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Purchasing a house is all the rage right now.
Mortgage rates are at an all-time low. Many are leaving urban cities for more space and cheaper homes in the suburbs. And demand in the housing market doesn’t seem to be slowing down.
So is now a good time to buy a house? The answer depends on you and your financial situation. For many, there’s never been a better time to get a mortgage. For others, the opposite is true.
“”You don’t want to end up in a position where you’re rushing to buy a house. People are acting like it’s their last chance, and it’s not their last chance. There will still be houses next year,” says Jennifer Beeston, a mortgage educator and industry veteran who is one of the top 1% of mortgage originators in the country by dollar volume.
Buying a house is a major commitment, and likely the biggest purchase you’ll ever make. If you’re exploring the idea of buying a house, make sure you’ve done these four things before you begin shopping for houses or comparing mortgages.
Check Your Credit Score
Your credit score, which is essentially a snapshot of your finances, plays a big role in what loans and interest rates you qualify for. It tells lenders how risky you are to lend money to. Because of the economic crisis due to the ongoing Covid-19 pandemic, most lenders have tightened their lending standards and require a credit score of at least 620 or higher to qualify. The higher your credit score the more likely you are to qualify for better loan terms. You can usually access your credit score for free through your credit card company — check your monthly bank statement or log into your account online to see what your score is before you apply for a mortgage.
Save For a Down Payment and Closing Costs
To buy a house, you’ll need enough to cover a down payment and closing costs. Typically, that’s at least a few thousand dollars. Saving up that much for a house can feel overwhelming, but it’s more straightforward when you have a plan.
In 2019, the average down payment was 12% for all homebuyers: 6% for first-time homebuyers, and 16% for repeat homebuyers, according to a National Realtors Association survey.
But if you can, you should really put 20% down on a house, according to Bernadette Joy, founder of Crush Your Money Goals and contributor to NextAdvisor. With a 20% down payment, you’ll build equity faster, pay lower monthly payments because you’re financing less, and you can avoid paying private mortgage insurance (PMI) — an extra cost your lender tacks on to your monthly payment when you don’t put 20% down.
At a minimum, you should be prepared to put at least 3.5% down, which is the requirement for many government-backed loans.
Have a Consistent Stream of Income
Your lender is going to want to see a history of your income to make sure your income source is stable and reliable. It’s important to hand over the right documentation to show steady employment.
If you’re employed by a company, recent pay stubs and W-2s will do. If you’re a freelancer or self-employed, on the other hand, you’ll need to submit your tax returns as well as any other documents the lender asks of you.
Generally, you should keep your total housing expenses below 30% of your take-home pay, says financial journalist and NextAdvisor contributing editor Farnoosh Torabi.
Make Sure You’re Not Tied to a Lease
If you’re a renter thinking about buying a new home, you’ll need to plan accordingly. That means you’ll either need to wait until your lease is up or break your lease early. Beeston says this year, due to the pandemic, landlords aren’t being as accommodating about letting tenants move out before their leases expire.
“If you need a house and you’re in a position to buy a house, then it’s great. If you’re trying to break leases or really push to get in a house when you’re not ready, you need to get ready first,” Beeston says. “One thing I’ve seen a lot in 2020 is landlords really holding people to their contracts.”
10 Steps to Buying a House in 2020
If you’ve done all your research and you’re financially ready, here are the 10 steps to buying a house, along with tips to help you navigate the process.
1. Decide Whether You’re Ready to Buy a Home
There are a lot of factors to consider before you buy a house, such as your financial standing, career goals, and location. After all, it’s a big life change.
That’s why it’s important to evaluate whether you’re ready to buy a home, and why you want to. Are you financially ready to make one of the largest purchases of your life? Is the real estate market competitive where you want to live? Will buying a home make you happier?
Many of these factors will determine what type of home you buy, where you buy it, and whether you’re committed to taking the leap from renting to paying a mortgage.
If low interest rates are the only thing piquing your interest, don’t buy a house this year. It’s not a good enough reason. Rates don’t matter if your credit score is too low or you haven’t saved for a down payment.
2. Find a Mortgage Lender
Shopping around is key to finding the best mortgage lender for you. Research different mortgage lenders such as banks, online lenders, and credit unions, among others. Knowing all of your options can help you make the right decision.
