Whether you want to buy a house for the investment benefits or to enjoy the perks of ownership, you can plan to start preparing for the homebuying process long before you reach out to a realtor to explore properties. Since a home purchase involves a significant amount of money, you need to learn about the financial aspects and process and get a better understanding of how to approach your home search. You can get yourself into a good financial position to succeed.
Use this guide to help get started on the path to homeownership.
Understanding What Home Buying Involves
To have an idea of what to expect when buying a home before you move forward to specifics, take a look at a some broad stages you go through:
- Research and planning: During this phase, you learn about the upfront and ongoing costs as well as your financing options. You also do a personal finance assessment to make sure now is a good time to buy and determine exactly what's affordable. You also come up with a vision for your future home.
- Getting financing preapproval: Find a mortgage lender to discuss your options and obtain a preapproval. This includes evaluating loan terms like interest rates and possibly handling roadblocks like credit issues or lack of cash reserves.
- House hunting: Likely working with a real estate agent, you can begin checking out homes that meet your requirements and visit them to find out if they seem right for you. This phase can have some unpredictability depending on what the market looks like and can take time to find the best fit.
- Making an offer: This involves the offer and negotiation processes for the right home along with the paperwork and earnest money deposit that comes along with it. You could go through the steps multiple times until you get an accepted offer on a property.
- Closing: An accepted offer means the detailed and busy closing phase begins with plenty of paperwork and tasks to complete. It all ends with the closing meeting where everything gets sorted out for you to move into your new home.
Read More: Buying a Home Timeline: What You Need to Know
Preparing for Important Costs
Checking your financial readiness for homeownership requires knowing how much money you need to pay upfront as well as how you'll manage your mortgage payment and other homeowner expenses in the long term. That way, you can come up with a savings strategy and alter your budget accordingly.
Upfront costs include the earnest money deposit, down payment and closing costs. While the down payment goes toward the cost of your home so you can take out a smaller loan, the closing costs cover the many expenses with processing your loan, transferring the home to you and completing the various financial and legal requirements required by the government and lender. A down payment minimum can be as little as $0 or as much as 20 percent, and closing costs can take up to 6 percent of the loan amount. The earnest money given at the home offer will go toward these upfront costs.
You don't always need to come up with upfront costs like a down payment on your own since you might qualify through assistance programs.
After you make your down payment, the rest of the home's purchase price is financed through a mortgage where you'll have a monthly payment including principal, interest, property taxes, potentially private mortgage insurance (PMI) and homeowners insurance. The payment amount can change depending on how things like the interest rate, insurance premiums or taxes change. Besides the mortgage, you'll have other costs for things such as repairs, utilities and maintenance throughout homeownership.
Read More: What Are the Costs When Buying a House?
Checking Your Credit & Savings
To make sure you have a good chance of qualifying for some type of mortgage, continue your preparation by taking a look at your credit and available cash savings. During the process, keep in mind you usually need a credit score of at least 500 to qualify for any of the regular mortgage programs and that you need the cash for a minimum down payment and closing costs unless you pursue other options to cover these expenses.
You can take a look at your credit report through TransUnion, Equifax and Experian using the AnnualCreditReport.com website to get a picture of your current debts and any delinquencies. Lenders look at your debt-to-income ratio, so compare your monthly income to monthly debts. You can then find your credit score through the website of one of the three bureaus, through a service your credit card or bank might offer or through a financial site like Credit Sesame.
When exploring your cash savings, you can look at money in different bank accounts as well as investment accounts from which you can withdraw money. Besides checking for the minimums for upfront costs, keep in mind it helps to have at least 20 percent to put down so you can avoid the extra cost of PMI, which is common for mortgage programs.
Read More: Credit Score for Mortgage Rates: How It Works
Knowing Your Price Range
If your credit profile and savings support continuing to buy a home, then take the next step to calculate your price range through a home affordability calculator to make sure you'd be able to afford the kind of home you'd like. You should have an idea of the home's size, location and features so you can research online and identify the typical prices in the area of interest. You can use this information as you move forward with the calculator.
At a minimum, you need to know your yearly income, expected down payment and total monthly debt payments as well as the kind of loan term and interest rate you expect. The tool will show a maximum home price and accompanying mortgage payment. You need these numbers to to decide if you can afford your dream home as well as figure where the mortgage payment will fit into your budget.
Choosing a Financing Method
You have several options for financing the rest of the home price. This includes mortgage programs with little or no down payment as well as options targeting those with a certain rating of credit or with a particular affiliation.
Here are some options and who they suit:
- Conventional mortgages: This option can offer flexibility and a good interest rate if your credit score is at least 620 and you can afford a minimum 3 percent down payment.
- Jumbo mortgages: With 20 percent down and a 700+ credit score as common requirements, these mortgage loans help you with financing high-cost properties.
- Federal Housing Administration (FHA) mortgages: First-time homebuyers particularly can benefit from FHA loans since they allow for a credit score of 500 or more with down payments ranging from 3.5 to 10 percent.
- U.S. Department of Agriculture (USDA) mortgages: A USDA loan is a good way to avoid a down payment as long as you don't mind buying a rural home, you don't exceed the USDA's 115 percent median area income requirement and you have a 640+ credit score.
- Veterans Affairs (VA) mortgages: If you or your spouse have a military affiliation as a family member, the no-down-payment VA loan can offer benefits to those that meet the service requirements and have a 620+ credit score.
Alongside choosing a type of loan, you need to think about your loan term and interest rate. The most common terms are for 15- and 30-year mortgages, and interest rates depend on the loan program, your credit score, the loan term and other factors. A 15-year term helps reduce interest with the trade-off of higher payments, while a 30-year term means more affordable payments but more interest paid over the years. You can also choose between an adjustable interest rate that can go either way or a fixed rate that doesn't have unpredictability.
