Buying your first house is one of the most enthralling adventures you can embark on. It can also be one of the most frustrating.
There’s a lot that goes into purchasing real estate. It’s complicated. But if you know what to expect and how to prepare ahead of time, you can enjoy the experience from start to finish. Here are the six steps to buying.
Step One: Money
Even if you plan on getting a home mortgage loan to finance your home, you need a lot of cash out-of-pocket to complete the deal.
First, you need a down payment of about 20 percent for a conventional loan. If you’re buying a house for $400,000, you’ll need about $80,000 for a down payment.
Second, you will have to submit an earnest money deposit with your offer on the house you decide to try to buy. That deposit is between one and three percent. Averaging two percent, you’ll pay $8,000 (refundable if the seller does not accept your offer).
Third, there are closing costs, which include things like the appraisal, inspection, title check and transfer, homeowners’ insurance, property taxes, and other fees associated with your transaction. Closing costs are between three and eight percent. Averaging at five percent, closing costs on that $400,000 house would be an additional $20,000.
In total, you’d need an estimated $108,000.
There are loans that can reduce the down payment if you qualify, and you may be able to negotiate closing costs with the seller.
Some lenders will allow you to roll your closing costs into your loan but at a higher interest rate, which you’ll pay on for the life of your loan. Ask your agent for more information about the money you’ll need and what programs you might qualify for.
Step Two: Numbers
You’ll have to have a rock-solid credit score and a balanced debt-to-income ratio to purchase a home. Your lender will check your credit at the time you apply and will check it again the day of closing.
Do not make any changes to employment, finance anything, or drain your bank account because the lender could cancel the loan on the day of closing if there are significant changes.
Your credit score should be 620 or higher. The higher your credit score is, the lower your loan’s interest rate will be.
Your DTI, or debt-to-income ratio, is the number you get when you calculate all of your debt and divide that amount by your gross income. This number should be 36 percent or lower, or 43 percent at the maximum.
To improve your credit score or DTI, pay off any outstanding accounts like credit cards (but don’t close the accounts), clear up any collections, and lower debt.
Step Three: Your Real Estate Agent
It’s crucial to find the best real estate agent to work with. Your agent is an integral part of your real estate journey.
He or she can help you find a lender, refine your wish list, shop properties, submit offers, negotiate terms, and explain the closing process step-by-step. Interview no less than three agents to find the one that best matches your needs and your personality.
Step Four: Pre-Approval
Get pre-approved (not pre-qualified!) for your home mortgage loan before you start shopping for houses. You’ll need to know how much money you have to spend.
You’ll also want to prove to the lender that you have guaranteed funds, which can give you an edge over other buyers if they’re not pre-approved.
Have your paperwork in order. You’ll need bank statements, pay stubs, tax records, and proof of all debt and income. The longer it takes you to gather your information, the longer it takes to get approved. By having your ducks in a row, you can expedite the home loan application process and start the exciting house-hunt with your agent.
Step Five: Offers and Negotiations
Submitting an offer is exciting and creates adrenaline-pumped anticipation, but it’s not time to celebrate yet.
There’s no guarantee the seller will accept the offer you submit. There may be other buyers aiming for the same prize you are, and if their offer is better than yours, the seller will choose them over you.
Or the seller may not be willing to negotiate as much as you need them to.
You might have the notion to ask the seller to pay some of your closing costs, but that’s a contingency that could cost you the deal if other offers aren’t asking for the same.
Step Six: Closing
Before you can take ownership of the house, your lender has a few requirements. First, they want the house appraised, so they know it’s worth what you’re asking to borrow. They also order an inspection to ensure that everything is in sound condition and working order.
During this time, there’s a title check to make sure there’s no legal reason the house can’t be sold, and then the title is prepped for transfer. Your agent will help you understand the processes of closing.
The tricky and most stressful part of the transaction is that during the inspection, appraisal, and title check, the contract can still be negotiated or canceled, pending the findings. You might find yourself renegotiating or backing out of the problems that are insurmountable.
At the end of closing, you’ll meet at what’s commonly referred to as “the closing table,” even though many closing meetings are held virtually now.
This is when all the final documents are signed, many of which can be done digitally, and when you pay closing costs, which can be done electronically.
The Bottom Line
Arm yourself with knowledge before you set out to buy your first house. Make sure you’ve got your money and numbers aligned with the requirements for your home mortgage loan.
Find the right agent representation, and be aware that the deal isn’t done until the last paper is signed and the final payment made on closing day. Then, you’ll get the keys to your new home and all the reason in the world to celebrate becoming a homeowner.