By Lonnie White
Are you interested in buying a home? Checkout out our 10 step guide to home buying!
*Before exploring home ownership, first make sure you are in a financial position to qualify for a mortgage. If so, make sure you're certain that you want to become a homeowner. Although home ownership is awesome, it is definitely an enormous commitment and there are many responsibilities which come with the role.*
Financial Health
Employment & Income:
When it comes to purchasing a home, lenders will be reviewing your income and employment history. They want to see not only how much money you make, but how consistent and reliable your income actually is. A good rule of thumb for most lenders is 2 years of consistent work history and a decent debt-to-income ratio (leading us into our next topic).
Debt-To-Income Ratio:
Debt-To-Income Ratio also referred to by lenders as DTI, is a financial measurement which lenders and creditors use to gauge the amount of debt you're qualified to handle. DTI evaluates how much of your income is used to pay for debts or expenses. To calculate your DTI, simply divide the amount of your monthly expenses by your monthly income. This value generated as a percentage represents your Debt-To-Income Ratio. For example, if your monthly expenses total $3,500 and your monthly income equals $7,500, your DTI is equal to $3,500/$7,500, or 46%. It is always wise to be aware of your DTI, and also to know where you're ranked by the Top 3 Credit Bureaus.
Upfront Costs:
When purchasing a home, it is always important to have money saved up (IT IS POSSIBLE TO BUY A HOME WITH $0 DOWN). Although a lender is willing to loan you the majority of the money, AKA a mortgage, these lenders will still ask you to put down a considerable amount of money. These upfront costs are referred to as a down payment and closing costs.
- Down payments fluctuate depending upon the type of loan you are using and also based on the purchase price of the property you are buying. Certain loans enable you to buy a home with as little as 3% down although there are benefits for making a higher down payment.
- Closing costs consist of lender fees, title fees, and third party fees. Many closing costs can be negotiated and sometimes rolled into the mortgage itself.
Credit Health
When applying for a mortgage, your credit score plays an enormous role in a lender's decision. Your credit score assigned by the top 3 credit bureaus (Equifax, Experian, and TransUnion) directly impact the structure of the loans and interest rates which you qualify for. From a lender's perspective, the lower the score, the higher the risk. Therefore, to be eligible for the most favorable loans, you will want to have a credit score which demonstrates a high level of financial accountability. Prior to purchasing a home, take the initiative to improve your credit score by paying off debt and ridding your report of any possible errors which negatively impact your credit standing.
Credit Factors:
Payment history
Credit Utilization
Derogatory Marks
Age of Credit History
Total Accounts
Hard Inquiries
The golden question when it comes to credit and home buying..."What credit score do I need to qualify for a mortgage?" Well, the answer to this question isn't 100% written in stone. Every applicant's situation is different although most mortgage lenders will require a minimum score of 620 to meet their basic lending criteria. In order to qualify for the best loans, an applicant will generally need a credit score of 720 and up.
HOW TO BUY A HOUSE IN 10 STEPS. HOME BUYING MADE EASY.
Determine your price range
Calculate your down payment & closing costs
Get your pre-approval
Select a qualified real estate agent
Browse properties (Go House Hunting!)
Submit offers on properties of interest
Order an inspection
Order an appraisal
Walk the house for final review
Close on your new home
Let's review these 10 steps to buying a house in detail so you'll be prepared for every step along the way!
STEP 1: DETERMINE YOUR PRICE RANGE
When shopping for a home, it is always important to first identify your price range. How much income do you generate on a monthly basis? What expenses do you have? What are your total monthly expenses? How much can you afford to spend on a mortgage? These are all questions which need to be answered when deciding on a price range suitable for you and your budget. Home ownership isn't a competition; home ownership is a personal journey and it is never wise to spread yourself too thin. If you are serious about buying, take the first step and begin assessing your financial health so you can determine your price range. Checkout some free home buying calculators to generate your home buying price range!
STEP 2: CALCULATE YOUR DOWN PAYMENT & CLOSING COSTS
A lot of homebuyers are intimidated when it comes to down payments and closing costs, but you shouldn't be. The major misconception of needing 20% down to buy a house has discouraged millions of people from even attempting to explore home ownership. The 20% rule affords you a lower payment and exemption from PMI (Private Mortgage Insurance), but needing 20% to qualify just isn't true. The average person doesn't have that much liquid capital set aside, it's just not realistic. Yes, your down payment is a large sum of money towards your purchase, but in many instances, 3%-3.5% is sufficient to secure a mortgage. Checkout the typical down payment for various loans below!
FHA Loan - As little as 3.5%
Conventional Loan - As little as 3%
VA Loan - 0%
USDA Loan - 0%
When it comes to closing costs, these expenses vary partly depending upon your lender and the negotiations made by your real estate agent. Closing costs consist of loan origination fees, points, title search fees, appraisal fees, surveys, title insurance, taxes, deed recording fees, etc. Closing costs can range anywhere from 1%-5% of the purchase price of your home. It is important to have funds set aside solely for these additional expenses. When applying for a mortgage, make sure your lender provides you with a detailed closing disclosure so that you are fully informed on the costs you are responsible for.
STEP 3: GET YOUR PRE-APPROVAL
Prior to house hunting, you will need to get a pre-approval letter from your lender. The majority of real estate agents will not take you to walk properties without having first produced your official pre-approval letter. Based upon your financial and credit health, your lender will issue you a pre-approval letter which outlines how much home you are approved for; this clearly defines your house shopping budget. Getting pre-approved will require you to submit an application and run a credit check in addition to providing financial documents to verify your income.
