Steps to Buying a House in 2022
It is an important step in your life to buy a home. However, for first-time buyers, it can be as daunting as exciting to buy a house. We are here to help you through this difficult decision. This article will walk you through the steps of buying a house.
Step 1: Determine whether you're ready to buy a home.
Buying a home is a significant investment. Before you start looking for properties or comparing different mortgage options, ensure you are ready to become a homeowner. Are you wondering whether it is worth buying a house? Let's take a look at the things that homeowners and lenders should be aware of.
- Income and Employment Status
Your lender will not only want to know how much you earn. To ensure that your income source remains stable and reliable, lenders will also require a work history of at least 2 years. It is about gathering the necessary documentation to prove steady employment to prepare your income. You will only need to submit your pay stubs or W-2s if you are on payroll. If you are self-employed, however, you will need to provide your tax returns and any other documents requested by the lender.
- Debt-To-Income Ratio
The Debt to Income ratio (DTI) is another financial tool mortgage lenders use for evaluating your loan application. Your lender can use your DTI to determine how much of your monthly income is going towards debt to help them evaluate your ability to take on mortgage debt. DTI is calculated when your gross monthly income and monthly debt are divided. To calculate your DTI, your lender will use your credit report's debts.
Your lender might calculate your housing expense ratio depending on which type of loan you are applying for, which is sometimes called front-end DTI. This ratio compares your monthly income and your total house payment (principal interest, taxes, and insurance) to determine your monthly housing expense ratio. If you have a $1,200 monthly house payment and a $6,000 monthly income, your housing expense ratio would be $1,200/$6,000 or 20%.
Before you apply for a loan, it is smart to check your DTI. For most options in mortgages, your back-end DTI must be less than 43%. However, this number can vary depending on the lender and loan type.
- Liquid Assets
Even if you have a mortgage, liquid assets are still required to finance the purchase of a home.
Down Payment: Although buying a home does not always require any down payment, most homeowners will need some money to make a down payment. The down payment is the first payment you make to your loan at closing. The amount you need to make a down payment will depend on the type of loan you have and how much you borrowed. A home can be bought with as little as 3% down though there are many benefits to putting down more.
Closing Costs: You will also have to pay closing costs before you can move into your new home. These are fees paid to your lender or other third parties for the creation of your loan. The amount you pay in closing costs depends on where you live and what type of loan you have. As an estimate of closing costs, it's a good idea if you have 3%-6% of the home's value. You may be able to roll part of your closing costs into your mortgage, or the seller can pay them using seller concessions.
- Credit Health
Your credit score is a major factor in determining which loans and interest rates are available to you. Lenders will assess how risky you are when you apply for a loan. As you prepare to apply for a mortgage, it is worth taking steps to increase your credit score and reduce debt. Higher numbers will mean lower interest rates and better loan options.
The following factors affect your credit score:
• Your payment history
• The amount you owe
• Your credit history length
• Types of credit you used
• You are looking for new credit
To be eligible for a loan on your home, lenders will require that you have a minimum credit score of 620. You will get the best loan terms if your credit score is higher than 720.
- Eagerness to Live in One Place
A mortgage is a commitment that can last for 30 years. Although you don't have to stay in your home for the entire mortgage term, it is a significant decision. Consider whether you are ready to stay in your current location for at least a few years more. Think about your career goals and family obligations. These factors will have a significant impact on the home you choose and where your primary residence is located.
It depends on many factors, such as personal financial readiness and lifestyle preferences. Market conditions also play a role in determining whether it is a good idea to purchase a house. The right time to purchase a home is determined by your circumstances. Before making major financial decisions, such as purchasing a home, consult a financial expert.
Step 2: Assess How Much You Can Afford to Buy a House
Once you have decided that you are ready to purchase a home, you can start to plan your budget. Start by calculating your DTI ratio. Consider your income and current debts, then calculate how much you can afford each month to pay for a mortgage. Many costs associated with homeownership such as property taxes and homeowners insurance have to be paid. These expenses should be included in your household budget when you determine how much you can afford.
Step 3: Prepare for the down payment and closing costs
There are many options for saving money to buy a home, including investments and savings accounts. You may be eligible to use gift money to pay down your down payment if you have relatives willing to contribute. In this case, make sure to give your lender a gift letter. How much money do you have to save before purchasing a home? Let's take a look at the main expenses and see how much we can save.
