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How to Buy a Home In 9-Steps

With no signs of slowing down, housing prices are on the rise.

The price of single-family homes has increased by 42% since 2011. Eight years ago, such a house would have cost $200,000; today, it is worth $284,000.

As home prices rise and inflation increases, student loan debt increases, and wages stagnate, it becomes more and more difficult for each generation to achieve homeownership.

However, it isn’t impossible.

The 9 Steps to Buying Your First Home

With the right savings plan, decent credit score, and a bit of professional guidance, you can still buy your own home. This is even though the path has become littered with potholes and speed bumps.

You’re ready to buy your first home, aren’t you? Here are nine steps to buying your first home.

1. Make sure your credit rating is in good shape

Your credit score plays an instrumental role in determining your mortgage interest rate.

If you pay 1 percentage point more in interest over 30 years, the typical length of a mortgage, you could lose a lot of money. You would pay an additional $40k in interest over 30 years if you bought a $200,000 house with 5% interest on a 30-year fixed rate.

You should have a credit score of 620 at a minimum. If your credit score is below 620, you may still be approved for a loan, but rates will be astronomical and your down payment will be high. Credit scores in the 680-740 range are considered above average. Anything over 740 will qualify you for the most competitive interest rates.

Buying a home isn’t a wise idea if your credit isn’t great. The most effective way to improve your credit score is to clear your debt (especially credit cards), lower your credit utilization, and diversify your credit portfolio responsibly.

It is particularly critical to pay off the debt you owe because lenders look at your debt-to-income ratio, which is divided by your pre-tax monthly income by your monthly debt obligations (including your estimated future mortgage payment). To qualify for a loan, borrowers must have a debt-to-income ratio of less than 43%.

2. Put Money Aside For a Down Payment

In order to become a home buyer, you must pay off debts and save for a down payment at the same time.

As a rule of thumb, you should save 20% for a down payment. In February 2019, the median home sale price was $232,700, so the average 20% down payment would be $46,540. First-time homebuyers in 2019 generally do not have that kind of cash on hand.

The amount of down payment required has decreased in recent years from 20% to 10%, 5% or even 3.5%. Those who qualify for an FHA loan will pay only 3.5% down if their credit score exceeds 580.

Veterans and military members are eligible for VA loans, which require no down payment but a funding fee of 2.15% that can be financed into the loan.

However, putting down 20% does have some benefits. Private mortgage insurance, or PMI, is usually not required when you put 20% down.

PMI is the most unnecessary expense in my budget, and I currently pay more than $200 a month for it. The PMI protects my lender in the event that I fail to make my payments, so my lender would disagree.

Also, PMI is not required for VA loans even if you put 0% down.

You can also increase your offer’s attractiveness in a competitive market by increasing the down payment.

3. Establish Your Price Range

There may be a vast difference between how much you can afford for a house and how much you should actually spend.

Don’t aim for a home that you could afford, but which requires you to make other sacrifices you are not thrilled with, like cutting back on vacations or putting off education.

When purchasing an apartment or house with a partner, if both of you work, but one intends to change careers or become a stay-at-home parent in the future, it won’t be efficient to use your current combined income.

Take a conservative approach. If your income is expected to decrease in the next decade, don’t get a home that costs more than three to five times your income. If you think your income may decline, keep it closer to three times your income than five.

4. Request a Home Loan Preapproval

You should look for a lender before looking for a house. Online mortgage rate comparisons and interviews with prospective lenders can help you find the best deal.

If you already have a real estate agent, talk to them about recommendations and accept recommendations from them. Also, contact your own financial institution, but ultimately, choose the lender who offers the lowest interest rate.

Request a preapproval letter from that lender. Preapproval is different from prequalification. It is common for lenders to provide you with a ballpark figure of the loan amount and interest rate they might offer after checking just a few data points.

However, a preapproval letter confirms that the lender will grant you a loan if your financial circumstances do not change. You will need to submit all of your financial documents to an underwriter for verification before you can receive preapproval, such as W-2s, pay stubs, tax returns, etc.

It is possible to be preapproved for a higher amount than you had budgeted. You do not have to spend that much just because they are willing to give you that much.

5. Work with a Realtor

Buying a home is a great experience because your real estate agent’s fees are usually paid by the seller, so you don’t have to pay a cent, though some sellers may lower the price slightly if you purchase without an agent.

Ask friends and family for recommendations, and use a buyer’s agent whenever possible.  Check our mortgage terms to help you navigate through the home buying process.