STEP 4: SELECT A QUALIFIED REAL ESTATE AGENT
With so many people being an active real estate agent, it's difficult to determine which agent is qualified to best represent you during your purchase. Recent statistics from NAR (National Association of Realtors) identified more than 195,000 licensed agents in Florida in 2021. This number is incredibly large, and therefore it may be overwhelming to select an agent to assist you. DO NOT make the mistake of simply choosing a random person off of Facebook, or trusting your coworker who has their license but only works part time. The agent you select will be carrying a ton of responsibility and needs to be well versed in the industry to ensure your experience goes smoothly. The agent you select must be acting in your best interest and you should be confident that they are doing so. Your real estate agent will be responsible for finding homes which match your criteria, scheduling and accompanying you to property showings, and making offers and negotiating favorable terms for your transaction. Most importantly, your real estate agent will be tasked with facilitating the contracts to make your dream home a reality. It is highly recommended that you select a professional with experience, and with the necessary knowledge to get your deal across the finish line.
Characteristics of a Qualified Agent
Experience - Have they closed a deal? Are you their first ever client?
Knowledge - Are they a local market expert? Are they familiar with your area of interest?
Availability - Do they do real estate full time? Will they be available to best assist you?
Organization - Do they follow a structured process? Will they stay on top of your file?
Real estate agents work for free until the deal is finalized. It is very important to make sure that your agent is ready and willing to put their best foot forward in assisting you throughout the entire home buying process. If you need help selecting an agent, feel free to contact us at any time and we can connect you with one of our elite licensed professionals!
STEP 5: BROWSE PROPERTIES (GO HOUSE HUNTING!)
Where are you interested in living?
What is your price range that you are comfortable with?
What are you looking for in a house?
What is your top priority?
This list above includes some introductory questions which can get you started with brainstorming your ideal criteria. You will want to make a list of your "must have" criteria (These are the make or break factors) and of your "would like" criteria (Options that you want but can live without). We have included a simple buyer's assessment below which can get your criteria neatly organized. After assembling this list, make sure you compile it into a document to share with your real estate agent. Your agent will help narrow down some options so that you can efficiently hunt for houses.
STEP 6: SUBMIT OFFERS ON PROPERTIES OF INTEREST
After selecting a house you're interested in purchasing, an offer must be submitted in writing. Your real estate agent will be tasked with drafting up this offer letter. In summary, this letter will detail your offer to purchase the seller's property and will include all of your desired terms and conditions. During a sellers market, your agent should make sure to prepare a very competitive offer to increase your chances of acceptance. In a buyers market, you will have more leverage in terms of negotiating favorable terms such as closing costs and repairs. More times than not, alongside an offer is an EMD (Earnest Money Deposit). A buyer's agent will indicate a date of acceptance and a date upon which you, the buyer, will submit an escrow deposit (typically 1%-2% of the purchase price) to demonstrate serious intent to purchase. Make sure you discuss inspection and appraisal contingencies with your agent so that your EMD is protected in case of an issue.
3 Potential Responses:
Acceptance
Rejection
Counteroffer
Negotiations may take place for quite some time, but remain persistent and make sure your agent is advocating for you to earn you a fair deal. Once an agreement is reached, you will then proceed to the next step of the buying process.
STEP 7: ORDER AN INSPECTION
When purchasing a home, the majority of lenders will not require an inspection. Despite it not being mandated, a comprehensive inspection is highly suggested so that you are made fully aware of the condition of the property. Look at an inspection as being the Carfax for your brand new home. The same way you would request a Carfax prior to buying a car, you should feel obligated to request an inspection prior to closing on a house. During an inspection, a licensed inspector will thoroughly investigate the condition of the home while looking to identify any existing issues. Upon completion, a report will be produced displaying the inspection results. Make sure to carefully comb through this report. If there are any substantial damages or issues with the house, consider either negotiating with the seller to have them repaired, or consider walking away from the deal (In this case you will be refunded your EMD as long as you have an inspection contingency included in your contract). This step is extremely important. After all the documents are signed and you have successfully closed on the house, you assume full liability for any and all damages associated with the property.
STEP 8: ORDER AN APPRAISAL
What is a home appraisal?
A home appraisal is a process in which a licensed real estate appraiser evaluates and determines a numerical value for a property. This valuation is supposed to be an unbiased opinion, and should reflect the fair market value of the subject property.
All lenders require home appraisals prior to issuing a mortgage. Reason being, it is not in a lender's best interest to lend more money than a home is actually worth. If the appraised value is lower than your offer, your lender may not finance that specific home. As mentioned above, an appraisal is supposed to be an unbiased opinion. As with anything handled by humans, errors and discrepancies do occur and it is highly advised to obtain multiple appraisals if the initial valuation comes in too low.
STEP 9: WALK THE HOUSE FOR FINAL REVIEW
This step is as straightforward as it sounds. Walk the property for a final review before closing. Be thorough. Make sure to inspect anything that was supposed to be repaired. Make sure all of the systems (Electrical, plumbing, HVAC) are all in working order. If the coast is clear, proceed to closing. Just make sure not to skip this step even if you are already 100% sold and committed.
STEP 10: CLOSE ON YOUR NEW HOME
Prior to closing, your lender will provide you with a closing disclosure. Carefully look over your closing disclosure. This document details the expenses you are responsible for on the day of closing. Make sure that these costs don't deviate too much from the loan estimate your lender initially provided you with. Considering all things look appropriate, make sure to arrive on time to your closing. You will need the following items.
Drivers license/ID
Proof of Funds (POF)
Closing Disclosure Copy
Your closing agent will walk you through the contracts and after signing all the required documents you will officially be a homeowner. Congratulations, you have just purchased your new home!
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