For many, buying their first home is the ultimate milestone. It’s a time for excitement and also one of responsibility. There are many things to be considered when you’re making this decision – it’s not just about finding your dream house! If you want to buy your first home, read on for six steps that will help make the process easier.
To qualify for a home mortgage loan, you’ll need to save for an earnest money deposit, a twenty percent down payment, and closing costs.
An earnest money deposit is a way of showing that you are serious about purchasing the property. The money will be held by an escrow company until closing on your home sale.
An initial payment of at least twenty percent is necessary for many lenders, but the amount depends on factors like your credit score and debt-to-income ratio.
Closing costs can range anywhere between two to five percent of the purchase price of a home. These fees cover things like application fees, appraisal fees, bank charges, title insurance policies, inspections, and other costs associated with your transaction.
Debt-to-Income Ratio and Credit Score
These two factors are important to lenders because they determine how much you can afford for a home.
Your Debt-to-Income ratio is determined by adding together your monthly housing payment, taxes, insurance, and other debts you have. Doing so will show potential lenders if you have too much debt to handle the monthly payments of a mortgage. Ideally, your DTI would be 36 percent or less – 46 percent at the most.
Your Credit score is another way that lenders determine if you are eligible for a loan. The higher your credit score is, the better chances you’ll have of being approved for a mortgage. At the lowest, your credit score should be 620.
You can improve your DTI and your credit score by paying down debts, including credit cards, loans, lines of credit, and making sure there are no derogatory marks on your credit score or any accounts in collections.
It’s important to get a lender to pre-approve your home mortgage loan before you start shopping for homes. This reduces the risk for lenders and lets you know what kind of property they’ll potentially be offering you a mortgage for.
Once your lender approves you, they will give you a letter that details how much money they are willing to lend towards a home purchase.
Pre-approval lets you know your exact budget so you can shop at the right price point. It also signals to the seller that you’re financially empowered to support your offer and ready to move forward at any time. This pre-approval could prompt the seller to choose your offer over another.
Find the Right Agent
There are many real estate agents to choose from, but it’s important that your agent understands your needs and goals. It can be helpful to work with someone who has experience with first-time homebuyers.
A good agent will help you develop a wish list of what you’re looking for in a house, give guidance on the right price point, and work around your schedule. They’ll know market trends and can show you comparable properties (similar houses recently sold), so you know if the asking price is appropriate.
The agent will also assist with offers, negotiations, and the closing process.
The House Hunt, Offers, and Negotiations
When you find a house that you like and are ready to put in an offer, it’s important to move quickly. If you wait too long to make up your mind, someone else may have already sealed the deal.
Your agent will create an offer on your behalf after discussing with you the price and any contingencies you may have.
Expect the seller to send back a counteroffer. The counteroffer will include any amendments to your original offer, like an extended closing date or an offer to pay for any damage.
Your agent will negotiate the best deal possible with the seller’s agent on your behalf. You’ll sit down together at least once or twice before it goes to contract. Be sure you know what is and isn’t negotiable in the house price, terms, and conditions.
The Closing Process
Before you can take ownership of the home, it first has to be inspected, appraised, and possibly surveyed. It also has to undergo a title check and a mountain of paperwork.
An appraisal is an estimate of the house’s value with comparable properties and the home’s condition in mind.
An inspection is a thorough examination of the house’s systems to make sure they’re in working order. If you find a problem with a system, it could affect your contract and perhaps even the sale price.
Surveys are also important because they ensure that you own all of the property you think you do. There may be easements on it or portions that belong to someone else.
On closing day, you’ll have a meeting either in person or virtually, a time that is traditionally when you’ll sign documents, which can also be done digitally in some cases. And you’ll pay your buyer closing costs. Once all that is wrapped up in ribbons, you’re ready to gather the keys to your new home and celebrate your win.
Buying residential real estate can be a tricky process. Trust your professional real estate agent to guide you through the process. Before you shop for houses, prepare your DTI, credit score, and savings. With your agent at your side, shop for houses.
When you find a house you like, strike while the iron is hot with a competitive offer. Prepare to negotiate. Then, when you’ve reached an agreement with the seller, you can enter the closing process of having the house inspected, appraised, and surveyed. Once the assessments are done, you’re headed to the closing table to take care of the final details.
Congratulations on your decision to become a well-educated first-time homebuyer.