Find a lender that’s easy to work with, knows the area you’re looking to buy in, answers all your questions, and informs you every step of the way about the homebuying process—especially if you’re a first-time homebuyer.
Also, pay attention to the rate and fee differences among lenders, and factor those costs into your budget.
For more guidance, read NextAdvisor’s take on how to find the best mortgage lender.
3. Get Preapproved for a Mortgage
Many homebuyers don’t start thinking about financing until after they’ve found a home they want to purchase, but that’s a rookie mistake.
Once you’ve found a mortgage lender, the next step is to apply to get preapproved for a mortgage. This typically involves a credit check and answering questions about your income, your assets, and the home you want to buy.
During the preapproval process, be prepared to prove multiple times that you can pay a mortgage. Lenders are taking extra steps to verify each borrower’s employment status, up until the mortgage loan is finalized.
While the pandemic is ongoing, and especially in competitive markets, some sellers may ask for a preapproval letter to let a prospective buyer tour the property. A preapproval letter — which typically is valid for up to 90 days — shows sellers how serious you are about buying; it means a lender has already verified important financial information about you and you know exactly how much you can afford.
4. Figure Out How Much House You Can Afford
Now it’s time to create a home-buying budget.
Start by calculating your debt-to-income ratio — a comparison of your current debts to what you bring home after taxes.
This can give you a snapshot of how much money you can afford to spend each month on a mortgage. But you’ll also need to account for property taxes and homeowners insurance. You may also have to pay homeowners association fees, depending on the property.
It’s important to factor all these expenses into your household budget. NextAdvisor’s mortgage calculator is a helpful tool to determine how much debt you’ll be able to take on responsibly. You can adjust various inputs, like the term of your loan or a lower interest rate, to see how each influences your monthly payments.
You may qualify for more than you can afford. If that’s the case, don’t consider the amount you qualify for, but rather the amount that makes sense for your budget, Beeston says.
“You have to remember that you don’t live in the purchase price — you live in your monthly payments,” Ryan Serhant, a New York real-estate veteran and star of “Million Dollar Listing New York,” recently told NextAdvisor.
5. Hire the Right Real Estate Agent For You
A real estate agent will represent you and your best interests throughout the entire home-buying process, from start to finish. Your agent can help you find homes that meet your budget, help you write offers, negotiate, and more.
If you’re unsure where to start, ask your friends and family for recommendations. Schedule phone calls with a few prospects to get a sense of their experience and see if they mesh well with your personality. Don’t be afraid to ask tough questions, and make sure the agent is familiar with the area and understands your budget needs.
“Personally, would I work with a realtor with only one transaction? Probably not. Because you want someone who is a local expert. They need to know the market inside and out. They need to be a full-time realtor. Ideally, you want someone who you get along with really well because you’re going to be dealing with this person in an intense manner for as long as you’re shopping with them,” Beeston says.
If you’re a buyer, the cost of working with a real estate agent doesn’t come out of your pocket. Typically, the seller will pay the real estate agent’s commission (roughly 3% of the purchase price).
6. Start House Hunting
Finding the house of your dreams comes easier when you’re well-prepared. Make a list of your must-haves for buying a home, like price range, square footage, number of bedrooms and bathrooms, condition of the home, neighborhood, and property value trends, among other things.
The pandemic has changed some of these parameters.
“If you’re going to be quarantined and you’re in the city, you’re stuck in 1,000 square feet. So we have seen a lot of buyers come into our area from the city — not only because of the interest rates but because they also don’t want to be quarantined in that small space,” says Adriana Buenrostro, a realtor with Prosper Real Estate in Sonoma County, California.
Your real estate agent can help you find houses within your budget and take you to see them in person. You can also let your agent know which specific houses you’d like to see.
Because of the pandemic, it may take longer than usual to find your dream home nowadays. Many people still want to physically see homes, but social-distancing restrictions have added red tape around in-person showings. You may be asked to sign a form acknowledging certain Covid-19 guidelines before entering a home, and many houses are being shown by appointment only.
Buenrostro says Covid-19 has drastically changed guidelines and restrictions for showings this year.
