[ad_1]
The post Buying a House: A Guide for First-Time Homebuyers appeared first on Millennial Money.
Buying a home is one of the most intense financial processes in life, and it pays dividends to go into the process informed.
Here’s everything you need to know about buying a house for the first time.
How to buy a home: A step by step guide
- Identify your criteria
- Find a real estate agent
- Get prequalified for a loan
- Get preapproved for a loan
- Go house hunting
- Put in an offer
- Getting a home inspection
- Getting an appraisal
- Let the agent negotiate
- Closing time
1. Identify your criteria
The first step is to identify three specific criteria:
- The target market where you want to live (e.g., downtown Chicago or rural Colorado)
- The type of property you want to live in (e.g., a high-rise condo, a country home, or a traditional suburban dwelling)
- The price point you can afford (e.g., $150,000, $250,000, $500,000, etc.)
Only you can decide where to live, what type of place is right for you, and how much you can afford.
Also, do some research on your target area to understand how much you will owe in property taxes. Often, people start looking in one town and quickly realize there are more options in the surrounding areas with lower taxes. You also might find that the particular area where you want to buy is in a flood zone, which means you have to pay for flood insurance.
2. Find a real estate agent who specializes in buying
It’s important at this stage to find a realtor who knows the art of buying a house, and who is highly knowledgeable of your target market. Getting the right real estate agent is worth every penny.
Should you sign a contract?
When you’re comfortable with a certain agent, they may ask you to sign a contract asking you to work exclusively with them for a set period of time.
Only you can decide if this is the right move. Read the contract and consider asking for an out if it doesn’t go well. If the realtor gives you a hard time, you may want to look elsewhere.
It’s also a good idea to run any contract by your attorney before you sign. Real estate legalese can be confusing, especially for a first-time homebuyer.
Learn more:
- Hidden Costs of Buying a Home
- Is Buying a House a Good Investment?
- 3 Key Homeownership Steps to Consider
3. Get prequalified for a loan
The next step is getting pre-qualified for a home loan through a lender or mortgage broker.
Talk to your real estate agent about finding a lender, or hop online and find a well-reviewed lender. You don’t have to go wild shopping around for a lender at this stage. The goal is simply to get a letter from a loan officer stating what kind of home loan you qualify for based on your financial information.
What you need for prequalification:
- Credit report
- Income data
- Bank statements
- Expected down payment amount
- Estimated monthly payment
At this point, all information you provide is on the honor system. The lender may do a soft pull on your credit score, but they won’t investigate any of the documents you provide. You’re just looking for a loan estimate.
Getting prequalified isn’t required by law, but it can help you narrow down an area and a house that aligns with your budget.
4. Get preapproved for a loan
By now, you’ll probably be itching to start looking for houses. But there’s one more step: loan preapproval.
This step is more complicated than getting prequalified because your lender will take a deep dive into your finances to decide whether you’re a worthy borrower. This is also where you will sort out your mortgage rates and terms with your lender.
Here are the most common types of mortgages you’ll be able to choose from:
- Fixed-rate conventional loans in which the borrower pays back an agreed-upon amount over a 30-year term are the most popular type of mortgage loan.
- Adjustable-rate mortgages come with interest rates that adjust annually. The main benefit to a borrower is that the loan usually has a lower interest rate upfront.
- An FHA loan is backed by the U.S. government. It is designed to help first-time homebuyers and lower- and middle-income families secure mortgage loans. You can put as little as 3.5% down on a home, and have a credit score of 580, and still qualify.
What you need for pre-approval:
- Full income history extending at least several months
- The lender will conduct a hard credit pull
- Bank statements
- Tax documents (personal and business)
You’ll also have to fork over a few hundred dollars for a pre-approval letter.
This step isn’t mandatory either. Yet by obtaining a pre-approval letter, you’ll demonstrate to sellers and banks that you’re serious about putting an offer down on a property instead of just shopping around and wasting time. So it’s a good idea.
Learn more:
- How to Get Approved for a Home Loan
- First-Time Home Buyer Programs
- 3 Best Ways To Buy A Home in 2021
5. Go house hunting
Now comes the fun part: checking out properties.
Be patient, but don’t hesitate to specify what you like and don’t like. Your realtor can’t read your mind, and any feedback you provide will make the home search process more efficient.
