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13 Steps To Buying Your First Home
Congratulations! you’re thinking about buying a home for the first time and want to make smart decisions to avoid paying to much or making a decision you’ll regret later. You're already on the right track, let's keep you there.
It takes more than a steady job, a little savings and watching a few episodes of House Hunters in order to make your dream of owning a home a reality.
Take your time and follow these steps for the smoothest possible transaction. Home buying is never a completely stress-free process, you have a lot at stake, but with the proper planning and guidance, you can keep surprises to a minimum.
Here’s a quick outline of the steps involved and what you'll need to do.
Where Do I Start?
About two years before you would like to purchase is the ideal time to start addressing all the factors involving purchasing a home. These include your savings, income, and credit-worthiness.
Savings: If you have been dreaming of buying a home, you hopefully have been saving. First-time Buyers can expect a downpayment around 3.5-4% of the purchase price. Down payment assistance programs are available for many First-Time Buyers.
Income: You will need stable and sufficient income to obtain a mortgage, what does your current employment situation look like? Lenders like to see borrowers making at least twice as much money per month as it costs them to own their home.
Credit-Worthiness: Mortgage rates are based on your risk as a borrower, with higher-risk borrowers receiving higher interest rates and vice-versa. A better credit score will ultimately lead to a lower rate, dramatically reducing the amount of money you actually spend on your home over the life of the loan. By law, one free credit report is available to you per year. You can use apps such as Credit Karma and others to get tips on how to boost your score and maintain healthy credit. Getting on top of your credit health as soon as possible is incredibly important!
1. How Much Can I Afford?
The price of the home ultimately comes down to two things: the down payment and the monthly payment.
Mortgage lenders evaluate your total debt-to-income ratio. It should be no more than 43% of your gross monthly income. The debt side of debt-to-income includes any existing outstanding debt obligations, i.e. student loan payments, credit card debt payments, car loan payments, alimony and child support payments, etc.
Lenders will take a look at all of your existing debt obligations, and if your existing debt payments do not exceed 43% of your monthly income, you are generally qualified for most loans. All cases are independent, so you will want to contact a mortgage lender for more information, or we can refer one to you.
2. Establishing A Down Payment Plan
Most Conventional Mortgages will require a 20% down payment. This will lower your loan cost significantly on the front end (insurance, fees) and lower your interest rate helping you achieve a lower cost over the life of the loan.
Most first time home buyers do not have the cash on hand for a 20% down payment and are able to utilize Federal Housing Administration (FHA) backed loans to purchase homes. FHA Mortgage Loans only require a 3.5% down payment and have less strict credit requirements, but come with a higher price tag over the life of the loan.
With higher risk borrowers comes higher premiums for the loan. With FHA these include things like upfront and monthly mortgage insurance, higher interest rates, and borrowing limits among other things. The Department of Housing and Urban Development (HUD) is a great source for a list of nonprofit home-buying programs. Also check with different lenders, credit unions, or even your employer to see if they have an assistance program.
3. Determine What You Need In A Home
What is most important to you? Make a priority list of the aspects of your home that matter the most to you, such as a quiet street, low maintenance, move-in ready or close to work.
If you can pinpoint what you are looking for early on, you can avoid issues and potential buyers remorse in the future.
4. Preparing Your Home-Buying Budget
Research and ask resources such as your real estate agent about the different costs related to the home buying process. Many buyers are unaware that the down payment they saved so hard for it only part of the expense.
The most common buyer costs other than down payments include are as follows:
HOA Transfer Fees
Most of these will vary depending on the price and size of the home, financing, and location. Some of these costs can be paid through Escrow, a situation where the vendor delays payment for their services and is paid through the loan, this varies with financing and whether or not the chosen vendor will agree.
Be sure to talk to your agent about these expenses to make sure you have enough saved and are ready to go forward with the buying process.
5. Preparing Your Home-Owning Budget
The monthly payment you see on a mortgage calculator won't be your only monthly expense. Expected other monthly expenses are as follows:
Home Owners Insurance
Property Taxes (Bi-Annually)
You will need to address the amount of savings you have for the costs of maintaining, repairing and emergencies that go with upkeeping a home. Unfortunately, this is the place most first-time buyers fall into potential trouble, having underestimated the monthly cost of owning a home.
6. Finding An Agent
You need a Real estate agent to represent you and guide you through the home buying process. The best way to find a reputable Agent who will represent your best interests if to reach out to friends, family, and co-workers for references. We recommend that you interview more than one and ask questions that are important to you and find someone you feel comfortable with. Don't be shy, make them answer a couple tough questions up front to see if they are worth their salt. Real Estate Agents can have a poor reputation for over-promising and under-delivering, make sure your agent isn't one of those.
