Buying your first house is no doubt exciting, but don’t let that excitement carry you away. Real estate transactions follow a set path, meaning there’s an order to things throughout the process.
When you go about the home buying process in the proper steps, you can enjoy all there is to celebrate about the journey to homeownership.
However, if you take your steps out of turn, you could find yourself stressed to the max – and potentially without a house at all.
Here are the six steps to follow when buying your first house.
- Step One: Hold the House Hunt! Financial Planning First
- Step Two: Preparing Your Credit Report and Debt-to-Income Ratio
- Step Three: Get Pre-Approved for Your Home Mortgage Loan
- Step Four: Get the Best Real Estate Agent on Your Side
- Step Five: The Fun Part – Finding Your Dream Home & Submitting Offers
- Step Six: The Closing Process
- Have Questions? Ask Becky!
Step One: Hold the House Hunt! Financial Planning First
You’re not alone if you find yourself antsy to hit the pavement in search of your dream home. But that’s not the first step. Finding a house that you love first before you’ve prepared could be heartbreaking.
Your first order of business is to save for your down payment. Your down payment will likely be around 20 percent of the value of the house you buy. If you’re buying a $300,000 home, you’ll need a $60,000 down payment. But that down payment isn’t the only funding you’ll need.
When you’re ready to make an offer on the house you choose, you’ll need to submit an earnest money deposit with your proposal. The earnest money deposit does not go to the seller but goes into an escrow account.
But it does let the seller know you’re prepared to go through with your purchase.
Earnest money deposits are negotiable with the seller but usually land at around one or two percent, which translates to an additional $3,000-$6,000, paid cash-out-of-pocket.
Buyers pay closing costs, which adds another two to five percent of the property’s value so you can figure in another $6,000 – $15,000.
“Closing costs” is a term that envelops all of the fees associated with your real estate transaction, including lender’s fees, appraisals, inspections, title check, and title transfer, etc.
Closing costs may also be negotiable with the seller. Talk with your real estate agent about negotiating closing costs before you submit your offer.
Your home mortgage loan does not cover closing costs in most cases. There are exceptions, but most often, the buyer must pay closing costs at the end of escrow, separate and apart from the loan.
When budgeting for your down payment, earnest money deposit, and closing costs, don’t forget to figure in your cost of moving as well as a nest egg for emergencies. You don’t want to be house poor with buyer’s remorse.
Step Two: Preparing Your Credit Report and Debt-to-Income Ratio
Buying real estate isn’t all about the money you’ve saved. You’ve also got to provide a pristine credit report and a healthy debt-to-income ratio.
Lenders look at your credit report to see how well you’ve borrowed and repaid the money to creditors. They’re looking for timely payments and making sure you’re not over-extending yourself with your purchase.
It’s crucial that you do not finance any significant purchases, such as cars, or obtain new credit before applying for your home loan. It’s also imperative that you don’t change jobs. Lenders also look for reliable work history.
When a bank evaluates your credit report, they want to see a credit score of at least 620, although a score that is closer to 740 can earn you lower interest rates.
Your debt-to-income ratio, or DTI, is the amount of money you pay out each month compared to what you earn. To figure your DTI, add up your monthly expenses and then divide that number by your gross income.
A positive debt-to-income ratio is 36 percent or lower for best results, or 43 percent on the high end. You can lower your DTI by paying down debts.
Before you look for houses, make sure your money and numbers are in order.
Step Three: Get Pre-Approved for Your Home Mortgage Loan
Getting pre-qualified for a loan is not the same as being pre-approved. Pre-qualified means there’s a pretty good chance the bank would approve your application, but no application has been processed, and the loan is not guaranteed.
On the contrary, pre-approval means you’ve already gone through the application process, provided all the necessary documentation, and signed an agreement with the lender (who will also provide you with a list of estimated closing costs).
More importantly, this means you’re equipped with full purchasing power when you house hunt — not just window shopping.
Pre-approval lets you know your actual home-buying budget – including closing costs and earnest money deposit. It also expedites the process once you do find a house you’d like to buy.
Another perk of pre-approval is that it might give you an edge if you’re up against competing offers that don’t have pre-approval for their home mortgage loan.
Step Four: Get the Best Real Estate Agent on Your Side
Your real estate agent goes way above and beyond showing you houses that meet your criteria.
The agent helps you know what to look for when shopping homes, will help you write a compelling offer, negotiate on your behalf, and then walk you through the contracts and closing process.
Interview real estate agents. Start by asking friends or family for referrals, read ratings and reviews online, review their websites, and schedule meetings.
Have a list of questions ready. You’ll get an idea not only of the agent’s background, experience, and certifications but also their personality.
You’ll be working closely with your agent for several months. It’s vital that you feel comfortable and relaxed and that your questions are answered thoroughly and in a timely fashion.
Step Five: The Fun Part – Finding Your Dream Home & Submitting Offers
You’re equipped with purchasing power and a stellar real estate agent, so it’s time to start looking for a house that makes you swoon. Your agent will help you understand what your budget will buy in the current market.
First-time buyers can have unrealistic expectations and feel sickened when they have to start chopping up their wish list in place of compromise. Knowing ahead of time what’s fair in real estate can make the process easier.
Your agent will help you draft, submit, and negotiate offers, but don’t get your heart set on a single property. There’s a chance the seller will choose another offer, or that problems may arise during appraisals and inspections.
Step Six: The Closing Process
The closing process may feel like the hardest part of the journey.
You’re excited and ready to move into your new home, but the lenders have requirements and procedures that have to be met.
As part of the closing process, the house you’re buying has to be inspected and appraised.
An appraisal satisfies the bank that the house you’re trying to purchase holds the same value as the amount you’re borrowing.
The inspection confirms that the property is structurally sound, that all major systems like HVAC, electrical, plumbing, and roofing are all in good condition.
The title search verifies that there are no liens or taxes on the house.
The closing process can take as long as 90 days or more, so be patient.
When you follow the steps in order, buying your first home is a rewarding experience, but when you one-two-skip-a-few and start the house-hunt first, you could find yourself deflated.
Talk with your real estate agent for more understanding of the home-buying process.
Have Questions? Ask Becky!
Give Becky Nay a call today at 801-573-2077 to learn more about local areas, discuss selling a house, or tour available homes for sale.