- Down Payment
A down payment is a one-time large payment that is important to the purchase of a house. It is required by many lenders to protect them from losing their mortgage. Many homebuyers believe they require a 20% downpayment to purchase a home, which is incorrect. A 20% down payment is unrealistic for many first-time homeowners.
There are options available for buyers who cannot afford to pay 20% down. A conventional loan can be as little as 3% down. A minimum down payment of 3.5% is required by the Federal Housing Administration (FHA) loans. Eligible and qualified borrowers can even put 0% down on Department of Veterans Affairs (VA) and United States Department of Agriculture(USDA) loans.
However, there are benefits to paying a higher down payment. It usually means that you will have more mortgage options. You'll usually have a lower monthly payment and a lower rate of interest. You won't have to pay private mortgage insurance (PMI) if you make at least 20% down on a traditional loan.
- Closing costs
Closing costs are the fees that you pay to obtain the loan. While many factors will impact the amount you pay for closing costs (e.g., how much your home is worth), it is a good idea to budget between 3%-6%. If you buy a $200,000 home, closing costs might be $6,000 to $12,000.
Your loan type, lender, and location will determine the exact closing costs. Most homeowners will cover title insurance and appraisal fees. You will typically have to pay an upfront insurance premium or funding fee if you get a government-backed mortgage.
Your lender will provide you with a document called a closing disclosure. This list includes all closing costs and the amount you'll have to pay at closing. To understand what you can expect and catch any mistakes, carefully review your Closing Disclosure before you settle the amount.
- Other costs based on the loan type
A specialized inspection may be required depending on the type of loan. You might need a pest inspection to obtain a VA loan. Many lenders will arrange this inspection for you and then pass the cost on to you at closing. These costs may seem small compared to the other costs of buying a house, but they can add up quickly, so budget well.
Step 4: Choose the right type of mortgage for you
Before you can apply for a mortgage, you must decide which type of loan and what amount you are best suited for.
- Conventional Loans
Conventional mortgages, made by private lenders, are not guaranteed by the government. Conventional loans, also known as conforming loans, make up the majority of U.S. mortgages. It is a popular choice for home buyers because you can apply with as little as 3% down.
- FHA Loans
The Federal Housing Administration supports FHA loans because they are insured by the government. FHA loans don't have strict credit requirements. These are attained with as little as a 3.5% downpayment.
- VA Loans
VA loans are mortgage loans available to veterans, active-duty military personnel, eligible reservists, National Guard members, and qualifying spouses. VA loans are popular because there is no down payment. Although most lenders have a credit requirement for the VA, there is no minimum credit score.
- USDA Loans
A USDA loan is another government-backed loan that helps rural and suburban residents buy their homes. It can be obtained with 0% down, but you must live in a rural area. You also need to meet income eligibility requirements.
Step 5: Get preapproved for a mortgage
It's time to get preapproved to mortgage your house. Your lender will issue you a preapproval letter when you apply. It will tell you how much you are approved based on your income, credit, and assets. Your preapproval letter can be shown to your real estate agent to help find homes within your budget. Apply to your lender to get preapproved. Preapproval usually involves answering questions about your income, assets, property, and a credit check.
Step 6: Choose the right real estate agent for you
When buying a house or getting a mortgage, there are many parties involved. Your real agent will represent you in the home-buying process and will work for your best interest by helping you find homes that match your criteria, getting you showings, and negotiating for you.
Buyers usually have the opportunity to work for no cost with a professional real estate agent. The seller usually pays the commission of the buyer's agent. The commission paid by the buyer's agent is typically 3% of the purchase price.
An agent representing you will help you to understand the process of buying a house. Your agent will help you to find properties, prepare an offer letter, and negotiate on your behalf. Local market experts and real estate agents can advise you on the best price for each property.
You can buy a house online without the help of a REALTOR(r) or real estate agent. It is not recommended, especially for first-time homebuyers. It can be difficult and emotionally charged to buy a home. An agent can help you navigate the property market, make a legal offer, and save you from overpaying.
Step 7: Start House Hunting
Your agent will assist you in your search for houses within your financial budget. It is a smart idea to create a list of your top priorities. This will depend on whether you are searching for a starter or permanent home, and what style of the house you want to live in forever.
These are some considerations when looking for a house to buy.