7. Starting Your Home Search
If you are already working with a real estate agent, they will be your best resource in finding a home that meets your search criteria. There are many free resources to assist you in your search, but your agent has most reliable and detailed resources to guide you. You probably have an idea of the style or size home you want, but may not know where to start looking. Ask your real estate agent for more information about a specific area if you find one that interests you.
8. Visit Open Houses
One of the best ways to learn more about the homes in your area is to simply visit open houses. Doing this will give you perspective as to what you do and don't like, helping you narrow down your search and discover what is most important to you in the home you buy. Open houses are a great way to familiarize yourself with different neighborhoods and to spend time on your own evaluating your likes and dislikes. Viewing as many homes as possible before deciding on the one you want to buy is crucial for buyers to understand exactly how far their money will get them.
9. Getting Pre-Approved for Your Loan
If you are unsure where to start the Lending process, your real estate agent is likely a fantastic resource for lender referrals. They should be able to provide you with a few good references, try these and see what kind of interest rate they can get you (all will vary slightly). Once you feel comfortable with a lender, set up an appointment with your choice and submit your financials.
Your lender will run a credit check and inform you of how much your loan approval is for. Create a budget for yourself that will include this mortgage payment, HOA, insurance, maintenance and all of your financial responsibilities. Once you've done this, you will have a very good idea of how much you can afford to spend on a home.
You will want to discuss whether or not you qualify for any Down Payment Assistance Programs available for First Time Home Buyers. These can significantly reduce your down payment, leaving you with more of a cushion to cover monthly expenses or repairs/improvements down the road.
10. Making An Offer
All the days (or weeks) you've spent looking on the internet, visiting open houses, and getting pre-approved for your loan has finally come down to this; you've found the perfect house and you're ready to make an offer.
When you find the right home, your agent will prepare a contract offer to submit to the seller’s agent. You and your agent have a special relationship called fiduciary relationship. A fiduciary relationship is a responsibility of the agent to be a trusted advisor to you and nobody else, and to hold your interests higher than anyone else's, especially their own!
Your agent represents you and speaks on your behalf during this transaction always keeping your best interest front of mind. Your agent will negotiate on your behalf throughout the transaction, in the attempt to get you the best deal possible. Your offer will establish the terms of the transaction, including when the deal will close (usually 4-6 weeks), what the purchase price will be, and what concessions will be made by each party in order to complete the transaction.
The offer process has quite a few twists and turns, and just because you've put in a full price offer does not mean that you are done. After the offer and counter-offer process, once all terms have been agreed to by the Buyer and Seller, the buyer will deposit Earnest Money (2-3% of purchase price) with the Title/Escrow Company, at this point, the home is considered under contract and the purchase process begins. Note that the offer process has many time-sensitive aspects to it, and once an accepted offer is in place, the clock starts ticking.
11. Inspection Period
Once your offer has been accepted, the Inspection Period of the purchase contract begins. The Inspection Period is a 10-day period during which the buyer has the opportunity to learn everything they can about the home, including conducting property inspections, utility inspections, pest inspections, title inspections and more. During the Inspection Period, the buyer can back out of the transaction without loss of Earnest Money for almost any reason uncovered during the inspection. For this reason, you will need to schedule a home inspection as soon as possible after going under contract on a home. You and your agent need to make to allow ample time for discovery, interpretation, and negotiation of your findings.
Your home inspector will report to you everything about the home including issues that need to be addressed. The inspector will produce a report that documents all of the findings of the inspection, with specific notes of what items are in need of replacement, repair, or are not to code. At the end of the 10-day inspection period, the Buyer will submit This Inspection Report, along with a list of items the buyer believes needs correction.
Once the buyer has submitted their Inspection Notice, the seller has 5 days to respond, and the seller must indicate whether they will repair the requested items or offer a credit to the buyer. The buyer can then accept the repairs/terms agreed to by the seller, or elect to cancel the contract.
At the end of the 15th Day, (10 for Buyer Inspection, 5 for Seller Response), the Buyer loses their Inspection Contingency. The property then moves through the escrow process towards closing.
Once the 15 Inspection Period has passed, and both parties have decided to continue with the transaction, you will want to apply for your homeowner's insurance. Once approved, submit to your Title Company.
It is very important for buyers to not make any large financial changes such as applying for a credit card, buying a car, or anything that would affect their credit score in any way. Doing so can cause the buyer to be disqualified based on your debt-to-income ratio or credit score. An error in this respect may result in the contract being canceled, and the buyer forfeiting their earnest money deposit. Your credit score will be checked again prior to closing. Hold all funds steady in your accounts.