6. Find the house of your dreams.

Now comes the most exciting part. The experience of moving into a house and imagining your life there has become a reality. Open houses and private tours with your agent are good options, but you should also use Zillow and Trulia to research houses on your own.

Nevertheless, don’t get distracted by those fresh paint colors or that hot tub in the backyard. You should keep an eye out for what’s really important when house hunting. Bring along any family members or friends who know what you are looking for in a new house.

Simple cosmetic changes, like removing an ugly carpet or questionable wallpaper, can be made quite inexpensively. However, structural changes should be the focus of your attention. Check for the following things when touring a home:

  • What is the condition of the plumbing? Does the water heat up quickly? Is the pressure of the water good? Can you see any water damage or leaks? Are there any signs of flooding in the basement?
  • Do the foundations seem sound? Will there be any costly repairs to make?
  • What is the age of the appliances? Are they in need of replacement soon?
  • Are there any exterior issues? What’s the date the roof was last replaced? What’s the condition of the siding? Is the condition of the windows likely to raise your energy bills?
  • How would you rate the neighborhood? Are you comfortable in the neighborhood? Are you bothered by traffic noise? Would it be convenient to go to a restaurant, shop, hospital or park? Do nearby schools provide quality education?

7. Offer Them a Deal They Cannot Refuse

You and your real estate agent will submit an offer when you find a house that meets your needs and is within your budget. You may need to bargain the purchase price, especially if you intend to remodel the home.

Most real estate agents know a few tricks to make your offer more attractive – but so do their counterparts.

A counteroffer could be made by the seller. It’s okay to counteroffer right back until you reach an agreement that both of you are happy with.

It may be necessary for you to offer “earnest” money to the seller as a gesture of good faith. In the event of a failed appraisal or home inspection, you might be able to get this money back. When you purchase the house, the money goes towards the purchase price.

After securing financing, the house goes into escrow while an appraisal is conducted and the house is inspected before closing.

8. Order An Appraising And Inspection Of The Home Before Closing

Home appraisals are usually coordinated by your lender to determine the value of the house. In the event that the house is worth less than what you offered to buy it, the deal will probably have to be revised as the lender will not be satisfied with the investment.

Home inspections are your responsibility, and while they are not always required by law, you should definitely arrange them. During a home inspection, a home inspector will examine the property for structural problems, HVAC problems, and roof and major appliance problems. Home inspections cost on average $300 to $400.

9. The Closing Process

It’s a good idea to walk through the house one last time before closing to make sure everything is as you expected. Be sure that each agreed-upon repair has been completed, and if certain appliances were to be left behind, such as washers and dryers, verify that they are still there.

There will be a lot of paperwork to sign on closing day, so drink lots of water and stretch your forearms and hands.

In addition to the down payment, this is the day you write the check for any closing costs you’ve agreed to cover. You’ll feel the pain when you watch that rectangle slip from your fingers, but all the pain will be worth it in the end when you toast your brand new house with Champagne.

A few days before closing, make sure you have your checkbook, any identification you might need (driver’s license or passport, for instance), and maybe even a thank-you card for your real estate agent.

The average time from application to closing for a house purchase is about 40 to 45 days. It takes a lot of time and effort to make an offer, so you should be prepared for months of effort.

Here are 4 things you must avoid when purchasing a property

It’s possible to make mistakes when buying your first house, even if you follow the above guide step by step. Here are a few common mistakes you should avoid.

1. Failure To Hire a Real Estate Agent

A real estate agent can help you find houses you might not otherwise find, negotiate on your behalf and alert you to unfavorable terms in a contract. Moreover, as the buyer, you probably won’t have to pay a dime.

2. Forgetting the ‘Extras’ When You Calculate Your Housing Budget

If you’re making your budget, it’s easy to view a website’s estimated monthly payment and assume you’ll be paying that amount.

Those estimates are based on the assumption that you will put down 20% and your credit will be perfect. If you decide to calculate your own expenses, you will have to pay more than the house’s cost. As well as homeowners insurance, PMI, property taxes and interest, there are other costs.

3. Skipping the Inspection

Without an inspection, you’re out of luck if you discover problems after your purchase. The seller is not liable, so you must pay out of pocket.

4. Buying Outside Your Price Range

If you do not feel comfortable spending that much money even if you’re approved to borrow X amount, you shouldn’t buy a house for that amount.

Keep in mind that you’d be committing for 30 years. Choose the amount you’re most comfortable with.

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