Mortgage rates are at an all-time low, still. Demand in the housing market doesn’t seem to be letting up as many people are leaving the small spaces in urban cities for homes that are larger and often found in most suburbs. It feels as if buying a home is the new and best thing that everyone who is anyone is doing! In this article, I will tell you some of the important steps to buying a home.
Is it really the right time to buy a home? The answer isn’t quite that simple. It’s both – yes and no. For some of you, it is the absolute best time, and for others, maybe not so much. The answer depends on your own personal financial situation.
Some act as though this is the only time to buy and if they miss out, they will never realize their dream. What I tell them is that real estate isn’t going away anytime soon and you really don’t want to rush into buying a house. After all, it is one of the most expensive items we buy in our lifetimes. Buying a home is a major commitment and shouldn’t be taken lightly.
Before getting ahead of myself and telling you the step to buying a home, I recommend doing 4 important things.
- Check your credit score. Knowing your credit score will help you decide if it’s time to apply for a loan. Your credit score is essentially a snapshot of your finances and plays a huge role in telling lenders how risky you are to lend money to. A credit score of 620 or higher is required to qualify. If you find your credit score is too low, then spending time to bring your score up might be required.
- Start saving. To buy a home you’ll need to cover the down payment and closing costs. In 2019, the average down payment was 12% for all homebuyers, 6% for first time home buyers, and 16% for repeat homebuyers, according to the National Realtors Association. There are loan products that require only 3.5% down, but in a best-case scenario, being able to put 20% down will help you gain more wealth and have less debt. Putting 20% down or more will help you build equity much faster, pay lower monthly payments and you will avoid having to pay PMI (private mortgage insurance).
- Have a consistent stream of income and be able to prove it. A lender is going to want to see a history of income that is stable and reliable. Generally, the sweet spot is keeping your housing costs below 30% of your take-home pay.
- You have a current lease. You will either need to wait until your lease is up or break your lease early. If you decide to break your lease be prepared to pay a penalty. Due to the pandemic, many landlords are really holding people to their contracts.
Finally, here are the steps to buying your home…
1) Ask if you are ready to be a homeowner
After all, it is a big lifestyle change. It’s important to evaluate whether it’s the right thing for you to do right now. Ask yourself a few questions: Is the market a sellers or buyers market where you live? Do home prices seem reasonable or are they inflated? Are you planning to stay in the area for at least five years? Will buying a home and the care it requires make you happier? My point here is that if you are trying to buy before you are ready and basing your decision on low-interest rates alone, you may be overlooking some very important factors.
2) Find a mortgage lender
Interview and shop around at least 2 or 3 different lenders before choosing one. Knowing all of your options and costs associated will help you make the right decision. Pay close attention to the rate and fee differences and factor those into your budget. Having to put nothing down for a loan sounds wonderful, but the charges are probably still there. You should make sure you know how much borrowing money is costing you, even if it’s over the next thirty years.
3) Get pre-approved for a mortgage
In a hot seller’s market, it’s a really good idea to make sure you make not only a good offer, but one that is easy for the seller to choose. After all, the seller may be seeing multiple offers and having to pick between them. You want them to pick yours! Attaching a pre-approval letter is often a requirement of the seller, but sometimes it may not be required.
Having the pre-approval done before it’s asked for, is something I require from all of my buying clients. Having this done prior to beginning your home search, not only saves everyone’s time, but it also does another important thing. It tells you how much home you can afford, and shows you what to look at and what not to look at. A pre-approval letter is usually good for 60-90 days and shows a seller that you are prepared, serious, and ready to buy.
4) Create a home buying budget
You may qualify for more home than you can afford. If that’s the case, don’t consider the amount you qualify for, but rather the amount that makes sense for your budget. Think of it this way, you don’t live in the purchase price, you live in your monthly payments.
5) Hire the right real estate agent
A real estate agent will represent you and your best interests throughout the entire home-buying process, from start to finish. Your agent can help you find homes that meet your budget, help you write offers, negotiate, and more. Ideally, you want someone who is a local expert. They need to know the market inside and out. They need to be a full-time realtor. Oftentimes, more importantly, you may want to choose someone who you get along with really well. You’re going to be dealing with this person in a rather intense manner. Buyer’s don’t pay the realtor fees, typically the seller pays the commissions.
6) Begin your home search
Finding the house of your dreams comes easier when you’re well-prepared. Make a list of your must-haves for buying a home, like a price range, square footage, number of bedrooms and bathrooms, condition of the home, neighborhood, and property value trends, among other things. Know that you may not get everything that you want, but try to find the most important items that you need. Begin here: https://torinakano.exprealty.com/index.php?advanced=1
Since the pandemic, there are social distancing rules in place and oftentimes appointments will need to be made. But thanks to the internet, you can also look at properties virtually, with 3D walkthroughs and even live video chat tours. Narrowing down homes first on the internet and then seeing only those that really fit the needs is the way to go these days and almost a requirement.
7) Make an offer
When you’re ready to buy a house, your agent will submit an offer in writing. There are several provisions included in the offer, but the most important states the price you’re willing to pay for the home, how you will be paying for the home, and a deadline for the seller to respond to your offer.
You’ll be asked to deposit earnest money which is a sum of money to show good faith in the event that you back out of the deal. The earnest money will be held in an escrow account by a third party specified in the contract – oftentimes (in Texas) this is the title company that the sellers’ agent has requested.
The best piece of advice is to offer what you can afford — not a penny over — but sweeten the deal by offering to close as soon as possible.
8) The appraisal and inspection.
Assuming your offer has been accepted and the process is moving towards closing, your lender will schedule an appraisal and you will want to schedule a home inspection. Both will give you and the lender a solid understanding of the market value and homes condition before fully committing to the purchase. If the appraisal comes back lower than the offer price, it may require more cash to make up the difference or a re-negotiation. The inspection is for your benefit and will cost anywhere from $200 up to $500 dollars.
9) Secure your financing and do a final walkthrough.
To get final loan approval, it’s critical to keep your finances and credit in order during the underwriting process. That means no large purchases, late payments, or sudden changes to your credit. This means don’t pay for the new furnishings for your new home until after the loan is complete.
Mortgage underwriting can be completed fairly quickly — but it could also take a couple of months, depending on your situation and how busy the lender is. The entire closing process typically takes a total of 30 to 45 days.
Your lender may ask you for more paperwork during the underwriting process to see if anything significantly changed since pre-approval. You will need to provide up to date bank statements, tax returns, or additional proof of income. If so, respond promptly, don’t procrastinate.
You’ll also need to do a final walkthrough of the house you’re about to buy. It’s a chance for you and your agent to see every inch of the house and make sure everything looks and works as it should.
10) Sign the paperwork and close the sale.
Congratulations! You’re almost done with the steps to buying a home!
You made it to closing, the very last step in the home buying process. This is where you pay your closing costs, get your new home keys, and sign a bunch of paperwork. Since the pandemic, digital signing and electronic wiring of funds has become more practical and also provides more convenience than ever. You may not even need to leave your computer to complete this process.