For example, if you need to have a yard or balcony, that excludes a number of properties. Or, if you really want a pool, that counts out most other listings.
Keep in mind that shopping for a house takes a commitment, especially if you’re searching in a competitive market. Chances are you’ll have to dedicate nights, weekends, and possibly lunch hours to looking at houses for at least a few months. So you and your realtor are going to get to know each other pretty well.
Remember that agents are busy people trying to make a living. If you clear an afternoon to look for houses with an agent, don’t blow the agent off to hang with your friends.
Respect your agent’s time and it will be better for everyone involved.
6. Put in an offer
Eventually, you’re going to find your ideal place.
Put an offer in to the seller, sit back, and wait. The great part about working with a real estate agent is that you don’t have to worry about actually presenting any offers or countering with a lower rate. The agent takes care of all that.
If everything goes according to plan, the seller will accept your offer. Or, you may have an opportunity to adjust your offer if there are multiple bids.
Next, you’ll have to put a deposit down, which will cost a few thousand dollars. This nonrefundable deposit is sometimes called “earnest money.” It will take the house off the market, giving you priority to move forward with the next phases without having to worry about competing offers.
You’re not in the clear yet, though. Far from it.
7. Getting a home inspection
Once you put earnest money down on a property, the next step is to conduct an inspection. This is where you and your agent bring in a trusted third party to walk through the house and tell you everything wrong with it (or hopefully, what’s not wrong with it).
Make sure to get a thorough inspection report and have the inspector check everything from the foundation and electrical work to the quality of the roof and septic system (if you have one). If you’re prospecting a unique or old property, you may even want to bring in a specialist that can check for mold or other environmental issues.
The inspection process accomplishes two things for the buyer. First, it tells you whether the house is livable. If it isn’t, you’ll learn what you have to do to make it so. Second, it gives you a legal way to get out and reclaim your deposit if you find something terrible about the property.
8. Getting an appraisal
After the inspection, your lender will send an appraiser to the house, review the home and surrounding property, and estimate the listing’s fair market value.
Lenders require appraisals to ensure the loan amount they are distributing line up with the home’s market value. If, for example, the appraiser determines the home is worth 10% less than the agreed-upon selling price, your lender might not want to issue the loan.
This may also present an opportunity to strike a deal with the seller.
9. Let the agent negotiate
Next, it’s time to take the results from the inspection and appraisal and let your agent handle the final negotiations. At this point, just about anything goes.
Depending on the competitiveness of the property, this could be your chance to get a lower price. Alternatively, your agent may negotiate for a closing credit, which is a discount the buyer can use to cover the cost of a necessary upgrade (e.g., purchasing new appliances or installing a new deck).
Also, if the seller no longer wants certain items that would be useful to the buyer (e.g., a billiards table or outdoor furniture), these items can be thrown in as incentives to close the deal.
All you have to do during this stage is communicate with your agent and let them work their magic.
10. Closing time
Eventually, you’re going to get a phone call or text from your agent informing you that the buyer accepted the deal. Congratulations!
Now it’s time to go through the final stage of the closing process, which typically involves meeting at the real estate agent’s office, signing paperwork, and paying closing costs.
Remember that closing costs can be substantial, sometimes 3% to 5% of the home price. If you’re out of money at this point, you may be able to roll your closing costs into your mortgage payments. However, this is not advisable.
Ideally, you have some cash left on hand to pay for these costs upfront. Otherwise, you will pay much more over the long term in interest fees.
Is it the right time to buy a home?
Homeownership is a major responsibility. Quite frankly, not everyone is ready to take it on, for a variety of reasons.
Here are some signs you’re in a good position to buy a home.
Your credit score is good
Ever wonder why people focus so much on having good credit?
The better your credit score, the better interest rate you’re going to get on your mortgage. For most people, that means lower monthly mortgage payments. You could save tens of thousands over the course of a 30-year conventional loan just by getting a favorable interest rate with your good credit score.
If you have bad credit, your mortgage lender is most likely going to charge a higher interest rate, meaning tens of thousands of dollars spent on additional interest over time.
So, before you move forward, analyze your credit score and look for ways to improve it. By paying down any debt you might have, you can improve your debt-to-income ratio and, subsequently, your credit score.