Read More: Fixed Rate vs. Variable Rate: What You Need to Know
Handling Roadblocks to Financing
If your research reveals you may have issues getting a home loan, you can consider a few options moving forward. A poor credit score or lack of cash savings might mean holding off on buying a home for now, or it could mean finding a co-borrower and/or seeking financial assistance to be in a better place to qualify. You could also look for properties with seller financing and borrow money from the home's owner for a short term until you can try for regular home financing.
Getting Financial Help for Costs
You don't always need to come up with upfront costs like a down payment on your own since you might qualify through assistance programs. For example, first-time homebuyers often benefit from down payment and/or closing cost assistance through their state's housing agency. They can get this help if their income is low or moderate in the area and they otherwise qualify for financing and meet any credit and asset requirements. This kind of state assistance might mean a grant worth a small down payment or a similar loan that may eventually need to be repaid, or it may be forgiven based on some terms.
Another option involves looking at programs that target homebuyers in a specific occupation and offer some assistance toward a housing purchase. For example, the federal Good Neighbor Next Door program offers a 50 percent home price discount to homebuyers working as emergency medical technicians, K-12 teachers, police officers or firefighters. This program involves a forgivable second mortgage and has restrictions on properties.
You can also ask for concessions from the seller, such as help with closing costs. You might offer a higher price for the property to compensate for this. You could also ask about rolling certain costs in with the loan if you're fine with the effects on your monthly payment and interest.
Read More: Buying a Home With No Money Down
Securing a Preapproval
With your preparation and research done, you can take the step to get preapproved for a home loan so you have more certainty as you move forward with the house hunting process.
You can complete the mortgage pre-approval process through a lender rather quickly and have a preapproval document valid for a few months. Have information handy about your monthly income and debt payments, preferred loan and term. Also, look for documents you can use to prove your income (such as tax returns or paystubs) and cash reserves (such as bank statements).
This process will usually involve a preapproval mortgage application you complete online or in person, and you need to provide details about yourself and any co-borrower, such as your employment, intended property type, desired loan product, assets and debts and your monthly income and expenses. When the mortgage lender processes the preapproval application and checks your credit, you get an initial preapproval or denial. If preapproved, you find out your loan amount plus terms like the interest rate.
Starting Your House Hunt
With a preapproval secured and a price range in mind, you can start the house-hunting process. This can take a varying amount of time depending on what your needs are and how the housing market looks in the area. It helps to find the right real estate agent to help you identify possible properties and guide you through the rest of the homebuying process. The Consumer Financial Protection Bureau recommends researching agents online as well as asking people you know for recommendations to find the right fit.
You and your agent will discuss the area where you want to live, the qualities of your desired home and your budget to get started. You can look at real estate websites like Realtor.com for potential leads while your agent also looks for current and upcoming listings. You can do walk-throughs of multiple properties with the real estate agent to help decide where to make an offer. You can also attend in-person and virtual open house events.
Read More: What Is Earnest Money?
Making a Home Offer
When you've found your future home, your real estate agent helps you with the offer paperwork to submit to the seller. They use information such as recent sale comparisons and the home's features to help you with a suitable offer price, and they usually request your preapproval letter and desired earnest money amount when they send the offer. Negotiations can take time since multiple buyers may be involved and the seller may want to change the terms of the deal.
Getting an offer accepted means you can move on with the detailed closing process that can take up to 45 days. It begins with tasks such as getting a home inspection, title insurance and home appraisal and also involves working with the lender to finalize the mortgage application. You complete a lot of paperwork during this period, and you communicate with various parties involved in the home sale.
All this work culminates in the closing meeting that you and other parties like the realtor, attorney, lender, escrow company and title insurer may attend. The specifics vary as some parties may sign documents online rather than get together for the process. However, the goal is to have all the final papers signed for your mortgage and the home purchase and to transfer the remaining upfront funds to end the homebuying process.
Read More: 10 Things You Must Know When Buying a Home
- Freddie Mac: Home Affordability Calculator
- Consumer Financial Protection Bureau: What Are All the Costs of Buying a Home?
- Consumer Financial Protection Bureau: How Does My Credit Score Affect My Ability to Get a Mortgage Loan?
- Consumer Financial Protection Bureau: Buying a Home? The First Step Is to Check Your Credit
- Washington State Department of Financial Institutions: Guide to Home Loans
- DC Department of Housing and Community Development: Home Purchase Assistance Program (HPAP) – Eligibility, How to Apply and Program Details
- Consumer Financial Protection Bureau: Consider Whether It's the Right Time for You to Buy
- Consumer Financial Protection Bureau: Understand Loan Options
- Lending Tree: Minimum Mortgage Requirements for 2021
- Consumer Financial Protection Bureau: Preparing to Shop for Your Mortgage
- U.S. Department of Housing and Urban Development: About Good Neighbor Next Door
- Consumer Financial Protection Bureau: Get a Prequalification or Preapproval Letter
- Consumer Financial Protection Bureau: Why Did My Monthly Mortgage Payment Go Up or Change?
- Quicken Loans: Types of Home Loans: Which Mortgage Is Right for You?
- Consumer Financial Protection Bureau: What Is "Seller Financing?"
- Consumer Financial Protection Bureau: Find the Right Home
- State of California: Home Buying Process
- Consumer Financial Protection Bureau: What Is a Mortgage "Closing?" What Happens At the Closing?
Ashley Donohoe has written about business and technology topics since 2010. Having a Master of Business Administration degree, bookkeeping certification and experience running a small business and doing tax returns, she is knowledgeable about the tax issues individuals and businesses face. Other places featuring her business writing include Zacks, JobHero, LoveToKnow, Bizfluent, Chron and Study.com.