Preparing To Buy a Home

Buying a home is a huge accomplishment, but the housing market is competitive. That’s especially true when it comes to mid-priced, affordable houses. Preparation is key and the most prepared buyers have the best chance at beating the competition. Here’s what you can do.

When you’re preparing to buy a house, the earlier you can get started, the better. Working on your finances in the months prior to buying a house will improve your budget and your mortgage options. But even if you’re ready to buy now, there are steps you can take that will help you in the home buying process. This will be an overview of what you can do to prepare to buy a house, in chronological order:

Preparing to buy a home if you’re in the early stages

If you’re a first-time home buyer and you are in the early stages of home shopping, you are ahead of the game. While you’re touring open houses you can get your personal finances into shape and collect necessary documentation.

If you need a loan to buy a home, you can get ahead of your credit, debt, and savings — which means you could have a bigger home buying budget when you find the home that is right for you.

These four steps can help you prepare to buy a house when you’re still getting ready for homeownership:

1. Check your credit

Once you decide to buy a new home, the first thing you’ll need to do is check your credit history. This involves pulling credit reports from each of the three credit reporting bureaus (Experian, TransUnion, and Equifax) to better understand your credit score.

Your credit score determines whether you’re eligible for a mortgage, and it influences your mortgage interest rate. The higher your score, the lower your interest rate in most cases. Both a higher credit score and lower interest rate will save you money. Most mortgage programs require a minimum credit score between 580 and 620.

Ideally, you should check your credit history at least 6 to 12 months before applying for a mortgage loan. This allows time to improve a low credit score, if necessary. Yes there are steps you can take to improve your credit score, which will be discussed a different day.

You should also check your credit reports for accuracy and dispute any errors, especially negative errors that decrease your score. Remember we are only human, so the people report or recording your credit can make mistakes. The smallest error can have a big impact on your ability to get a loan or that lower interest rate that you hope for.

To get your credit report, contact each of the three bureaus separately, or order all three copies from AnnualCreditReport.com. Normally you’re entitled to one free credit report each year from each of the bureaus.

2. Lower your debt-to-income ratio

Your debt-to-income ratio (DTI) shows the percentage of your monthly gross income that goes toward debt repayment. Mortgage lenders use DTI to see how big a house payment you can afford.

Typically, lenders prefer a DTI ratio that’s no higher than 36% to 43%, depending on the mortgage program.

For example, let’s say you have a gross monthly income of $4,000:

  • Your monthly debt payments (including a future mortgage payment) shouldn’t exceed $1,720
  • Your DTI is 43% ($1,720 / $4,000 = 0.43)

Some mortgage lenders allow a higher DTI ratio when a borrower has “compensating factors,” such as a high credit score or a large cash reserve. In other words, a strong credit score or a healthy savings account might compensate for a high DTI.

To lower your DTI ratio, pay off as much debt as possible before applying for a mortgage. This includes credit cards, auto loans, student loans, and other loans. You may also pick up a side hustle or part-time job to increase you income, which will improve your DTI.

You don’t have to be debt-free to purchase a home, but less debt can increase purchasing power.

3. Save for a down payment

Unless you have VA or USDA loan eligibility, you’ll need to make a down payment. Conventional loans require at least 3% to 5% down, and an FHA loan will need at least 3.5% down.

So if the purchase price for your first home is $400,000, you may need at least $12,000 to $20,000 as a down payment.

You’re also responsible for closing costs — which are roughly 2% to 5% of the loan amount (or $6,000-$15,000 on a $300,000 loan).

When applying for a mortgage loan, your lender will ask for copies of your bank statements to confirm you have enough cash reserves for your down payment and closing costs. If you don’t have enough cash, some mortgage programs allow borrowers to use gift funds to cover all or a percentage of their mortgage-related expenses. Most lenders will allow gift funds from immediate family only, so check with your lender about the specifics of gift funds if needed.

Of course you should still have some sort of income. Money in the bank can be spent and no longer available when closing day arrives or the mortgage payment is due. Banks still expect you to have income on a regular basis to repay the loan.

