As you prepare, here are the steps to follow as you purchase your first home.
Determine Whether You Are Ready to Buy a Home
First, you should determine whether you are ready to buy a home. Homeownership can be more expensive than renting, since you’re ultimately responsible for added costs like home repairs, utility costs, garbage pickup, water, and electricity. You also need to pay for taxes and insurance related to your home. These costs add up quickly, and if you are not financially prepared, you could end up in a bad position—especially if you only have one income. In addition to establishing an emergency fund, consider getting out of debt (or at least reducing your debt) before applying for a mortgage. While having debt is not a deal breaker, lenders will use your debt-to-income ratio which shows how much of your income goes toward debt repayment each. This ratio helps lenders determine how mortgage you can handle, mathematically. While you may be under pressure from friends or family to buy a home, it might make sense financially to wait until you’re truly ready.
Start Shopping for a Loan
Most people need a loan to make a home purchase. In many cases, it makes sense to get preapproved for a mortgage before you begin shopping for a home. Your preapproval can provide you with an idea of how much you can afford. If you want more options, consider using a mortgage broker. With a mortgage broker, you have access to several different loan companies and programs, which can help you find the best rates. However, your small local bank or credit union may have options that will save you money as well.
Find the Best Payment Options and Loan Types
When it comes to your mortgage, you may be surprised at the different loan types and payment options available. Looking at terms like private mortgage insurance (PMI) can become overwhelming, but a little research can help you move forward. Some buyers choose a 15- or 20-year loan, because the term is shorter, and they might be able to lock in a low rate. On the other hand, one reason 30-year loans are so popular is that a longer-term usually means a lower monthly payment. In this case, you might have a slightly higher interest rate, but the payments are usually more manageable.
Adjustable-rate vs. fixed-rate mortgages
With an adjustable-rate mortgage (ARM), you can expect to see your interest rate vary over time. The initial rate is lower, but you run the risk of seeing the rate rise as market conditions change—and that means a higher monthly payment. On the other hand, a fixed-rate mortgage remains the same, no matter what is happening with the economy or the market. This provides stability in your monthly payment and can make it easier to plan. However, you run the risk of missing out if rates fall, but if they do, it might be possible to refinance to a lower rate and capture the savings.
Have a Down Payment Ready
Your down payment can reduce what you owe and also reduce your costs. Realize, though, that if you put down less than 20% of the cost of your home, you could end up paying private mortgage insurance (PMI). While you don’t need 20% down to be successful in homeownership, it might be a good idea to consider the cost of PMI when you buy. You may be considering creative financing to cover the down payment, but you should be careful when you make these choices. You want to build wealth with your home purchase. If you make the wrong choice, then you may end up hurting yourself financially.
Be Honest About What You Can Afford
You also need to determine how much home you can really afford. One good rule of thumb is to keep your mortgage, along with your taxes and insurance, between 25% and 30% of your income. Other experts advise that your home cost no more than two and a half times your annual salary. If you spend too much on your mortgage, you might not be able to meet your daily obligations, let alone save for retirement. A smaller house might be worth the peace of mind. If you are carrying debt (credit card or student loan debt), a smaller home payment can be an especially good idea.
Find a Good Real Estate Agent
Once you have determined how much you can really spend and are preapproved for a mortgage, it’s time to find a good real estate agent. This is one of the most important steps when preparing to buy a home. Your agent should support you at every step of your homebuying process while carefully considering your wants and needs. They will be your go-to person for advice, recommendations, and explanations of market to help you find a home that suits your needs and that you can afford. Once you make an offer, your real estate agent should work to negotiate terms that you are happy with. They can also guide you through the paperwork and the process needed to close successfully.
Request a Home Inspection
Once you’ve found the home for you, make sure to get a thorough home inspection. You should pay for the home inspection. When you do so, the home inspector will look for hidden problems with the home before you purchase it. You may be able to negotiate a lower price if you know that the home needs major repairs. Consider an independent home inspection, separate from the one the homeowners had done. In many cases, the results of a home inspection can be grounds for pulling out of a deal without losing your earnest money.
Be Patient During Escrow
Once you have bid on your home, and the offer is accepted, you will go into escrow. During this step, an escrow holder will make sure that all the documents, money, and other necessary information are properly prepared before you close. Escrow is set up to protect the buyer, the seller, and the lender. It can take time to complete escrow, depending on a number of factors. It’s not uncommon for a closing date to be three to five weeks in the future.
Close and Move-In
When the closing date arrives, you show up and sign the final papers. When this happens, the escrow agent will release the funds to all appropriate parties. Once you have closed on your home, it is time to move in. You can paint, unpack, and enjoy your new home. Be sure that you change your address with your bank, and other accounts. You can set up your utilities and cancel your old ones as well. That will save you time and money, because you will avoid late fees. Some companies, such as Xfinity, will even waive installation fees if you transfer your old account to your new address, too.
The U.S. Department of Housing and Urban Development funds public housing and offers vouchers for low-income Americans.The U.S. Department of Veterans Affairs (VA) has home loan programs for service members, veterans, and eligible surviving spouses.The U.S. Department of Agriculture (USDA) has a homeownership program for rural Americans.The Federal Housing Administration insures mortgages and offers downpayment assistance, making a home purchase more affordable.
