Buying a house can be challenging, especially if you're a first-time buyer. The process involves down payments, mortgage rates, interest rates, credit scores, and finalizing the deal, among other things. These things can overwhelm you, and our steps to buying a house for the first time below might help you navigate this challenging task.
Step 1 - Make Sure You're Ready
Buying a house is a significant investment, and you need to consider various factors to ensure you're ready for this step. First, consider your income status. Your financial position helps you know if you can meet down payments and other expenses when buying the house.
Second, understand your DTI (debt-to-income ratio) as it determines the approval of the mortgage applied. For instance, the FHA (Federal Housing Administration) provides a 43% DTI ratio. Thus, your regular debt payments, including housing-associated expenses (property tax, mortgage, and mortgage insurance), should be equal to or less than 43%. This way, you might be able to meet your obligations without straining financially.
Step 2 - Figure Out How Much House You Can Afford
Setting a home-buying budget is among the things to do before buying a house. And although the FHA provides no more 43% DTI ratio, buying a house that attracts less than 28% of your monthly take-home salary is considered best practice by most people.
Why is this important? It might leave you with enough for other things and emergencies. And if you have several houses to choose from, a mortgage calculator helps you get an idea of your monthly payment to settle on one within your budget.
Step 3 - Make A Plan for The Down Payment
Down payment is one of the most vital steps to buying a house. Like any other expensive goal, you need to figure out the financial aspect. Buying a house for the first time might require a mortgage, where you can get the money from a lender and pay it back. A pre-requisite for a mortgage is a down payment.
Here comes a most asked question. How much does one need? A 20% down payment on a mortgage can be a good start in most cases. A down payment of 10% on the house might be feasible, but a down payment of 20% may help you avoid PMI (private mortgage insurance), lowering your monthly payment.
Many first-time homebuyers save about 3% of the closing costs and fees lenders and title companies charge in their house-buying transactions. These include property taxes, professional fees, and insurance.
Your savings for house buying, the rates of people you transact with, and the location influence how much you can spend on down payment and closing costs. Perhaps, more savings and comparing service fees by other parties involved might help you get things done. Plan to set a budget for a down payment and closing costs. Start now and if you've started, keep going!
Step 4 - Decide What Type of Mortgage Is Right for You
A mortgage can help you get the finances to buy a house. However, not getting the right type of mortgage might be expensive. Let's have a look at a few of them:
- A fixed-rate mortgage – This type of mortgage attracts a fixed interest rate for the rest of its life.
- A conventional mortgage – Private lenders, including banks and credit unions, offer this mortgage.
These are not the only types of mortgages. Thus, read more here!
Step 5 - Get Preapproved for A Mortgage
Not everyone is privileged to have the cash to buy a house, leaving many with an option for a house mortgage loan. However, how does one get preapproved for the loan?
Preapproval for a mortgage is when a lender scrutinizes your income, down payment, DTI, assets, and other things to decide to pre-qualify you to buy the house.
You might not find a shortage of lenders, whether local banks or online lenders. Thus, when shopping around for the best lender, consider their loan terms, rates, mortgage insurance, down payment requirements, and closing cost, among others.
Step 6 - Begin House Hunting
This is the fun part of the steps to buying a house. It is a personal decision; thus, personal needs and preferences might play a key role. Ensure to make a list of your needs and preferences and rank them according to levels of importance, deciding the deal-breakers and negotiable ones.
That said, long-term considerations when searching for a house include:
- Location – It is the most crucial factor as location determines if your house is accessible to roads or within its neighborhood. Also, some individuals prefer houses far from busy, main street roads. If you have kids, consider the quality of the schools within the location.
- The age of the house – This is a non-issue for someone who wants to buy a newly-built house. But, if you're looking to renovate a house, some of the houses you'll get might be many years old. For instance, an older house may have more repairs, improvements, and upgrades.
- Purchase price – Find a house with the lowest price within your budget. This way, the house's value might keep rising.
Real estate agent
This is a person to talk to about buying a house as he can provide you with valuable information on houses and neighborhoods that are not available to the general public. Usually, the seller pays the real estate agent's fees, but you'll pay them if you opt for a buyer's agent. And look for an agent with many years of experience, good communication skills, a catalog sold homes, a full-time agent, and one who understands the local market.
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Step 7 - Make an Offer
Leaving the fun part behind, this is a serious step, where you submit an offer and sign the contract arrangement with the identified seller. It is a step closer to owning the property.
With the help of your real estate agent, you'll submit the offer. What if more buyers want the same house? The bidding process starts, and the seller makes a deal with one with the preferred offer.
Thus, preapproval for a loan and a flexible closing date can help you win. The house address, buyer and seller particulars, purchase price, down payment, lender particulars, furniture or other items to be left, and closing date are included in the purchase agreement.
Once you agree on the purchase price, the house goes into escrow. It will be unavailable for other buyers until you complete other steps of buying a house.
Step 8 - Get A Home Appraisal
Here, you are already under the contract and done with the most time-consuming things to do before buying a house. If you took a house mortgage loan, your lender arranges for an appraiser to approximate the worth of your house independently. Usually, the appraiser is an independent third-party not directly linked to your lender.
Why get a home appraisal? The appraiser lets you and the seller know the price of the house, ensuring that you pay a fair price. Therefore, an appraiser protects you as a first-timer from paying more than the house's value. It can help you make a good investment by getting the value of your money.
What if the appraiser arrives at a value below your offer price? You can consult with the real estate agent for guidance on the next step to follow.
Step 9 - Do A Final Walkthrough
It is the final step before settling the agreed amount. Typically, it allows you and the real estate agent to inspect the house. You inspect room by room, ensuring that everything is okay and in good condition. Also, ensure that the repairs agreed upon are complete and there are no new issues.
It is a step after the seller has moved out. The real estate agent helps you identify the things to look for during the process. And if there are any issues, the agent helps you with the next step.
Step 10 - Close On Your House
Yes, you did it! The effort you put in planning and searching for your dream house is over. The only thing remaining is signing the paperwork needed to complete the buying a house process. Before signing the papers, ask any questions or for clarification if you find confusing conditions/terms.
After getting the paperwork, it might take a while, perhaps a month, for the lender to fund the loan. As soon as the lender delivers the check to the seller, you can move to the house. And congratulations, the process is over!
As a first-time homeowner, you might have limited knowledge of the home-buying process. Hopefully, our guide from what you need to buy a house to who to talk to when buying a house can fill the gaps in your home-buying steps.
Remember to always stick to your budget, and if the above steps are enough to start your home searching and buying process, talk to a real estate agent. Besides the budget, consider location, the property's age, social amenities, and other preferences when house hunting.
There are two options to pay for your house: cash or a mortgage loan. If you are going for the latter, ensure to get preapproved and choose the right type of mortgage. That way, you might prevent your assets from turning into liabilities.
Also, going through how to buy a house guide like ours may simplify your process because of beforehand information. Good luck!