There is a reason why buying a house is one of the most exciting but probably also the scariest moments in a person’s life. It is a significant investment, the one you have been saving for a long time. In addition, it is also a lengthy process that consists of numerous steps.
Some of the essential ones are getting a mortgage, hiring a real estate agent, finding a property, making an offer, doing the home inspection, and so on. Because there are multiple tasks that you have to complete to ensure everything goes smoothly, losing yourself in the process can easily occur, which is why we will discuss all of these in great detail.
Think about your finances
Yes, we know this may seem like an odd question since everyone would like to own a house, but actually, we are talking about your finances. You may not get a mortgage if you cannot prove to the lender that your income is reliable and can pay it off. Because of this, the first thing a lender will want to see is your employment documents for the past two years. You will have to provide them with pay stubs that cover this period or tax returns if you are self-employed.
Next, they will check your debt-to-income ratio (DTI). Basically, they want to know what percentage of your salary goes for paying off debt every month. DTI is easily calculated by dividing monthly debt by your monthly income. This is something you can do on your own, and you should do it before applying for a loan. A general rule is that your DTI shouldn’t be higher than 50%, but this can differ between lenders and their requirements.
Lastly, don’t forget about the down payment and closing costs, as well as your credit score. When it comes to credit health, you need it to be 620 to qualify for a loan, and if it is over 720, you can get the most favorable terms.
Determine your budget
Before looking for a property, you need to know how much money you can invest. Go over the aforementioned data and figure out the amount of money you can use without going into debt. Besides this, make sure to include homeowner insurance and annual tax payments. These expenses do not exist for people who are renting, so they often forget about them. When it comes to the house’s overall price, you should keep it between three and five times your annual income. Finally, make sure to save enough money for a down payment (which is usually 20%) and closing costs (between 3% and 6%).
Get pre-approved for a mortgage
Once you have your price range determined and have gathered all the documents, it is time to apply for a mortgage. This is when the lender will go over all the paperwork you send them, and if you need their requirements, they will issue you a pre-approving letter that states the sum of your loan. You will have an interview with them and answer questions regarding your income, debt, credit score and history, and so on. When you get pre-approved, you can show the document to the real estate agent you hire and start looking for properties within your budget.
Employ a real estate agent
This person will be your best friend during this process since they will represent you and work in your best interest. They will not only find potential properties but also arrange showings, and once you find the right house for you, they will help you with negotiations. Some people want to purchase a home without a realtor. However, this is not recommended if you are a first-time buyer since the entire process can be quite complicated, as you can see. Plus, this professional is familiar with every area of the city and houses on sale, meaning they will be much more efficient in finding the right one.
Look for a house
Now that everything is settled, it is time for the best part. Be ready to see many properties and have a prepared list of questions about the history of the house, price, potential repairs you will have to do in the future, the school district and entertainment amenities in the area, etc. Another smart thing you should do is write down the details about every property you see. Your requirements will differ based on whether you are looking for a starter or forever home.
Make an offer
When you find the right house for you, you need to make an offer in writing. You need to submit a letter that includes your personal information, the sum of money you are willing to invest, and the time the seller has to respond to your offer. As already mentioned, the real estate agent will write this letter for you. Once you submit it, three things can happen. The seller can accept your offer, reject it, or send you a counteroffer. If they reject it, you can send another offer or move to the next property on your list. If they send you a counteroffer, you can further negotiate with them until you reach an agreement.
Have the house inspected
This is a step you shouldn’t skip under any circumstances. This is the only way to find out if there is any damage. If the inspectors find anything, you have two options. You can withdraw the offer and look for another house, or you can renegotiate the price and ask the owners to fix the damage. If you don’t get a house inspection beforehand and find issues after purchasing the house, you will be responsible for them, meaning that you will have to pay for the repairs.
Get an appraisal
Even though the lender won’t require you do the previous step, you will have to get the house appraisal. The sum of money they lend you cannot be higher than the property’s overall value, which is why they need this information. Moreover, if your offer is higher than the estimated value, it may be challenging to get the mortgage. Due to this reason, you should include an appraisal contingency that enables you to withdraw the offer without losing the deposit.