How to Buy a House

How to Buy a House

If you’ve never bought a house before, you might be confused as to where you need to start. If this is you, this list is here to help you get started.

Yep, if you’ve scrolled back and forth to gauge how long this article is, it almost approaches tome status. While you’re executing each step, consider bookmarking this page for easy reference.

Part I: Do Your Research

As far as home buying is concerned, getting all of the necessary paperwork in order is probably the least amount of fun you’ll have during the whole process. Nonetheless, like building a foundation to a new home, it takes some time, but after this part is through, things start happening fast.

  1. Know what you can afford.

Before you start shopping, you need to know what you can afford. If you search for ‘mortgage calculator’, a decent Google sponsored calculator appears after a few ad sites. Play around with some numbers to get a better idea of what you can afford.

28% of gross income seems to be the accepted max by many lenders, but this doesn’t take into account other debt or obligations you may have. If you’re currently renting, what are you paying now? Are you able to put away a little bit each month? Or are you currently at the max of what you can afford?

Keep in mind that even if you can afford it, that doesn’t mean you’ll be approved for the total loan amount you’d need for a certain house. Plus, don’t be fooled by the loan calculator because that won’t be your total monthly payment. You also need to factor in mortgage insurance (if you don’t put 20% down) and taxes.

The amount you pay for mortgage insurance depends on the type of loan you get. Typically, borrowers pay around 0.5%-1% of the loan amount, divided by twelve and paid on monthly. A $250,000 loan, for example, with a 1% mortgage insurance fee would be $208.33 a month.

Taxes can generally be found on the MLS listing. Find the total listed for the most current year and divide that number by 12 to figure out what you would pay month-to-month. If it’s not listed, know that taxes vary county to county, so look up how taxes are calculated in the location you hope to live.

Lastly, don’t forget HOA fees if you want to move into a community.

2. Get Your Taxes Together.  

As a general rule of thumb, you need two years’ worth of tax returns to get qualified for a loan. If buying after April 15th, you’ll need to process the previous year’s taxes.  

3. Calculate how much cash you’ll have for down for a down payment and closing costs.

No, you don’t have to put 20% ,or even 10%, down on a house (but if you don’t do 20% you will pay mortgage insurance). Depending on the loan type, such as USDA (for rural areas) you may not even have to put anything down. However, for FHA loans the minimum you need to put down is 3.5%. For a $250,000 house, this means you would need to put down at least $8,750.

Determining how much you can put down changes the loan amount. For example, you want to buy a $250,000 house, and you offer the seller his or her full asking price. If you get an FHA loan and you put the required 3.5% down, your total loan amount would then be $242,250. Child’s play math, but many people forget that with a down payment, they can buy houses that are more than what they’ve been approved for by their lender.   

Both down payments and closing costs are related to the purchase price of the house. Closing costs are anywhere from 2-5 percent of the price of the home. Going back to a $250,000 house, closing costs could be anywhere from $5,000 to $12,500. When talking with your lender, make sure they give you a detailed spreadsheet that outlines all fees and payment options with each loan.

4. Know what your credit score is.

To get pre-qualified, many lenders ask for a score before they’ll process your application, and so they can give you some preliminary numbers before they’ll do a hard credit check. Check with your bank, as many banks offer credit score checks for free. If you haven’t done it yet this year, will do it for free once a year.

5. Shop around for lenders.

Apply to several lenders so you can rate/ price compare. Don’t just look at interest rates— look at closing costs and fees. Rocket Mortgage is popular with many first time buyers because it explains every step, but don’t be afraid to talk to your personal bank. They might have some good options for loyal customers.

6. Get Your Pre-approval Letter

So many overzealous home buyers start shopping before they even know what banks will give them. Some will even go so far as putting in an offer (what their realtors were thinking we’ll never know).

Get your pre-approval letter first before you start clicking through Realtor and Zillow. This way, when you find the home of your dreams you won’t have the metaphorical rug pulled out from under you.

Part II: Shop

Now comes the fun part. Shopping. Who doesn’t love shopping?

