How to Buy a House When You're Considering A Move
If you are thinking about purchasing a home, you might just be wondering exactly how to do it and where you should even start. With terms like “closing”, “underwriting”, “HOA fees”, and other unfamiliar terms floating around, you are probably feeling a bit overwhelmed- and that is completely normal.
Knowing how to buy a house is not something that comes naturally to everyone. There are too many moving parts for that. In fact, there are so many moving parts that the process of buying a home requires several people from the first step to the last. And not one of those people are experts at every part of the process.
Take a deep breath, my friends. We are going to eradicate the overwhelm with this very basic guide on How to Buy a House. We will talk about the big steps in the process that can take you from confused to a homeowner. Let’s dive in.
How to Buy a House Step 1: Assess Your Financial Situation
Before you do anything else, you need to assess your current financial situation. You need to know where you are at so you will know if anything needs to be changed. Answer the following questions:
Your credit score plays a very important role when it comes to purchasing a home. It tells home mortgage lenders whether or not it is safe to loan you money. The minimum credit score you need depends on the loan you are applying for. There are four basic loan types. The names and required credit scores follow:
- Conventional/Traditional Loans- 620 – 640
- Federal Housing Administration Loans (FHA Loans)- FHA loans require a minimum credit score of 500 with a 10 percent down payment or a 580 with a 3.5 percent down payment.
- Veterans Affairs Loans (VA Loans)- This depends on the lender, but some will accept as low as a 580.
- USDA Loans - There are no set credit score requirements for USDA loans. Instead, the lenders look at other factors, like your actual credit history and income. Many experts suggest having at least a 640 before applying, but this is not necessary.
Does your credit score fit any of these numbers? If not, you should spend some time working on your credit before applying. A low credit score not only disqualifies you for some mortgage loans, but it can also cause you to pay really high interest on the loans that you do qualify for. The higher your credit score, the more likely you can get a home purchase loan with favorable rates and terms.
Your debt-to-income ratio (DTI) is determined by dividing your monthly bills by your gross monthly income. Lenders pay attention to your DTI in order to determine if you have enough money left over to pay your mortgage. For the most part, lenders want to see a DTI of 40 percent or lower- the lower, the better. Improving your DTI will require increasing your income or decreasing your monthly bills.
Many home buyers listen to the mortgage lender tell them how much home mortgage they can afford. This is a bad idea. Lenders only take into account what is on paper- not all of your expenses. They will not factor in Christmas or birthday presents, vacations, family movie nights, or other spending.
Instead of letting the lender decide how much you should borrow, figure it out for yourself. And do not just think about the total loan amount. Instead, calculate how much you can afford to pay each month. This is the number you need to base your mortgage on.
Most home loans will require a down payment, and the more you can put down, the less you have to borrow. Typically, the lowest down payment comes with the FHA loans at 3.5 percent, though a few loans do not require a down payment at all. Even so, you should aim to have a down payment when you are looking for a home purchase loan.
Before you start looking for a home or a home mortgage, you should think about what you need out of your new home. How many bedrooms and bathrooms does your family need? Do you want a large yard or maybe a house with a pool? Do you want to live in the city or in a rural area? Is there a certain school zone you need to be close to?
If there are other people moving with you, like a spouse or children, have everyone talk about what they would like out of your new home. Make a list and be sure to mark anything you are unwilling to compromise on. By knowing what you need and what you are looking for before you start looking, you can focus your attention on the right type of homes. This can save you a lot of time. It can also keep you on target instead of being distracted by “shiny” homes that do not have what you need.
How to Buy a House Step 2: Know the Best Times to Buy
When you make up your mind to buy a house, you may want to jump straight in. That move may have you spending much more than you need to. Spring and summer are popular home buying times. With so many buyers looking for homes, prices tend to be much higher. Also, interest rates on mortgages spike when there is high demand.
In the cooler and cold months, there are a lot fewer home purchases. As such, sellers are more willing to negotiate. If you wait until at least September, you should get a better price and a better interest rate. If you will hold off until December or January, you have an excellent chance of getting the best deal overall.
You should also take a look at websites like Zillow. They usually offer excellent information on your local market, including popular buying times. Doing your research before you start house hunting can help you make wiser decisions.
How to Buy a House Step 3: Know the Costs
When people think of buying a home, the main- and sometimes the only- cost they think about is the actual purchase price of the home. However, this is not the only cost- not by a long shot. For starters, most lenders require that you carry private mortgage insurance unless you pay at least 20 percent down. Sometimes, this cost can be fixed into your mortgage loan, but as it is a percentage of your home’s price, it should still be factored into your decision.
There are times you have to pay the property tax upfront, too. The people who write up your mortgage agreement and the lender will charge closing costs, which is generally a percentage of the home’s price. Your real estate agent or other people directly involved in the process may charge a fee as well.
You also cannot forget your actual moving costs and any painting and so on you want to do before moving in. There will also usually be utility connection fees. You can call around to different moving companies and the utility companies to find out how much this will all cost beforehand.
