Before you dial up your real estate agent and start packing your boxes, here are some things to know in order to be informed and in control as a buyer.
Buying a home is one of the biggest decisions you'll make in your life. Most of us fake our way through the process, following the lead of a realtor. But before you dial up your real estate agent and start packing your boxes, here are some things you can know in order to feel more informed and in control as a buyer.
In this guide, we’ll cover the home-buying process from start to finish. If you’ve already begun, feel free to skip ahead to the section that best applies to you.
Knowing what you can afford
Hidden costs to watch out for
Understanding the financials
Knowing when to buy
Staying organized and focused while house-hunting
First, take a look at how to know what you can afford.
Here are some tips for finding a house that you’re comfortable paying for:
Consider your debt-to-income ratio.
This is the amount of debt you have (credit card payments, student loans, auto loans, etc.) compared to your overall income. The ratio helps mortgage lenders evaluate how much additional debt you can handle, helping them to decide whether or not to give you a home loan. As a rule of thumb, you should aim to have a debt-to-income ratio less than 36 percent. Bankrate.com offers a helpful calculator so you can quickly find your ratio.
Save for your down payment.
Once you’ve got a realistic goal based on your debt-to-income ratio, start saving. Set up a savings plan and evaluate your current spending habits to fit your budget. You could even consider earning extra money from a side job, project, or hobby.
Build your credit.
Having a checking or savings account and paying your bills on time are the two most important indicators of good credit. To continue building your credit, try to diminish your outstanding debt and keep existing debt in check.
Calculate your mortgage payment.
Figure out the purchase price you can afford using a mortgage calculator. This calculator factors in the current interest rate for your area and different loan types to help you determine what your payment will be. Investopedia’s Mortgage Calculator is a good one to check out.
Factor in the extra insurance costs.
If you can’t afford to make a down payment of at least 20% on your home, you’ll need private mortgage insurance (PMI). PMI protects your mortgage lender if you default on your home loan. PMI fees depend on the size of your down payment as well as your credit score, requiring a monthly payment though, in some cases, you can pay in a large amount upfront.
But, what about those hidden costs?
You may have saved enough for a down payment, but these extra costs might mean you need to put away a little more. In addition to your down payment, it’s smart to set aside a few thousand more dollars to handle any of these hidden costs. Here are some typical expenses that often surprise first-time buyers:
Understand all the closing costs.
There may be any number of costs you may incur during the closing process, so it is good to ask questions and plan for these costs as you plan your purchase.
Inspections and appraisals
Surveys to verify property lines
Title insurance and title searches
Discount points (which you pay to get a lower mortgage interest rate)
Recording fee (to record the purchase in local government records)
Typically, the buyer pays these fees, but it’s not uncommon for buyers and sellers to negotiate for the seller to pay a portion, or even all, of closing costs.
Moving costs are in addition to the purchase.
In the excitement of buying your first home, it’s easy to forget that moving out of your old home and into your new one is an unavoidable home buying cost.
If you live in an apartment and are leaving before your lease is up, you’ll likely have to pay a penalty for breaking the rental agreement.
Professional movers will charge you a fee, often by the hour. If you choose to do your own move, you still need to consider the costs of packing materials and rental trucks.
Depending on how far you’re moving, you may also need to pay for a night or two in a hotel.
Include Home Owner Association (HOA) dues.
If you’re moving into a community with a homeowners’ association, it will be the seller’s responsibility to make sure the dues are paid up until the closing date. After that, dues are your responsibility.
Plan for initial decorating or renovations.
Rare indeed is the resale home that’s decorated exactly the way the buyers want it. Chances are that you’ll find something cosmetic you want to change right away, whether it’s painting the walls, replacing window treatments or ripping out carpet. Even if you’re buying a brand new home, you’ll still have decorating work to do.
Meet with a mortgage lender to discuss your finance options.
Applying for a mortgage might sound intimidating, but it’s not as out of reach as you might think. Here’s what you should know when navigating the mortgage process:
Get started with pre-qualification.
The pre-qualification step involves talking with a mortgage lender about various program options — a 30-year fixed-rate mortgage, a 15-year fixed-rate mortgage or an FHA loan, to name a few. They’ll take into account what you expect to have as a down payment and help you determine what is best for your situation.
Take your time with the loan application.
It’s a good idea to download a blank loan application to get a feel for the information you’ll need when submitting your own. Most applications will require proof of income, proof of employment for the past two years, proof of identity and residency and your Social Security number.
Work with a loan officer on origination and underwriting.
A loan officer reviews your financing options and helps you fill out a credit application to create an account for your loan. Then an underwriter reviews your application and determines the level of risk you present based on the information you provide. The underwriter may ask you to provide additional information about your financial history.
Allow time for processing.
When you settle on a home and sign a purchase agreement with the seller, the purchase agreement goes to your mortgage lender. The lender may decide to have your new home appraised to make sure you’re paying a fair price.
Get ready for the closing.
The lender then works with a title company to finalize the title on your new home. At the closing, you will sign all closing documents and pay closing costs to finalize your title on the home. Your mortgage lender will receive all of these documents when the process is complete.
When is the best time to house hunt?
Did you know there’s a time of year that makes home buying a whole lot easier? You may have heard that the autumn months are best for house hunting, but a few other times are idea as well, right down to a specific day of the week. Pay attention to the calendar as you’re saving up for the big move.
The market is always changing, but typically, a good month to buy a home is October. The premium for houses tends to be the lowest in the fall, bottoming out at 2.9% off the fair market value, according to MarketWatch.com. Few people seemed to take advantage of this, however, as only 8.4% of home closures happened during October. Sellers who keep their homes on the market through the fall and winter months are most likely very motivated to sell.
While you won’t necessarily have a lot of homes to choose from, many will be on winter clearance prices in January and February. You’ll most likely be able to negotiate a more favorable price and many are already priced to sell. But don’t expect to find your dream home during this time period. With fewer homes on the market, you may have to lower your expectations. Since 2013, February has the lowest number of home sales.
Research from RealityTrac® also found that with an average discount of 2.3%, Monday was the best day to close on a house. Friday came in at a close second with an average of a 2% discount. Of course, mid week offers other benefits. It's best to take into consideration what works best for all the last-minute activities, but most importantly, allow for flexibility as often delays happen.
Finally, it’s time to house hunt and make an offer on a house you love.
You’ll need these five house-hunting tips to keep you on track, organized and focused while you’re out exploring all your options.
Take a first-impression walk-through.
The first time you enter a home, do an initial walk-through without dwelling on a specific room or feature. Take note of your first impressions and enjoy the opportunity to soak it all in. Once you have a gut feeling, it’s time to consult your priority list.
Think like an inspector.
Once you’ve done your first walk-through, take another trip through the house, this time taking notes and paying careful attention like an inspector.
Measure your furniture.
Making sure your king-sized bed fits into the master bedroom could be a deal breaker. Don’t burden yourself with the unnecessary cost of an entirely new furniture collection.
Take photos and video.
You’d be surprised how much you can forget the moment you walk out of a potential house. Ask the realtor if you can take photos or a quick video tour so you’ll remember what you saw later.
Come back at another time of day.
If you decide you’d like another showing of the house, be sure to come back at a different time of day. Take note of the changes in the lighting and atmosphere. Each time you return, you’ll discover something new about the location.
Achieve your dream of owning a home with this ultimate guide. Follow these tips and you’ll be closing on, moving in and unpacking in your new house in no time.