Perla IrishWhat happens if you find the ideal house in the perfect zip code? It checks all your boxes, and you’re ready to make it your long-term home.
There’s just one problem—you’ve never bought a house before, and you have no idea what the process is like.
If that sounds like you, it’s a common situation. Buying your first house can be stressful and overwhelming, but you can ease a lot of this if you understand what to expect going into the process.
The following are some of the key things to know that happen during the process of buying a new house.
Get Your Finances in Order
If you’re thinking about jumping in and purchasing a house, you need to fully understand your own financial situation. Your lender will need to see how much money you make, but also more than that. They’re going to want to see your work history for at least the past two years to ensure you have stability and reliability.
If you’re on the payroll, you should be able to show your recent pay stubs and W2s. If you’re self-employed, you’ll submit your tax returns in most cases.
A term to get familiar with is your debt-to-income ratio or DTI. This is something mortgage lenders use in the evaluation of a loan application. Your DTI helps a lender see how much of your income each month is going to debt already, so they can figure out how much more debt you can take on in the form of a mortgage.
Your DTI is a calculation of your monthly debt divided by your gross monthly income.
You’ll have to demonstrate liquid assets in addition to your income. Some programs will let you buy a home without putting money down, but in most cases, you’ll need cash on hand for your down payment. The amount of money you need for a down payment can be as little as 3%, but for most people, a down payment of 20% is ideal.
Before you apply for a mortgage, check your credit score because this will determine whether you’re approved for a loan and also, if you are, what interest rate you’ll be offered.
Most lenders require you have a credit score of at least 620, but a score above 720 means you’ll probably get the best terms.
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Compare Your Mortgage Options
The type of mortgage you opt to apply for is going to affect what you need to qualify, including the down payment you’ll need to make.
Conventional loans are the most common option. A conventional loan is a mortgage not guaranteed by the federal government. They have pretty stringent qualifications.
The Federal Housing Administration will back an FHA Loan, and they’re easier to qualify for than a conventional loan, but they have requirements for mortgage insurance.
For active military members or veterans, there are VA loans, which require no down payment.
If you’re buying a more expensive house than what standard lending limits allow, you would need a jumbo loan. To qualify for a jumbo loan, you’ll usually need a higher credit score and a larger down payment.
Preapproval
After you’ve assessed your finances and decided on the type of mortgage that’s right for you, you can start to shop around.
There are a lot of lenders ranging from traditional brick-and-mortar banks to banks that operate only online.
You first need to make sure the lenders you’re considering offer the loan product you’ve decided on.
You’ll also want to see how their sample interest rates compare to average rates, what their mortgage origination fees are, and what the closing costs are going to be.
You can start working with a lender to get preapproved. Your mortgage preapproval is an important step. It gives you actual numbers about what you can afford based on the information the lender has about your finances.
When you get a preapproval letter, it will indicate how much a lender is willing to give you. You can get a loan estimate form at this time, which isn’t final but will break down things like rates and fees.
Your preapproval letter will be valid anywhere from 60-90 days. If you go beyond that, you’ll have to get it updated.
The preapproval letter isn’t the same as being pre-qualified. A pre-qualification doesn’t hold as much weight because it’s a general estimate of how much you might be approved for based on the information you provide, which isn’t verified.
Find a Real Estate Agent
You’ll likely need a pre-approval letter in hand before a real estate agent will work with you.
Once you have it, you have to realize that the person you choose to work with is going to play a considerable role in the entire process. They’re going to know the market in an in-depth way, they’re going to provide you with support and resources, and they’ll negotiate on your behalf with a seller once you find a house.
Plan to interview at least three agents before you decide on someone.
Once you have an agent, you can start shopping.
Making An Offer
After you find the home that’s everything you want, you make an offer. Your real estate agent should provide you with information about comparable sales and any other information that will factor into the offer that you ultimately make.
If you make an offer that the seller rejects, you might walk away altogether or make a counteroffer.
If your offer gets accepted, you have a few more steps in the process.
The final steps include actually getting a mortgage, having the home appraised, and then negotiating with the seller if there are any repairs that are needed.
The final step is closing on your home. Your bank will provide you with a closing disclosure at least three days before your actual closure, which you’ll compare with your Loan Estimate.
Finally, near closing day or the day of, you’ll do a final walk-through with your real estate agent and make sure that everything you agreed on with the seller is in place.
