If you are a millennial or a first-time home buyer, you may not know where to begin. Before you head out to purchase your dream abode, examine where and what you currently spend your money on. It’s important to review your finances — ideally for at least three months — in order to get an idea of how much you typically spend each month before buying a home. Then, once you’ve decided that you’re ready to purchase something, here are the steps that you’re likely to encounter.
Are You Eligible to Buy a Home?
When beginning the home buying process, it’s crucial to get a copy of your credit reports and scores. If you’re buying with a spouse, or someone else, they’ll need to run their credit too. You’ll want the highest score possible, before you apply for a mortgage. A score of 740 or higher is considered to be excellent credit. Typically, anything below 700 is not considered excellent credit. However, this doesn’t mean you can’t get a mortgage.
If you have bad credit, don’t panic, as there are different ways to improve your credit. One of the best ways to improve your credit is to try to stay below 30% of your total credit limits. If you have past due payments, deal with them. Add all your due dates to your calendar to make sure your bills are up to date and paid on time. Remember don’t open new credit cards if you don’t need them, and use your credit responsibly at all times.
According to industry standards, you should not spend more than 30% of your monthly income on your monthly expenditures. Remember credit utilization and effective budgeting are key, and creating a budget that you can stick to is easier than you think. The best way to do this is by determining all your sources of income and then tally up your monthly expenses. For expenses, make two specific columns, one for fixed expenses such as rent, mortgage, insurance, car payments, etc. and another for variable expenses such as entertainment, travel, food and other expenditures. Generally, variable expenses are easier to control. Then, analyze all of your expenses — especially the variable ones — and see what you can cut out.
Finding a Mortgage Lender
From this point, it’s important to meet with a mortgage broker, who generally works for a lender to determine how much you can afford. A mortgage lender is generally a financial institution that loans you money to purchase a home, which is called a mortgage. Most people think that you need a down payment of at least 20%. If you do not meet these requirements, your mortgage broker can educate you on programs, which require less. Some of these mortgage programs include the following:
- USDA Loans
- VA Loans
- FHA Loans
- FHA 203K Loans
- Private Mortgage Insurance
Lenders will want to see that you currently have multiple lines of credit available, which you pay off regularly. Lines of credit include the following: credit cards, student loans, automobile loans or any other types of loans. Lenders generally want to see activity on these lines of credit from the previous twelve months.
Financial institutions will analyze your debt-to-income ratio to determine what exactly you will qualify for. During this process, ask your mortgage broker to get a pre-approval letter, for the amount that your financial institution will lend you. Now that you know what you can afford, it will help the seller have confidence in your offer when you find the home you wish to purchase.
During this process, you should make sure you have enough to cover closing costs. Closing costs generally consist of loan origination fees, appraisal fees, title insurance, title search fees and taxes. You might also encounter deed-recording fees, discount points and credit report charges. A good rule of thumb is to set aside 2–3% of the purchase price.
If the home is over a million dollars, it might be 3–4% percent. In addition, to the attorney’s fees, which generally range from $2,000 to $5,000, financial institutions require you to have reserves beyond the down payment and closing costs. It is important to use an attorney, who specializes in real estate. Generally, financial institutions will want to see that you have post-closing liquidity.
It is important, once you apply for a mortgage, to not take on any new debt and or change employers as lenders want to see stability in a borrower. Financial institutions also want to see stability from the previous 24 months from the time of applying for a mortgage. Financial institutions do this as a way to ensure that borrowers do not make any decisions that may upend their ability to make mortgage payments.
Finding a Good Real Estate Team
When you’re looking to buy a home, begin by finding a trusted real estate attorney. He or she will be able to help you avoid common problems that can arise with the purchase of a home. Being that a real estate attorney is trained in this type of law, they can help a buyer avoid unclear terms and help a buyer fully understand the various contracts they’ll have to sign.
When looking to purchase a home, you should focus on a specific area. Remember, location is key! People buy in neighborhoods, every bit as much as the houses they choose.
Once you have a specific area in mind, it’s important to find a good real estate agent that is knowledgeable about the area you wish to live in and someone that you can trust. Most homebuyers use a real estate agent that was referred to them by a relative, friend or collogue. They can provide you with helpful information about the area, and inform you of what similar properties have sold for. Working with a real estate agent will make the process much easier for first time home buyers.
Finding a Good Home
Now that you’ve selected a trusted real estate agent, start looking for homes. Make a list of what you must have. When looking at homes, take pictures and videos, this way you can remember the specifics about each and every home you visit. It’s a good idea to drive through the area at different times of the day to check out how long it takes to commute to your workplace. If you have children in school, make an appointment with a school administrator. During this process you’ll most likely view a number of different homes, so don’t get discouraged.
Closing the Deal on Your New Home
Once you’ve looked at many different options, and you find a home that you love, it’s time to make an offer. When you find the home that’s right for you, and once you’ve agreed on the price and terms, you’re almost done. Always ask to have a home inspection along with an engineer’s report, if needed, and make sure you view the report as soon as possible. This will highlight any engineering problems in the home and provide a detailed engineering analysis, along with any potential engineering design flaws.
When you have an accepted offer, it’s crucial to begin home inspections. Generally, offers are contingent on the home inspection. Home inspections are done to check for signs of structural damage or specific things, which need to be repaired. Generally, your real estate agent will help you arrange these inspections. By having a home inspection contingency in your contract, this protects you as the buyer to renegotiate your offer based on the findings in the inspection report.
Moving forward, there is a great deal of paperwork that is involved in buying a home. At this time, your financial institution will arrange for a title company to handle all of the paper work during this process, and to verify that the seller of the property is the lawful and rightful owner of the home that you’re buying. This is part of the due diligence process in the closing process. Remember the closing process can vary with time and can be anywhere between 30, 60 or 90 days.
Now, it’s time for the actual closing. A day before signing all the paper work, it’s crucial to do a walk through, to ensure that everything in the home is in working order. At the time of closing, you’ll be required to sign all of the paperwork, which will be required to complete the purchase of this property. Once all paperwork is signed, and adjustments are made, you’re now a homeowner and ready to move into your new home.