There are also down payment assistance programs (DPAs) in every state. These offer grants or loans to qualified homebuyers who need help with their down payments. So if you need a little extra help with your out-of-pocket costs, ask your loan officer about local DPAs for which you might qualify.

4. Determine your budget

Before meeting with a mortgage lender, use an online mortgage calculator to estimate how much you can afford to repay on a loan. Once you know what your home purchase price range will be, you can gauge how much to save for your down payment and closing costs.

For example, if a calculator says you’re likely to afford a $300,000 home, aim to save a minimum of $15,000 for your down payment and perhaps another $6,000 to $9,000 for closing costs.

  • Estimated home purchase price: $300,000
  • 5% down payment (typical for a conventional loan): $15,000
  • Estimated closing costs (about 3% of loan amount): $9,000
  • Minimum amount to save: $24,000

Mortgage calculators do vary. Some estimate your monthly payment based on the home price, down payment amount, interest rate, loan term, and other monthly mortgage expenses like homeowner’s insurance, property taxes, and homeowners association dues.

Other mortgage calculators, however, estimate affordability using the information you provide about your income and current debt payments. But remember that this is only an estimate. You’ll still need to contact a mortgage lender to learn how much you really qualify for.

Preparing to Buy a Home When Your Are Ready Now

What if you’ve found your dream home out of the blue, and you feel rushed to buy?

A little preparation will still position you to get the best financing available and make a competitive offer. Here’s what to do.

1. Research loan programs

Even though your lender will discuss different types of mortgages, do your own research before meeting with the loan officer.

Once you’re ready, the home buying process is going to move fast. It can be difficult to digest everything your lender says — and you might not feel like you have enough time to explore all financing options.

If you settle for the first loan you’re offered, you might miss out on lower rates or a more affordable loan program.

So take your time and educate yourself on different types of loans. Think about what you really want in a mortgage. Is it:

  • The lowest down payment?
  • The lowest possible monthly mortgage payment?
  • Avoiding private mortgage insurance?
  • Paying off your loan in the shortest time possible?

All these things are possible. A loan officer can help you find the right match when you know what your priorities are.

Knowledge is the best tool to make an informed decision and choose the best home loan for your situation.

2. Get pre-qualified and/or pre-approved

mortgage pre-qualification and mortgage pre-approval can jump-start your home buying process. But while both steps sound similar, there are a few differences.

A pre-qualification is a preliminary step where you provide the mortgage lender with basic information about your financial situation via an online form. The lender doesn’t verify this information, but uses it to measure your mortgage eligibility.

The lender might offer you a preliminary approval letter after getting pre-qualified, but it typically doesn’t carry as much weight as a pre-approval letter.

Getting a pre-approval letter is the most important step before house-hunting. Most Realtors and sellers will only work with pre-approved buyers.

Getting a pre-approval letter involves submitting a mortgage application and providing your lender with supporting documentation. This includes tax returns, paycheck stubs, W2s, financial statements, and a credit check.

The underwriter reviews this information and determines how much you can afford to spend on a property.

A pre-approval letter doesn’t guarantee financing, but it’s a lender’s way of saying they will likely approve you, provided you meet other loan conditions. Plus, it shows your price range.

Most Realtors and sellers will only work with pre-approved buyers, so it’s crucial to take this step before you start seriously house hunting.

3. Find a real estate agent

Buying a home can be a complicated, intimidating process, so you’ll need a professional on your side to answer questions and look out for your best interests.

Don’t rely on the seller’s agent to provide advice and guidance. It’s their job to advise their client, not you.

To find a good real estate agent, get recommendations from friends and family. You should also read online reviews, and interview two or three agents before making a final decision.

In most cases, the seller pays your Realtor’s commission using funds from the home sale. So you don’t have to worry about paying their fees out of pocket.

4. Be ready to make an earnest money deposit

Make sure you have liquid cash for your earnest money deposit. Once you find a property, you’ll need to submit an earnest money check with your offer. This is good faith money that says, “I’m a serious buyer.”

Earnest money deposits vary but typically range from 1% to 2% of the purchase price — usually a minimum of $500 to $1,000.