If your home is part of a homeowners' association (HOA), you will have those fees as well. You can find out any necessary information like this from the real estate agent or the previous owners. All of this information should be shared upfront.
How to Buy a House Step 4: Create Your Budget
Now that you have an idea of what all you are looking at paying, it is time to create your budget- two budgets, actually. The first budget should involve the costs that will be due before you actually move in. This should include your down payment, how much you can afford for closing costs, moving expenses, connection fees, and so on. You need a good idea of what you can afford upfront as this might impact the price of the home you buy. If the home and all the associated costs are more than you can afford, you will either need to look for another home, negotiate for a lower price, increase your income, or increase your down payment.
The second budget needs to be for the costs after you move in. You should set a household budget just like you- hopefully- already do for your current home. However, this budget will show just how much you can afford to pay out each month, including any insurance and fees. Again, if the actual monthly expenses will be more than you can comfortably afford, there will have to be some adjustments somewhere.
Having this budget figured out in the beginning can help you stay within your means as you shop for a mortgage. And, sharing this information with your real estate agent can guide them in the direction of houses you can afford.
How to Buy a House Step 5: Shop for a Mortgage
Now is the time to look for your funding. It is much better to do this before you start looking at homes so that you start out looking in the right direction. At this point, you are not actually getting a home mortgage. Instead, you are comparing loans and lenders. You are getting prequalified for the mortgage and getting a preapproval that you can take house shopping with you.
This preapproval tells you, your real estate agent, and the seller how much you should be able to borrow. With it, you and the real estate agent know what price range you can work within. It also shows the seller that you are serious and that you can afford the home.
How to Buy a House Step 6: Consider Working With a Mortgage Broker
You might consider working with a mortgage broker as opposed to applying at a bank. Mortgage bankers work for one bank and with that one bank’s loan products. Mortgage brokers have a network of lenders and each of those lenders has their own products.
The benefit of using a mortgage broker is that they have access to several loan types and can decide where you should apply simply by looking at your financial situation. They can save you a lot of time and frustration by helping you determine if there is something you need to work on before applying. They also may be able to get you approved for a loan product you did not even know existed.
How to Buy a House Step 7: Shop for a Home
After you have your preapproval from a lender, you get to move on to the fun part- you get to start looking at houses. Keep in mind the housing needs that you listed earlier, but know that you may not find a home that has everything you need and want. You can always make modifications later if you want, except with two things: Where the house is located and the layout of the home. These two things are permanent, so make sure you are happy with them before making a decision.
Other things can be modified. Walls can be torn down. Carpet can be exchanged for hardwood floors. The den can be turned into another bedroom or a guest room, or a bedroom can be turned into an office. Kitchens can be upgraded, and so on. The most important part is that you find a home with the foundational aspects you are looking for.
How to Buy a House Step 8: Make An Offer
When you find your dream house- or one that can be turned into your dream house- make an offer on it. You may or may not be in competition with other buyers. If you are, having all of your ducks in a row so that you could make the purchase immediately will give you a leg up in the fight. You can have your real estate agent help you with the offer. You may need to offer more than you wanted to, but remember to stay within the amount you can afford.
Knowing the Real Value Helps You Make Smarter Financial Decisions.
How to Buy a House Step 9: Get It Inspected and Appraised
An appraisal is necessary as it lets you and your lender know if you are getting a fair price or if you are being charged more than it is worth. An inspection is what helps you find any issues in the house. This information can help you either negotiate the price or possibly have the seller cover any necessary repairs. On inspection day, walk around with the inspector so you will know what they know.
How to Buy a House Step 10: Close the Sale
Next, it is time to finish up the paperwork process. This is the point that the loan will actually be fully approved, loan documents and purchase agreements will be signed, all underwriting will be done, and anything else that needs to be done to finalize the sale. Be aware that this process can take weeks or longer. Also, if anything in your financial situation has changed, your loan approval might be in jeopardy. If that is the case, you will find out during this step.
How to Buy a House Step 11: Move In, and Enjoy!
You did it! You have bought your home. All the hard work is done, now it is time for you to enjoy it and make it your own. Now is also the time to take another look at your budget. Make sure that it is in line with what you will owe each month and double-check that you calculated everything right. You do not want to be surprised later.
I have one more home buying tip for you. Instead of making one payment each month, split your monthly payment and pay every two weeks. For instance, if your mortgage payment is $700 per month, pay $350 every two weeks instead. This will actually have you making a full extra payment each year, which will help you pay down your balance faster.
Conclusion
Learning how to buy a house when you are thinking about moving is not really as difficult as it seems. However, unless you are familiar with the process, you can quickly and easily get overwhelmed. Real estate agents and mortgage brokers can make the process a little simpler for you since they do these things for a living.
You might also talk to any family and friends of yours that have purchased a home. Ask them to share their experience as well as anything they wish they would have know beforehand. Most of all, take a deep breath and take it one step at a time.