“We’re only allowed to walk two people on the property (plus the realtor) at a time. They have to be living together or else they can’t enter the home,” she says.
But thanks to the internet, you can look at properties virtually, with 3D walkthroughs and live video chat tours.
7. Make An Offer On A House
When you’re ready to buy a house, your agent will submit an offer letter in writing. There are several provisions included in the offer letter, but most importantly it states the price you’re willing to pay for the home and a deadline for the seller to respond to your offer.
Your offer could get accepted or rejected, or the seller may make a counteroffer. The outcome of your offer will determine how you and your agent proceed. If rejected, you’ll have to move onto another property.
If the seller comes back with a counteroffer, which means there’s likely been a change in purchase price or terms, you’ll have the option to accept, reject, or make another counteroffer. Negotiations may continue for a while after you submit your offer.
If accepted, you can move forward with a purchase contract to complete the deal and onto the next steps.
In most cases, you’ll be asked to deposit earnest money — a sum of money to show good faith in the event that you back out of the deal. Think of it like a security deposit for the home you’re about to buy. The earnest money can be held in an escrow account by a third party specified in the contract, such as a real estate company or lawyer, until closing.
Housing demand has increased significantly in the suburbs of metropolitan areas like New York City, Washington D.C., and Los Angeles, meaning sellers are getting multiple offers. In these types of markets, Beeston says you may face a lot of rejection, and your agent may have to write 10 to 15 offers before one is accepted.
Farnoosh Torabi, NextAdvisor contributing editor and host of the “So Money” podcast, says you should make your offer stand out if you’re buying a home in a competitive market.
“My best piece of advice is to offer what you can afford — not a penny over — but sweeten the deal by offering to close as soon as possible,” Torabi writes.
8. Get an Inspection and Appraisal
Assuming your offer is accepted, you’ll need to get an appraisal and a home inspection. Both can give you a solid understanding of the home’s condition and value before you fully commit to purchasing it.
Your mortgage lender will often order the appraisal, but the homebuyer is typically responsible for hiring the home inspector. Set aside at least a few hundred dollars to cover the cost of an appraisal and a home inspection.
According to HomeAdvisor, most people pay between $312 and $405, although some will pay as little as $250 or as much as $600 to $1,000 for an appraisal. Depending on the size of the home, expect to spend anywhere between $200 to $400 for an inspection, according to HomeAdvisor. Read this NextAdvisor guide for more details on home inspections and appraisals.
Concerns over coronavirus have changed the appraisal and inspection process. Appraisal and home inspections are still happening, but under specific health guidelines. Many appraisers are doing drive-by or exterior-only appraisals. In some states, buyers are allowed to attend the inspection as long as they follow certain rules such as wearing a mask and maintaining a six-foot distance. In other states, buyers aren’t allowed to attend the home inspection.
9. Secure Your Financing and Do a Final Walkthrough
To get final loan approval, it’s critical to keep your finances and credit in order during the underwriting process. That means no large purchases, late payments, or sudden changes to your credit.
Mortgage underwriting can be completed fairly quickly — but it could also take a couple of months, depending on your situation and how busy the lender is. The entire closing process typically takes a total of 30 to 45 days.
Your lender may ask you for more paperwork during the underwriting process to see if anything significantly changed since preapproval. You may be asked for bank statements, tax returns, or additional proof of income. If so, respond promptly.
You’ll also need to do a final walkthrough of the house you’re about to buy. It’s a chance for you and your agent to see every inch of the house and make sure everything looks and works as it should.
10. Sign the Papers and Close the Sale
You’ve made it to closing, the very last step in the home-buying process. Expect to pay your closing costs, get your new house keys, and sign a big pile of paperwork.
Closing costs are an assortment of fees associated with purchasing a home beyond the property cost. For example, property taxes and homeowners insurance are paid at the end when you finalize the transaction. You’ll pay the closing costs, which typically range from 3% to 6% of the home’s purchase price, using either a wire transfer, cashier’s check, or a certified check.
The closing agent will file the paperwork with your county recorder or register of deeds office to make it official.
Once that’s complete, you’re officially a homeowner. You’ve come a long way, but after closing and moving, there’s one more important task: making your first mortgage payment on time. It’s usually due one month after you’ve closed, which gives you some time to plan and prepare.