You have a steady cash flow
Buying a house is extremely expensive. First and foremost, you have to come up with a down payment, which can equal as high as 20% or more of the purchase price. And that’s just the start!
You’ll also have to come up with the money for the closing cost, home inspection, taxes, homeowners insurance, repairs, and moving costs, to name just a few.
Make sure you have a reliable cash flow and plenty in your emergency fund before moving forward. Otherwise, you could find yourself not having enough cash on hand to cover your expenses.
This begs two questions: how much home can you afford, and how much cash flow do you need?
One general rule is that your home mortgage should be no more than 2 to 2.5 times more than your gross annual income. So, if your family brings in $120,000 (roughly $10,000 monthly), your mortgage should be between $240,000 and $300,000. Of course, each situation is different. The most important thing is that you don’t bite off more mortgage than you can chew.
You have a strong “why”
Think about why you want to buy a house. Maybe you’re tired of renting, want more space, or want to start increasing your net worth.
Whatever your why, make sure it’s compelling enough for you to take on such a significant financial responsibility as a monthly mortgage payment.
Another thing to consider is that it’s very easy to put off buying a home because the process is difficult. Before you know it, 10 or 15 years have flown by, and you’ve been paying money to a landlord rather than paying yourself back in equity during that time.
Think about your future self too, and where you want them to be.
Tips for buying a home
Ditch your biases
Keep an open mind when searching for a house. Look at neighborhoods you haven’t considered and follow your agent’s advice when it comes to finding good deals. Part of the fun of looking at houses is shopping around and seeing what you like and dislike.
Your first home is your most important home
New home buyers often have dreams about finding the perfect home. Yet this doesn’t always align with reality.
Keep in mind that most homeowners don’t stay in the same place forever. People often commence with a starter home and then upgrade to a bigger place as their family grows or life priorities change.
At the end of the day, it’s all about finding the right place at the current moment and for a good price.
Think livability, not resale value
There’s a big difference between buying a home as an investment versus somewhere to live. Of course, you should try to get the best possible value. But don’t dwell on the future resale value.
The purpose of a primary residence is to have a comfortable and secure place to live.
Learn more:
It’s a learning process
Remember that it’s important to educate yourself about the homebuying process.
You’re going to learn a lot about real estate when buying a house, and just as much about yourself, including your preferences, patience levels, and financial situation.
Read as much as you can, ask a ton of questions from the qualified experts in your corner, and learn as you go along.
Must-read: Home Buying Kit for Dummies
You should definitely check out Home Buying Kit for Dummies by Eric Tyson and Ray Brown.
This book teaches you everything about negotiating a great price, finding the best mortgage, and ultimately getting the best deal on a new home. Don’t head into the home buying process without checking out this must-read book.
I also highly recommend The Millionaire Real Estate Investor by Gary Keller.
Frequently Asked Questions
How long does it take to buy a house?
A recent study indicates that the average time to close on a home is around 50 days.
Overall, the home purchase process takes a lot of time and energy. But as the saying goes, nothing good comes easy.
What are the costs of buying a house?
Houses can be very expensive, costing tens of thousands of dollars between down payments, repairs, and closing costs. However, once you secure a property and start paying your mortgage, you will most likely find that the amounts are comparable to your prior rent payments.
Explore the real estate market and try to find something in your price range, and you may be pleasantly surprised at what you can find. You can also try using a mortgage calculator to see what your specific costs will be.
What is PMI?
PMI stands for private mortgage insurance, which is an extra fee you have to pay if your down payment is less than 20% of the home’s purchase price. Typically, a borrower has to pay PMI until their equity exceeds 20% of the loan value.
If you can, try to save up a 20% down payment so you can avoid PMI, which can easily cost $100 or more each month.
The Bottom Line
Buying a home is a major step in your personal finance journey, and it can be one of the best moves you ever make.
Take your time, explore the market, and don’t settle until you find your dream home at a price point that fits your unique situation. And remember that the last thing you want to do is go through this process and then find yourself in a foreclosure situation because you’re unable to afford your mortgage payments.
Here’s to finding the best home for you so that each monthly payment adds to your own net worth as opposed to a landlord’s. Good luck!
The post Buying a House: A Guide for First-Time Homebuyers appeared first on Millennial Money.
[ad_2]
Source link