Your Credit Report and Debt-to-Income Ratio
The first thing you should do when preparing to buy a house is to get a copy of your most current credit report from all three of the credit bureaus so that there are no surprises down the road. Look for any incorrect information or outstanding debts.
You don’t want anything in collections when you apply for your mortgage loan, and all of your debts should show timely payments and low balances. Your overall credit score should be 620 or higher to qualify.
Your Debt-to-Income ratio, or DTI, is the amount of your monthly installment debt divided by your gross monthly income. It’s used to measure how much money you have available to spend after you pay all of your bills each month. Lenders want to see that no higher than 36 percent of your gross monthly income goes towards paying debts.
Step Two: How Much Can You Afford?
Before looking for a home, you should ask yourself what price range you can afford. If this is your first time buying a house, chances are it’s not going to be as easy as just choosing whatever home takes your fancy and putting down an offer with no contingencies attached.
You’ll do well to shop around among different lenders so that you can compare interest rates so that you know which loan type is best for you. For a conventional loan, you’ll need a twenty percent down payment.
You should also prepare yourself to pay the additional costs of buying a home, such as paying for an appraisal, title insurance, taxes, and legal fees. These are known as closing costs. They’re an out-of-pocket expense and are due on closing day before you collect your keys.
You’ll also pay an earnest money deposit, in the amount of about one to three percent of your offer price, when you submit an offer to the seller.
Get Pre-Approved
Once you’ve found a lender whose terms and rates match your needs, it’s time to go through the application process for your home mortgage loan – before you shop for houses.
A pre-approval is not the same as prequalification. When you get prequalified, the lender only looks at your credit history to determine how much money it might be willing to lend you.
When you’re pre-approved, a full application is run on you that will include verifying your income and assets as well as a thorough look at your credit report.
Pre-approval confirms your budget, gives you immediate purchasing power and lets the seller know that you mean business. When you’re pre-approved, the seller knows that there is a lender out there that is willing to finance your purchase.
Find the Right Agent
Before you start your house hunt, be sure to hire a real estate agent who is familiar with the location and market you want to live in. Having an agent on your side will help guide you through the process and assist you in meeting all deadlines and requirements for the purchase.
An experienced agent can tell you which neighborhoods might fit your lifestyle, what type of home to look for, what is the median price range in your area, and if there are any foreclosures or short sales for sale.
Your real estate agent can also give you important advice when it comes to bidding on a home, managing negotiating offers, and navigating the complex closing process.
Refine Your Wish List and Start the House Hunt
Your agent can provide you with a list of prequalified homes that fit your criteria, as well as access to those listings.
Your agent will help you refine your wish list to match what’s realistic for your budget, location, needs, and desires when shopping for your new home.
Shopping for houses is the fun part, but don’t fall in love with any particular property until your offer has been accepted. There’s no guarantee the seller will accept your offer, even after negotiations.
The Closing Process
The closing process is the final stage of buying a house and should be managed with care because there are deadlines to meet and requirements to follow. Your agent will provide you with the tools you need to make it through this complicated but rewarding time period.
During the closing process, there’s an appraisal on the house you’re buying, as well as an inspection, and potentially a survey. These are all meant to protect you, the buyer, from being surprised after closing with things that could have been fixed before you bought the house.
An appraisal is a professional estimate of what a house is worth, based on comparable sales. If the appraisal comes in at a value that’s less than the purchase price, you will either need to pay more or ask the seller to reduce the price. Your lender can give you an idea of what your property should be appraised for before closing day.
An inspection is done by an inspector who looks at the physical condition of the home, from foundation to roof. The inspector might tell you that there are repairs or replacements needed to meet local building codes and regulations for safety.
If you find an issue during the inspection period, you’ll need to come up with a plan as to what will be done about it before closing day.
A survey is a legal document that shows where the property boundaries are, as well as any easements and rights of way. It can help resolve disputes with neighbors about fence lines and encroachments on common areas.
The closing process is full of deadlines and requirements that you must meet to avoid delays or forfeiting your deposit.
Conclusion
Buying a house is an exciting journey, but it can also be hectic and stressful. As long as you do your homework upfront, the prospect of homeownership will be enjoyable rather than overwhelming.
A good agent will make the process as easy as possible. Talk with your agent today for more information about the steps to buying your first house.