12. Locking In Your Interest Rate
If you haven't already done this with your lender, you will need to lock in your interest rate. A good lender will watch interest rates closely for you and tell you when rates are at a low point so you can lock them in at that time.
You can also watch interest rates by yourself online. A live look at interest rates is below for easy viewing.
|30 Year Fixed|
|Latest Analysis: Mortgage Rates Sideways to Slightly Higher Despite Stock Rout|
View MoreMortgage Rates
It's crucial to note that since interest rates are unpredictable and fluctuate during the day, you shouldn't drive yourself crazy trying to hit the lowest point. Our best advice is to be satisfied with an interest rate that you think is reasonable, factoring in current market conditions and what you can comfortably afford.
Also keep in mind that rates vary by credit score, geographic region and the type of loan you're getting. Because of these reasons, you may not be able to get the low rates you hear or see advertised.
Congratulations! You've made it to the final stage of purchasing your home! You're just a couple steps away from having the keys to your new home, here are the final things that need to happen.
You have the right to a final walk-through of property 3 days before your closing meeting. During this walk-through you will confirm two things:
The seller has fully vacated the property (or is well along in the process)
The home is in the same physical condition as when you conducted your inspections. If everything is not the same as when the inspection was conducted, the buyer has the right to cancel the contract and receive all earnest monies back.
Make sure that any repairs or replacements stipulated in the Buyers Inspection Notice are complete.
Three-Day Review Period
All mortgage borrowers have a 3-Day right of review of all Closing Disclosure Documents prior to closing. During this period you will review all of the terms of the loan, comparing the Loan Estimate to the Closing Disclosure.
The countdown has begun. Most of the time, everything goes as planned. Small things in the loan docs are allowed to change, like typos. However, these bigger changes reset the three-day review period:
The APR on the loan changes by more than 1/8th of a percent (most fixed loans) or 1/4th of a percent (most adjustable rate loans).
A prepayment penalty is added to the mortgage.
There’s a change of loan products (e.g. change from a fixed rate loan to an adjustable rate loan).
You've successfully deposited your earnest money, completed your inspections, and locked in your mortgage loan and interest rate, now it is time to fund escrow. Funding Escrow is the process of combining the Earnest Money already deposited and the loan for the lender.
Loan Funding Documents (the mortgage industry refers to them loan docs) are created and sent to the Title Company, where the closing meeting takes place. Expect to spend about an hour at the Title Companies office, and be ready for a big stack of papers.
One of the documents worth mentioning here is the Closing Disclosure, which may look somewhat familiar. Think of it as the reference to one the first documents you received in the mortgage process, the Loan Estimate. The Loan Estimate gave you the expected costs of your loan, while the Closing Disclosure confirms those costs of your loan. The two should match pretty closely, as there are laws in place to prevent them from differing too much.
Signing the Papers
You will head down to your Title Company's office for the final signing, you will want to make sure to bring some sort of official identification. There will be dozens of documents that will require your signature, so be prepared to spend about an hour or so at the Title Office. The job of a great title agent is to make signing incredibly important documents feel like a breeze, with proper explanation of each page, while also allowing time for you to fully read and understand each page. The job of a great realtor is to be there with you at closing, making sure you understand each page and to be ready to answer any questions. The Title Agent does not have the same fiduciary relationship with buyer/seller that the real estate agent does. They should also remind you to READ THE FINE PRINT: it will have a major impact on your finances and your life for years to come.
Key Closing Documents
Closing Disclosure (or HUD-1 and TIL in some cases) – a summary of loan terms, monthly payments and closing costs.
Promissory Note – as it sounds, it’s the promise that you’ll repay the loan. It shows the loan amount and terms of the loan and the lender’s recourse if you fail to make payments.
Deed of Trust – secures the note above and gives the lender a claim against the home if you fail to live up to the terms.
Certificate of Occupancy – if the house is newly constructed, this is the legal document you’ll need to move in.
In particular, make sure the interest rate is the same as the one on your Closing Disclosure from the Lender, and that there is no prepayment penalty. Carefully review the "Combined Settlement Statement" provided by the Title Company, comparing costs to the good faith estimate you were given at the beginning of the process, and throw a fit about any fees that are off by more than 10%.
Once you have signed all the documents requested by the Lender, the transaction file will be sent to the county recorder where it will "record" and the transaction is then final (unless by later court decree). You should either leave the office with all the necessary keys for accessing the home, or your agent should have arranged the transfer of keys earlier on. Congratulations! You've closed escrow, move into your new home!
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