Are you now ready to buy a home in 2021? If so, consider this helpful how-to guide. It has 11 steps to assist you on your journey so that you’re prepared for everything. At BNRG Properties, we want to make it easier for you. Let’s start looking at the steps you should be taking and how it all works.
Are You Ready to Purchase a House?
A home is a significant and major investment, so before you start shopping, make sure you’re prepared to be a homeowner. Filling out a loan application is the easy part; knowing what the lender takes into consideration is also important.
- Income/Employment – Lenders want to know how much you make and ensure that you’ve got a reliable and stable income source.
- Debt-to-Income Ratio – DTI allows the lender to determine how much income goes to debt to ensure that you can cover the mortgage. It’s calculated by dividing the monthly debt by the gross income.
- Liquid Assets – A down payment is almost always necessary. Though some lenders want a 20 percent down payment, you can go as low as three percent. Still, the higher amount ensures that you don’t have to pay mortgage insurance.
- Credit Health – Credit scores are essential for determining interest rates and to see if you qualify. Improve your score before requesting a loan.
- Prepared to Live in a Single Place for a Long Time – Many mortgages last 30 years, so make sure you’re happy with the location.
How Much of a House Can You Safely Afford?
Now that you know you’re ready to buy, think about the budget. Focus on your DTI ratio and pay close attention to current incomes and debts. How much can you safely spend on the mortgage each month?
Homeownership often comes with many hidden costs. You’ve got property taxes and insurance. Things break down and must then be repaired, too. You can use our Affordability Calculator to help you decide.
Save Money for Closing Costs and the Down Payment
Most lenders don’t provide you with the full purchase price of your home, which means you pay a down payment. This is a large amount of cash.
Usually, paying more means having wider mortgage options available. You may also qualify to get lower interest rates and a smaller payment. Conventional loans don’t require mortgage insurance if you put down 20 percent or more.
Many first-timers can’t afford 20 percent down. Therefore, you’ve got choices. Some loans offer three percent down, and the FHA loans are 3.5 percent for the down payment. USDA and VA loans can be obtained for 0 percent down.
Closing costs are also a concern. These are the fees paid to get that loan. While they vary, you might do well to save between three and six percent of the home’s value. For a $200,000 home, you could pay between $6,000 and $10,000.
Pay close attention to the Closing Disclosure and make sure that the lender didn’t accidentally duplicate fees.
Get Preapproved for Your Mortgage
It’s also good to be preapproved for your mortgage. Lenders often give their customers a pre-approval letter stating how much they are willing to loan you. Show that to the real estate agent so that they know your budget.
Apply for the loan and answer any questions about assets, income, and the type of home you want. Consider that there are many loan options. These are the most common:
- Conventional – Conforming or conventional loans aren’t backed through the federal government. They’re popular for home buyers.
- FHA – Federal Housing Administrations are part of the federal government, so they’re less risky for the lender. If you don’t pay, the government insures the loan. You can sometimes have a low credit score and lower down payment.
- VA – If you are a veteran or active-duty member in the Armed Forces, you can apply for a VA loan. There are certain requirements, but they’re insured through the Dept. of Veterans Affairs.
- USDA – If you plan to move to a suburban or rural area, you could get the USDA loan, backed by the government. There are many eligibility rules.
Find a Real Estate Agent
A real estate agent can help with the transaction. They should focus on homes you desire and can afford, make sure you get showings, negotiate, and write offers, and more.
Generally, the seller pays their commission, which is often three percent of the home purchase price.
They are there to help you learn how to buy. Usually, they know the local market and area, so they ensure you don’t get price gouged.
To find the most suitable real estate agent, ask for recommendations from others. Many websites show you various agents in the area. Consider making a list from there and researching them.
Begin the Hunt for the Perfect House
When you start the house hunt, focus on top priorities that are important to you. These could include:
- Home condition (are repairs needed)
- Square footage
- Public transportation access
- Backyard and/or swimming pool
- Number of bedrooms
- Trends in property value
- Local entertainment
Rank those priorities on your list from most to least important. Give it to your agent so that they can help you find the right match. This can take a while, so never rush the process. Remember, this is a long-term investment.
Also, do a quick walkthrough of each house you visit. Look for signs of mold or other major problems. You can ask the seller of the house to fix it all before closing or lower the purchase price so that you can do the repairs.
Making an Offer
Once you find a suitable house, you should make an offer. This should be done in writing, and your agent can help. The offer letter should provide your name and address, the price you want to pay, and give a deadline for a response from the seller.
It’s best to include something called an earnest money deposit. It’s often one or two percent of the home’s purchase price and can go toward the down payment or closing costs. This shows that you’re serious about buying. Also, if you agree to the sale and cancel later, you often lose the deposit.
The seller has three responses:
- Accept and move to the next step.
- You can submit a different offer or go to another home.
- Counteroffer where they tell you what purchase price they desire. Then, you can accept, reject, or counteroffer yourself.
Negotiations can go on for a while.
Get an Appraisal and Home Inspection
The appraisal of a home gives you a general estimate of how much that property is worth. Do this before you buy it. Lenders often require an appraisal so that they don’t lend more money than the house is worth.
Inspections are different. The appraisal just says what the home is worth. Inspectors specifically look for problems, test electrical systems, check the roof, and more. While a lender doesn’t often require an inspection, this can help you negotiate and know what is wrong with the house.
Ask for Credits or Repairs
If there are serious or severe issues with the house, you can ask the seller to fix it. Alternatively, you can ask for a lower purchase price to cover the repairs yourself. This can all be done through your real estate agent.
Complete a Final Walkthrough
Right before closing, you should do the final walkthrough. Make absolutely sure that you’re committed to this property. Also, check to make sure any repairs were completed by the seller and that everything has been removed.
Close on the New House
The lender must provide you with the Closing Disclosure at least three days before the closing date. This tells you what you’ve got to pay at closing and gives a summary of the details on the loan. Read through this information carefully. The numbers might vary slightly from the Loan Estimate, which is the document you received roughly three days after the application.
When you’ve reviewed the Closing Disclosure, you must attend a closing meeting. Make sure you bring the copy of the Closing Disclosure, ID, and proof that you have funds for all the closing costs.
You now sign the settlement statement listing all costs that relate to the sale of the home. Pay your closing costs and down payment. This is also when you are going to sign your mortgage note, stating that you promise to pay off the loan in full. Then, sign the deed of trust or mortgage. Officially, you are now the owners of your new home!