If you’re in the market for a new home.
You should follow these expert tips to buying a house.
Many people a new home but don’t know where to start. There are many things to consider before buying a home.
The worst thing you can do is rush things, ending up in a home you don’t love.
We’ve put together a a step-by-step Guide showing you what needs to be done before buying a house.
This list is great for first-time homebuyers and those buying their second or third home that want to avoid common mortgage mistakes.
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Before you jump into the home buying process follow these 8 steps to buying a house.
- Check your credit
- Maximize your credit score
- Check your savings account
- Find out your budget
- Look at homes in your price range
- Get pre-approved
- Make a list of features you need
- Hire a real estate agent
Step 1. Before you buy you should check your free credit scores
There are several sites that allow you to get your credit scores for free. The websites below allow you to view and monitor your credit report and scores for free, they even have phone apps.
Once you have an idea of your FICO score you can see if you’re in a position to get approved for a mortgage. The credit score requirements for a home loan depend on the type of loan you get. The two most popular types of loans are, FHA and Conventional loans.
FHA Loans: FHA loans are the most popular type of loan, especially among first time homebuyers. The reason they are so popular is because of their low downpayment and credit requirements. To get approved for an FHA loan you must have a 580 credit score and a 3.5% downpayment. or higher.
If you do not have a credit score of at least 580, it’s highly recommend you improve your credit before applying.
Maximize your credit score
When buying a house you want your credit rating to be as good as it can be. If the balances on your credit cards are high, it will negatively affect your credit score. The amount of credit you are using compared to your credit limit is your credit utilization ratio. This ratio accounts for 30% of your overall FICO score, only your payment history (35%) has a bigger impact on your credit rating. Try to keep your credit card balances below 10-15% to ensure you’re maximizing your scores before applying for a mortgage.
Step 2. Check if you have enough for a down payment on a home
You’re going to need money out of pocket for the down payment on your home. The down payment is a percentage of the home purchase price you need to bring to the table.
FHA and 203k loans require a 3.5% downpayment. Conventional loans will require between 5%-20% as a downpayment. If you live in a rural area then you should check to see if your area is approved for a USDA loan. USDA loans require no down payment but are only available for properties in rural areas in the country. Veteran’s may be eligible for VA loans, which also does not require a down payment.
Make sure you have enough money in your savings account, 401k, or any other investment account for all the mortgage costs.There are other costs related to getting a mortgage, such as closing costs, up-front mortgage insurance, and the home appraisal. You will also need to have additional cash reserves in the bank, usually 1-3 months worth of mortgage payments.
Step 3. How much house can you afford?
Knowing what you can afford is an extremely import step in the home buying process. Your income compared to your debt obligations is called your debt-to-income ratio. Your front-end Debt to income (DTI) ratio should not exceed 31%. This is your monthly income compared to your monthly debt obligations minus the housing payment. DTI is the amount of your monthly mortgage payment compared to your monthly income after figuring in the mortgage payment..
For example: If you make $52,000 per year, and your total monthly income after taxes is $3,500.Then you may be approved for up to $1,085 monthly mortgage payment. Which is roughly $200,000.
Check out our calculator to see how much house you can afford
Step 4. Find a house you like within your price range
After you know how much house you can afford. Look on Trulia to find homes in the area you want to buy in. Make sure you’re interested in homes within your budget.
Some people may find that they don’t like any of the properties in the price range they can afford. If this is the case you should work on paying off your monthly debts in order to get approved for a larger loan. Remember just because you can technically afford a home doesn’t mean you really can in reality. If your debt-to-income ratio is under 40% thats great, however, it doesn’t take into account many expenses especially if you have kids.
Go over your budget to see how much of a mortgage payment you really can afford.
Step 5. Find a lender and get pre-approved
You will need to get pre-approved before you can start looking at homes. Most real estate agents will not even show you a home until you have a mortgage pre-approval letter. Plus you wouldn’t want to give up your hopes looking at homes you don’t qualify for.
A mortgage Pre-qualification is not sufficient to most homeowners. A pre-qualification letter is basically an option based on the facts stated by the borrower, no documents are needed to get a pre-qualification. A pre-approval not only means that your credit history was pulled by a lender, it means they actually verified your income and financial documents.
For the mortgage pre-approval process you will need to send your loan officer a few documents. They will pull your credit report to check your score and make sure there’s nothing to be concerned about. You will also be required to show proof of income using W2’s, tax returns and bank statements.
It’s best to shop multiple loan offers to make sure you’re getting the best deal possible. You should speak to at least 3 different lender sand get a loan offer from each.
Documents needed to get pre-approved for a home loan
- 2 years of tax returns
- W2’s and paycheck stubs
- Copy of your credit report and scores will be pulled by the lender
- Copy of bank statements
- Proof of down payment funds
Get the right type of mortgage
There are many types of home loan programs available, you should speak to multiple mortgage companies and loan officers to determine which one is right for you. FHA loans are the most popular mortgage option for first-time homebuyers because of their low down payment and credit score requirements.
If you’re a Veteran then a VA home loan will save you tens of thousands of dollars. They come with no money down and no monthly mortgage insurance premium. USDA loans are another type of Government mortgage program to help develop rural areas of the county.
You can also choose which type of mortgage term you want. The 30-year fixed-rate mortgage is the most common, but there are 15-year fixed-rate mortgage loan terms that can save you a ton of money in interest. An adjustable-rate mortgage may be another great option for a borrower who is not planning on staying in the property for a period of at least 5 years.
Step 6. Make a list of features you want
Okay. You just got your pre-approval letter. Before going out house hunting you should make a list of features you want. How many bedrooms and bathrooms do you need? Do you need a home office? Media Room? Do you want an open layout? These are important questions you need to know the answer to. Really think about the things that you want, and things that are deal breakers.
Open layouts are great, but if you have kids and the game room is right above the living room with no walls separating the two, the noise could be unbearable. What is the view? If the view is a sore sight, or right behind a fire station that’s something you have to think about. This is not temporary, you will be seeing the same view as long as you’re in the home. Make sure you think of all the possibilities and don’t settle.
Step 7. Hire a great real estate agent
Real estate agents are vital to the home buying process. Some people believe they don’t need a realtor because they can do it themselves, or they don’t want to pay a realtor. Sure. You can do it yourself, but I can almost guarantee, if you don’t have real estate contract experience you will do more harm than good.
Realtors know what to look out for, what the seller should pay for, they are really on your side throughout the entire process. This is so important if you want the home buying process to go as smoothly as possible. You do not pay the realtor’s fee. Realtor commissions are built into the price of the home. The seller always assumes they will be paying 3% of the sales price to the buyer’s agent. We can refer you to a local agent if you aren’t currently working with one.
Step 8. Get a home inspection
Some first-time buyers believe they can save a few hundred bucks by pre-going the inspection on the property. While lenders do not require you have the home inspected before completing the mortgage loan process, it is an absolute necessity. A home inspection will reveal any potential issues that may need to be repaired prior to the final walk-through. You can use the inspection to help you negotiate these repairs on the home be made at the sellers expense.
The home will be apprised by the lender, and this is an expense the homebuyer is reasonable for. A home appraisal protects the homebuyer and the lender from offering a loan for more than the fair market value of the property.
As long as you follow these 8 tips for home buyers the home buying process will run smoothly. Check your credit score and make sure you have enough money in savings for a down payments. Calculate how much house you can afford. Make sure you like the homes in your area in your price range.
Compare loan offers and get a pre-approval letter. Make a list of everything you need in a new home. Hire an agent and start looking for your dream home!
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