You've decided you want to become a homeowner, so now what are your next steps? Understanding all the things you need to buy a house will keep the home buying process positive while keeping you from becoming overwhelmed.
What's the First Step to Buy A House?
Determining how much house you can afford and getting pre-approved for a mortgage are two important first steps in the home buying process.
Online affordability calculators can help you in determining a house budget by leveraging factors including your monthly income and expenses, current interest rates, down payment, and term lengths. Once you have an idea of how much home you can afford, you will want to start the pre-approval process so sellers know you have funding available when considering your offer on a house.
The Credit Score You Need to Qualify for a Mortgage
Your credit score is a three-digit number between 300-850.
Credit scoring models like FICO and VantageScore use information from your credit report, created by the three main credit bureaus: TransUnion, Experian, and Equifax, to establish your credit score.
Credit scores are usually based on factors such as how many accounts you have in good standing and how often you make payments on time. The credit score you will need to buy a house varies by state and by the type of mortgage you are looking to get. While credit scores required for homeowners vary, Credit Karma found that the average VantageScore 3.0 credit score was 684 for first-time homeowners.
Factors Lenders Consider When Determining Your Eligibility For A Mortgage
Lenders want to know you will be able to repay the money they are lending you. There are many factors lenders consider when determining your eligibility for a mortgage.
- Private Mortgage Insurance (PMI). PMI is usually not required with conventional mortgages if you have a down payment of at least 20%. If you do have PMI on a conventional mortgage, lenders are required to end it once your principal is 78% or less of the original property value. FHA loans will require PMI until you refinance the loan.
- Employment. Lenders will want to know you have a steady income and will review your employment earnings from the past two years.
- Debt-to-Income Ratio (DTI). Most conventional lenders increased DTI limits to 50% at the end of 2018 with most DTI's over 45% requiring a higher minimum credit score.
Figuring Out the Size Home You Need
Buying a house is one of the biggest investments most individuals make in their lifetime. There are several factors to consider when determining how big of a home you need, including:
- How many rooms do you need? Answering questions including how many people are in your family, if you are planning on adding to your family, whether or not you frequently host overnight guests, and if you need a home office, can help in determining how many rooms you should look for.
- How much square footage do you need? While a larger home provides more space, they often increase property taxes, are prone to collecting more clutter, can be more expensive to heat and cool.
- How much land do you want? Every situation is unique, and some buyers look for outdoor space for kids and pets to play on, while others are happy with less green space and easy access to local stores and restaurants. Make sure you consider what you will want now and in the future when making this decision.
Budgeting and Getting Your Down Payment Ready
The amount of your down payment can affect the type of mortgages you may qualify for, your mortgage interest rate, and monthly mortgage payments. Follow these steps to budget for a down payment:
- Determine how much you need. Online down payment calculators can help determine down payment amounts for various mortgage types based on your location, mortgage amount, and credit score.
- Identify your timeframe. Dividing the anticipated down payment by the number of months you have before you plan on purchasing a home will help you determine how much you need to save each month.
- Make room in your budget. To save a large amount of money, you need to increase your income, decrease expenses, or both.
- Establish an automated savings plan. Saving can be difficult, so creating an automated way of saving a certain amount from each paycheck can be helpful.
- Maximize unexpected money. Bank large commission checks, bonuses, cash gifts, and tax refunds to achieve your goal faster.
Making an Offer
From down payments, contingencies, escrow accounts, and counteroffers, the process can get overwhelming fast. Here are some simple tips to help you make a strong offer and go from house hunter to homeowner:
- Pick a starting price. Several factors go into coming up with a starting price, including the condition of the house, seller situation, the current housing market, and your budget. Your buying agent can be a valuable resource in determining this number.
- Set contingencies. In addition to standard contingencies like appraisals and home inspections, you can also include things like a quick closing or offer to let sellers rent the house back from you until they find a new home.
- Add a house letter. It's not uncommon for a seller to receive several offers, and one way to make your offer stand out from the rest is with a home buyer letter to the seller letting them know what their home will mean to you.
- Submit your offer. Once all components of your offer are ready, your agent will deliver your offer to the seller. They will then have the option to accept it or come back with a counteroffer for you to consider.
Getting Ready to Close
A closing date will be listed on the final purchase agreement between you and the seller. In addition to a home inspection, the selling and buying agents will work with the title agency and lender to get everything ready for the transfer of ownership to take place.
This time period can last anywhere from a couple of weeks to several months. If you are working with a SimpleShowing Agent, you will also receive your $5,000 average refund check at this time.
Understanding all the things you need to buy a house before you start looking will keep you from becoming overwhelmed and make the experience a positive one.