First-Time Home Buyers Guideline to Home Buying Process
Buying a home for the first time can be a very exciting and important moment in a home buyer’s life. As we mentioned in our previous article, knowledge is the key to a successful buying experience in real estate.
If you have read the 6 Helpful Questions For First-Time Home Buyers, you are now ready to begin the process of home buying. Remember that the more you educate yourself about the process beforehand, the less stressful it will be and the more likely you will be to get the house you want for a price you can afford.
Take a look at this simple guideline that will introduce you to the buying process and help you to find and buy your first home:
1. Qualify yourself
The process of getting pre-qualified involves providing personal and financial information to your mortgage lender such as income and asset info, as well as information for pulling credit.
As a first-time home buyer, you should already know how much house you can afford before the mortgage lender tells you how much you qualify for.
Though there's not a fixed debt-to-income ratio that lenders require, the old standard dictates that no more than 28 percent of your gross monthly income be devoted to housing costs. This percentage is called the front-end ratio.
The back-end ratio shows what portion of income covers all monthly debt obligations. Lenders prefer the back-end ratio to be 36 percent or less, but some borrowers get approved with back-end ratios of 45 percent or higher.
2. Get Pre-Approved
Getting pre-approved for a mortgage is more in-depth than getting pre-qualified. During the pre-approval process, you will be asked for documentation that supports the information you’ve verbally provided as part of your pre-qualification.
A distinct advantage of completing the pre-qualification and pre-approval steps before looking for a home is that you’ll know in advance exactly how much you can afford.
In addition, getting pre-approved also allows you to move much faster when you find that perfect home. In today’s competitive market, a pre-approval lets the seller know your offer is serious.
3. Consider your financing options and secure financing
First-time home buyers have a wide variety of options to help them get into a home, including federally-backed loans and loans for home buyers who cannot meet the standard 20% minimum down payment.
Your state may also have its own programs for first-time homebuyers. Your mortgage interest rate will have a major impact on the total price you pay for your home, so try to shop around.
4. Check your credit
The home buyer's credit score is among the most important factors when it comes to qualifying for a loan.By law, you can receive one free copy of your credit report per year.If you find something wrong, dispute it. This will start the process of removing the error from your record and may also improve your credit score.
Just because you pay everything on time every month doesn't mean your credit is stellar. The amount of credit you're using relative to your available credit limit, or your credit utilization ratio, can sink a credit score.
The lower the utilization rate, the higher your score will be. Ideally, first-time home buyers will have a lot of credit available, with less than a third of it used.
Repairing damaged credit takes time -- and money, if you owe more than lenders would prefer to see relative to your income. Begin the process at least 6 months before shopping for a home.
5. Evaluate assets and liabilities
So you don't owe too much money and your payments are up to date. But how do you spend your money? Do you have piles of money left over every month, or are you on a shoestring budget?
A first-time home buyer should have a good idea of what is owed and what is coming in.
You should understand a little bit about monthly cash flow.
6. Determine Home Affordability
When buying a home, mortgage lenders will look at your income, your assets, the down payment you have, as well as your other debts, liabilities, and obligations.
It is recommended that home buyers look for homes that cost no more than three to five times their annual household income, assuming a 20% down payment and only moderate debt in addition to new housing payment.
Another general guideline is that a buyer’s total debt payments should not exceed 36% of their total household income, a ratio known as debt-to-income (DTI).
The best approach is to work with a mortgage professional to determine exactly what you can afford, both from a loan approval standpoint, as well as a comfort level for making the monthly payments.
7. Organize documents
When applying for mortgages, home buyers must document income and taxes.
Typically, mortgage lenders will request 2 recent pay stubs, the previous 2 years' W-2s, tax returns and the past 2 months of bank statements -- every page, even the blank ones.
Buying a home can take a long time, but knowing what you need and where to find it can save time when you're ready.
8. Find a home
Make sure to take advantage of all the available options for finding homes on the market, including using your Real Estate Agent.
With the help of your real estate agent, you can begin touring homes in your price range. It will be helpful to take notes on the homes that you visit as it may be possible that you will view a lot of houses. Some even take pictures or videos to help them remember.
Not only will you want to take notes about the home, you’ll also want to evaluate the neighborhood. In what condition are the other homes? Is there a lot of traffic on the street? Is there adequate parking? How about proximity to shopping?
Take the necessary time to find the right home-but don’t take too much time.
In a sellers' market, homes which are priced right sell quickly.
9. Make an offer
After you find the right home, your real estate agent will help you come up with and negotiate an appropriate offer based on the value of comparable homes in the same neighborhood.Your real estate agent will help you decide how much money you want to offer for the house along with any conditions you want to ask for, like having the buyer pay for your closing costs. Your agent will then present the offer to the seller's agent; the seller will either accept your offer or issue a counter-offer.
You can then accept, or continue to go back and forth until you either reach a deal or decide to call it quits. If you reach an agreement, you'll make a good-faith deposit and the process then transitions into escrow. Escrow is a short period of time (often about 30 days) where the seller takes the house off the market with the contractual expectation that you will buy the house - provided you don't find any serious problems with it when you inspect it.
Be mindful of your financial circumstances, down payment amount and closing costs when negotiating a price. Then, once you and the seller reach an agreement on the price, you’ll go under contract, or in escrow depending on your geographic location.
10. Obtain a home inspection
Home inspections are a common “next step” between buyer and seller after a home goes under contract. They’re so common that purchase offers are typically written with a contingency clause stating that the offer is subject to a satisfactory inspection by a licensed home appraiser.
As a home buyer, always exercise your right to a home inspection.
Even if the home you plan to purchase appears to be flawless, there's no substitute for having a trained professional inspect the property for the quality, safety and overall condition of your potential new home. If the home inspection reveals serious defects that the seller did not disclose, you'll generally be able to rescind your offer and get your deposit back. Negotiating to have the seller make the repairs or discount the selling price are other options if you find yourself in this situation
A thorough inspection will take anywhere from 2 to 8 hours to complete.
Several days after the inspection, the licensed inspector will provide to you a report which details the home’s system and structure. It will then be your choice whether to ask the seller to remedy the deficiencies found.
If the seller agrees to make repairs (e.g.; replace jiggly door handle; repair cracked window sill), you will have an opportunity to “walk-through” the home prior to closing to ensure all repairs were made, as agreed.
Inspections should be performed on all homes — even newly-built ones.
11. Close or move on
If you're able to work out a deal with the seller, or better yet, if the inspection didn't reveal any significant problems, you should be ready to close.
Closing is the last step prior to getting the keys to your new home. It’s the legal process by which ownership of a home moves from one person to another, in the form of a deed.
Closing is a relatively simple process, basically involves signing a ton of paperwork in a very short time period, while praying that nothing falls through at the last minute.
In advance, all of the necessary paperwork for signature will have been delivered by your lender, and your final Settlement Statement -- called the HUD-1 -- will mirror the preliminary settlement statement which was sent to you in advance.
Often, closing is just the formality of “sealing the deal”. Sometimes the seller is there; or, an agent for the seller is there. Your real estate agent may be there, too, as well as your lender.
Closings can take anywhere from 25 minutes to two hours, depending on the complexity of the transaction.
Things you'll be dealing with and paying for in the final stages of your purchase may include having the home appraised (mortgage companies require this to protect their interest in the house), doing a title search to make sure that no one other than the seller has a claim to the property, obtaining private mortgage insurance or a piggyback loan if your down payment is less than 20%, and completing mortgage paperwork.