The seller doesn’t pocket the money, though. Funds are held in an escrow account, and either returned to you at closing or applied to your closing costs and/or down payment.

Other things to know when preparing to buy a house

There are a lot of moving parts in the home buying process. Many buyers, in their excitement about buying a new home, can gloss over some important steps along the way.

Wherever you are in your home buying process, here are some important things to remember:

A home inspection is essential

Unless you’re an expert home builder yourself, you might not notice some serious problems with the home you’re buying.

Maybe the foundation has shifted, or maybe a load-bearing wall has been unwisely moved. Maybe the basement floods twice a year and you happen to be visiting during a dry month. A home inspector can find these and other types of problems for you.

Even when your lender requires the home appraiser to check for minimum building standards, you, or your Realtor, should order your own independent inspector. The results could affect your decisions about whether to buy the home.

Comparing loan offers can save you money

A lot of first-time homebuyers accept the first loan offer they receive, believing all other lenders would offer, more or less, the same deal.

This isn’t true. Even for loan programs run by a government agency, like the Federal Housing Administration, mortgage rates can vary by lender. Getting quotes from at least three lenders can reveal these differences, creating a chance to save.

How much money can you save by getting a rate that’s just a quarter of a percentage point lower? A $300,000 loan with a rate of 6% instead of 6.25% would save about $50 a month and about $18,000 in interest over the life of the loan.

You may have to pay mortgage insurance

Unless you put at least 20% down on a conventional loan, you’ll likely need to pay for private mortgage insurance (PMI). This coverage protects the lender in case you default on your mortgage.

FHA and USDA loans charge their own type of mortgage insurance which includes an upfront premium as well as annual premiums which — like PMI — get added to your monthly payment.

These extra charges seem annoying, especially considering the insurance protects the lender and not the buyer. But this coverage also helps the buyer by allowing the lender to offer a lower mortgage rate or lower down payment. If you’re a military member or a veteran, you can avoid mortgage insurance altogether with a VA loan. VA loans charge an upfront funding fee but no ongoing premiums.

How much should I save before buying a house?

Home buyers can put as little as 3 percent to 5 percent down on a conventional loan or 3.5 percent down on an FHA loan. VA and USDA loans require no down payment, but not all buyers will qualify. So if your price range maximum is $300,000, then plan on saving at least $9,000 for your down payment and set aside another $12,000 for closing costs.

How long should it take to buy a house?

The time you’ll need to find your dream home depends on the housing market in your area. However, closing on a home takes an average of 45 to 60 days once you are under contract. Closing can take even longer when negotiations and counter offers are involved, and sometimes closing will take less than 45 days when both the buyer and seller are motivated for a speedy sale.

What should a first-time home buyer look for?

The home buying process is different for everyone, but generally, first time buyers should find out how much house they can afford, get multiple rate quotes on their mortgage loan, take advantage of first-time home buyer programs, and make a down payment that is the right size.

What should you avoid when buying a house?

Common first-time home buyer mistakes include getting only one rate quote, not checking your credit history, not researching different types of loans, and not being honest with yourself about how much house you can afford.

How to prepare your credit to buy a house?

First, review your credit reports and credit scores from the three major credit bureaus: Equifax, Experian and TransUnion. Be sure to contest any errors, pay off past-due debts, and then request that the creditor delete them from your record. Avoid applying for new loans or lines of credit. Also, if you have any high-interest credit card debt, then pay those balances off immediately.

Will shopping for a mortgage hurt my credit? 

Experts recommend getting multiple mortgage quotes before you buy a home. This should help you find the lowest rate and save money month to month. As long as you get all your rate quotes within a two-week window, multiple credit pulls shouldn’t hurt your score. But you can also protect yourself by asking lenders to provide a rate quote without a hard credit inquiry. This should be relatively accurate, as long as the credit information you provide is true.

I hope you found this information useful. Visit these websites for more help with preparing for your move: https://orchard.com/blog/topics/preparing-to-buy

https://www.nerdwallet.com/article/mortgages/tips-for-first-time-home-buyers

 

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