- Square footage
- Condition of your home and the potential need for repairs
- Public transportation access
- Number of bedrooms
- Backyard/Swimming Pool
- Entertainment options in the local area
- Ranking of local school districts
- Trends in property value
- Property/real estate taxes
Your priorities should be ranked from most important to least important. This list can be shown to your agent to help him/her show you homes that meet your criteria. Don't be discouraged if it takes longer than expected to find the right home.
Step 8: Make an Offer
Make an offer for a home by sending a written offer letter. You must include information about yourself, such as your name and current address, the price you are willing to pay, and other details. The seller will need to respond by a certain date.
Many offers include an earnest cash deposit. It's usually 1%-2% of the purchase price. If you purchase a home, your earnest money deposit will go towards your down payment or closing costs. You usually lose your deposit if you cancel after you have agreed to the home purchase. Negotiations may continue for some time. After you have reached an agreement with the seller, it is time for the appraisal and inspection.
Step 9: Schedule a Home Inspection
An inspector will check your home to find any problems. Once you have received your inspection report, look at each item one by one and identify major problems. Ask the seller to fix any health hazards in the home before you close. You may need to consider other options if you cannot reach an agreement. Homebuyers often include a home inspection clause in their offer. Buyers have the option of negotiating repairs or withdrawing from the purchase without having to forfeit their earnest money deposit.
Step 10: Secure A Home Appraisal
A home appraisal is a review of the property that will give you the current value. Before you can buy a house with a mortgage loan, an appraisal is required. Lenders require appraisals as they cannot lend more than the home is worth. You might not be able to get financing if the appraisal comes back lower than what you offer. If you feel the appraised value is too low, be thoughtful in your offer. You can't expect a reviewer to agree with you.
Buyers should include an appraisal condition with their offer. Appraisal contingencies allow buyers to withdraw from a purchase or negotiate a lower price without having to forfeit their earnest money deposit. Appraisal contingencies can vary as with inspection contingencies.
Step 11: Request repairs or credit
You might ask your seller for help after you have reviewed the inspection results. There are three options:
- Ask for a discount on your purchase price based on the results.
- Ask the seller to give you credit to pay some of your closing expenses.
- Before you sign a contract, make sure the seller has the problem fixed.
Your agent will forward your requests to the seller's representative. Your agent will work directly with the seller if you are buying a house that is for sale by owner (FSBO) . Your request might be accepted by the seller, or rejected. You can decide how you want to proceed if your seller refuses to accept your request. You can withdraw from the sale if you include an inspection clause in your offer letter.
Step 12: Have a Final Walkthrough
Even if you are 100% committed to the property, you should conduct a final walkthrough before closing. Take a tour of the house and verify that the seller has not left anything behind. If you have requested repairs, make sure to inspect them. Also, be on the lookout for pests. Double-checking your home's systems is to ensure that everything is working properly. You can confidently move forward with closing if everything is in order.
Step 13: Settle the Closing on Your New Home
Your lender must give you the Closing Disclosure. It will tell you how much you have to pay for the closing and summarizes all loan details. It is due 3 business days before closing. Check your Closing Disclosure carefully to ensure the numbers are consistent with your Loan Estimate.
After you have reviewed your Closing Disclosure, it is time to go to your closing meeting. For closing costs, bring your ID and proof of funds. You have to sign a settlement statement that lists all costs associated with the sale of your home. You also have to sign the mortgage note that states the promise to repay the loan. To secure your mortgage note, you will sign the deed of trust. Once you’ve settled your closing, you are finally an official homeowner.
FAQs about Buying a Home
What is the average length of time it takes to buy a home?
The time it takes to buy a house, from the beginning of the process until the time you move into the home, is about 5-6 months. The length of the process can vary depending on factors such as how much work you do ahead of time and whether you are paying cash or applying for a mortgage.
How much should you spend before purchasing a house?
You should have enough cash reserves in case of an emergency before you buy a house. These funds should cover at least two months' worth of mortgage payments. It depends on what type of loan you are applying for and your qualifications.
Steps to Buying A House: Final Thoughts
It can take a while to complete the steps of buying a house. You need to be prepared to become a homeowner because you'll need a budget. You will work with a lender to be preapproved for mortgage financing and begin looking for properties. It is a good idea to have a trusted agent by your side. Your agent will assist you in submitting an offer to the seller once you have found a property.
Once you have reached an agreement, you will receive an appraisal and an inspection. You may negotiate credit or repairs with the seller if the inspection reveals a serious problem. Before you purchase the house, you will also need to walk through it. Once everything is acceptable, you can move in and become a homeowner.
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