be said about selling your current home before buying another.
Buying a home before selling your current home
The biggest benefit to buying a home before selling your current home is the fact that you have a suitable property lined up. This can reduce the stress and pressure of having to find a home once your current home is sold. This however also can create disappointment and heartbreak. If you are unable to purchase a new home without having to sell your current home, you’re purchase offer is going to be contingent upon sale and transfer of title of your current home. If your current home does not sell in a timely manner, this can lead to you getting “bumped” by a non-contingent buyer and you losing out on the home you’re looking to purchase, which can be devastating.
Selling your current home before buying a new home
The time it takes to sell your current home is unpredictable. There is no crystal ball that exists that can tell you exactly how many days it will take. Selling your current home before buying a new home will put you in an ideal position to negotiate on the new home you’re purchasing due to the fact you are purchasing without the sale contingency of your current home.
One risk of selling your current home without buying a new home first is the chance of not being able to have a place to live. There are options if your current home sellers before buying another though. A “lease-back” can sometimes be negotiated with the buyer of your current home. A “lease-back” would allow you to retain possession of your current home for a certain number of days after closing at the expense of paying the buyers mortgage. A “lease-back” allows for additional time to find a new home.
When buying a home, it’s strongly recommended you have a Realtor. There are many reasons why you should have a Realtor represent your best interests when buying a home. Keep in mind, all Realtors are not the same! Attempting to buy a home without a Realtor can really make the home buying process more difficult. Having a Realtor is always recommended when buying a home.
The timeline for finding a house varies greatly from person to person. However, once you find a home and have an accepted offer, it usually takes around 30 days to close.
Trust the professionals. Beware of advice from people who do not work in the industry. Real estate is a popular topic, and almost everyone feels like they have some great insight to offer.
In reality, the people who know best are the people that work in the business. Good Realtors have sold hundreds (maybe thousands) of properties. They know what to expect and what pitfalls to avoid.
Friends and relatives have only bought and sold a few homes. Buying and selling a couple of houses does not make someone a well-rounded source of information. First-time buyers may become persuaded by well-meaning friends and family, only to be disappointed later. Be confident in your decisions and trust the professionals.
A 620 credit score, or higher, is recommended. This score will be compared with your debt-to-income ratio. As you are probably aware, a higher credit score offers better lending terms. However, this is an ever-evolving topic as loan requirements are constantly changing.
Some lenders will approve buyers with a 580 score, sometimes even lower. Again, your loan officer will be the best source to give you a current answer for today’s lending requirements.
There are some great home buying programs to research. The main ones would be VA loans, USDA loans, and FHA loans. Knowing the difference between these loan types is essential.
It depends on your loan type. The most common answer is 3% to 5% of the purchase price. FHA loans dropped their requirement from 3.5% to 3.0%. Some conventional loans require 3% down. Veterans are eligible for a VA loan, which requires no money down.
Properties in rural areas may be eligible for a USDA loan, which also requires no money down. A good loan officer will walk you through all of these options.
Mainly loan origination and closing costs.The downpayment is usually the most significant cost associated with buying a house. Lending fees are the second-largest cost to homebuyers. Most lenders will charge between 2% to 4% of the loan amount for loan origination fees, depending on the loan type.
Conventional loans usually have lower loan origination fees but require more money down. Adjustable rate mortgages are less common. Your loan officer will be able to help you determine how much you can expect to pay towards loan origination and closing costs. Ask them about private mortgage insurance to learn the best way to avoid that fee.
Interest rates are a large deciding factor in your monthly payment amount. In addition, they have a long-term effect on your overall loan payoff amount.
One unpredictable homeowner fee is the cost of maintaining everything in and around the home. For example, water heaters break, HVAC needs servicing, and appliances break down. Over time, these items will need to be replaced or repaired.
Your mortgage lender may forget that you’ll need $300 to $500 to hire a home inspector to perform a home inspection. So be sure to budget that money.
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