  1. Find a realtor.

Don’t just go with personality (though that is important), also take note of how fast they communicate back when you call, send an email, or text, and how extensive their knowledge is of the area you want to move to. Do they understand the pros and cons of the area, market values, and resale potential? You’ll want to shop around for a good realtor as seriously as you would for a house. For more on how to choose the perfect realtor, click here.

2. Analyze local comps (aka comparable properties)

When you find a house you’re interested in, get your realtor to do an analysis of comps in the area so you know what a strong bid would be. Your bid should always reflect the home’s actual value. Of course you don’t want to lose out on the house, but you definitely don’t want to overpay for it either. Should you do this, that’s money you won’t get back if and when you choose to sell it.

3. Submit a formal offer.

Put an offer in with your pre-approval letter (see step 6 from Part I). If you want the seller to take your bid more seriously, you can put in a higher earnest money deposit. When you initially make the bid, you have to put aside either $1000 or 1% of the home’s purchase price (which reflects your bid). Putting in more reflects how much you want the house, and how unlikely you are to walk away should inspections not go well.

4. Negotiate

The seller will more than likely counter if you bid under, so know what your maximum bid is. Remain firm with yourself. It’s easy to fall in love with a house and the type of lifestyle it may offer, but you know what you can afford and what you can’t.  

If at any point either you or the seller accepts the others offer, so begins the inspection process.

Part III: Inspect and Close

You’re almost at the finish line now, but you’re not done yet. There are a couple of pitfalls during this process where your house deal might fall through if you’re not careful. In the words of Professor Moody, “Constant vigilance!”

  1. Seller Paid Inspections

Unless the house is a foreclosure, the seller will pay for the inspection of the well and septic (if it has them, of course), and termites.

If the house does have a well and septic, those must be in working order for lenders to approve a loan. Regardless of whether the seller put “As Is” on the MLS, these must be in working order for any lender to give you, the borrower, money. Most sellers know this, and will agree to repair any systems not in operational order. Dropping the price isn’t really an option because, again, no lender will finance a loan on a house that doesn’t have a working well and septic, no matter what the purchase price of the home is.

The same is true of termites. Any termite damage must be addressed by the seller for a loan to go through.   

2. Buyer Paid Home Inspection

Next it’s time to schedule your own inspection. This will give you an in-depth idea of the house’s condition, and may also open up another round of negotiations (if the seller didn’t specify the house will be sold as-is).

You can either request that certain repairs will be made or get money off of the purchase price. You can also ask for both, but if you push the envelope too much the seller will likely deny all of your requests.

If you and the seller can agree on repairs and purchase price, the sell moves forward. If you don’t, everything falls through, and you both lose any money you spent on inspections. If the seller agrees to any of the repairs you requested, but you still walk away, you’ll lose your earnest money deposit.  

3. Bank Appraisal

Next the bank will come in and do an appraisal (the cost of this is included in closing costs). If the house’s purchase price is under the appraisal value, the loan will be approved. The appraiser will inspect the condition of the home to make sure it meets the loan type qualification requirements. This part may be more difficult for you and the seller depending on whether or not you intend to use a government backed loan. More often than not, appraisers won’t give you any problems, though.

4. Prepare for Closing

Your lender may ask for additional paperwork as you get closer to closing. They’ll also do a title search during this time to make sure there are no liens on the property (so that when you buy you know you own the house free and clear).

5. The Last Step: Closing

Get ready to sign lots and lots of papers! Know that whatever signature you choose is the one you’re going to have to use all the way through— meaning if you write your entire first, middle, and last name out, then you’re going to have to do that all the way through. For this reason, we recommend doing some initials followed by your last name so you don’t leave closing with a crippled hand.

Next, write out your check (if you’re doing a down payment).

And voila! You’re done! Congratulations! Get your key, start making mortgage payments, and get on with your new life. If you’re looking for moving tips, that’s a whole other blog!

UltraFico: Is it going to help you buy a home? Yes and no.

UltraFico: Is it going to help you buy a home? Yes and no.

How Much Will Banks Loan Me? or How Much House Can I Afford?

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