Buying a house for the first time can be an intimidating process. However, with the right amount of information and planning, first-time home buyers can also find the process immensely rewarding.
Below are vital steps to buying a house and some of the most important considerations that prospective homeowners may find useful in their house acquisition journey.
Steps to Buying a House for the First Time
1. Make Sure You Are Ready
If the buyer does not have enough liquid capital to cater to the purchase, they may consider taking a mortgage to finance the deal. On their part, lenders are bound to consider a raft of factors before approving the mortgage.
Among these factors is the borrower’s Debt-To-Income ratio (DTI). To find out a person’s DTI, the lender divides the prospective borrower’s monthly income by their debt and multiplies the result by 100 (to get a percentage ratio).
Therefore, for someone who earns $10,000 and whose total monthly expenditure stands at $4,000, their DTI would be (5,000/10.000) x100= 50%
To qualify for most property loans, one needs a DTI of 43% or less.
The leader might also consider other assets that the borrower owns, and the stability of their income stream. Mortgage lenders ordinarily look at a person’s income for the past two years as a favorable indicator of income stability.
A prospective borrower may use an online mortgage calculator to get an estimate of the property loans for which they are eligible.
2. Make a Plan for the Down Payment
Prospective house buyers may need to consider making a substantial down payment on their house. That means paying a minimum of 10% of the purchase price upfront. If one can manage to make a down payment of 20% or more, that is a plus.
That is because, besides lowering their monthly installments down the road, a purchaser who manages to make a down payment of 20% or more is likely to enjoy exemption from Private Mortgage Insurance.
PMI is an indemnity policy often required by mortgage lenders from low installment buyers and buyers who commit to low down payment. It is meant to act as a safeguard against cases of likely default from such buyers. Buyers who effect a large down payment may not have to pay for this insurance.
It is also worth remembering that, unlike a rental, homeownership means that the house maintenance costs now shift to the buyer/occupier. A smart buyer will therefore bear these costs in mind when budgeting on the house they intend to buy.
Wisdom also demands allocation to be made for the closing costs associated with closing costs for the house. These are the fees and prepaid expenses and taxes charged during the conveyance or transfer of title to the house.
3. Decide What Type of Mortgage is Right for You
Different mortgage loans are designed to cater to different types of buyers. A buyer should go for the one most suitable to their circumstances.
The main categories of mortgage loans are as follows:
- Adjustable Mortgage
- VA Loans
- Jumbo Loans
- USDA Loans
- Conventional Mortgage
- Fixed-Rate Mortgage
- 2nd Mortgage
- FHA Loan
The terms and interest rates applicable may differ depending on the kind of mortgage a buyer chooses. More information about these types of mortgages can be accessed here.
4. Get Preapproved for a Mortgage
Getting preapproved for a mortgage means that the prospective lender has pre-evaluated the borrower’s financial standing and found them to be worthwhile contenders for credit. In other words, the lender has performed an initial credit check on the applicant and determined their creditworthiness for a particular mortgage loan.
To determine whether a borrower qualifies for preapproval, the mortgage lender may look at the applicant’s income, credit score, the amount of credit sought, and whether they have any assets to their name.
Once issued, most mortgage preapprovals may be valid for 60-90 days depending on the type of mortgage and the lender concerned.
When shopping around for the best mortgage lender, first-time buyers may consider going with seasoned mortgage lenders with a first-time homebuyer program.
5. Begin House Hunting
With a preapproval in place, it is time for the buyer to contact an estate agent and begin house hunting. Estate agents are among the professionals who to talk to about buying a house.
Desirable qualities in an estate agent include a thorough knowledge of the area, availability of the agent, and experience in the industry. Buyers can also compare the prices charged by different agents within the area and determine which price point is most agreeable to their budget.
Some of the factors to consider during the house hunting exercise include the following:
Getting a house in a good secure neighborhood is one of the top priorities for buyers. Since a house is a permanent fixture, the location and layout of the house cannot be changed and it is thus best to get it right.
Consider the least expensive house in the best neighborhood
A modestly priced house in a great neighborhood gives the buyer an advantage should they later decide to resell the house. It allows them to fetch a competitive sum for it in the future.
Consider whether unappealing elements are adjustable
Sometimes a buyer may come upon a house that ticks all the right boxes, save that it has a repulsive color painted on it. In such instances, the buyer may consider whether the unattractive quality can be rectified to their liking.
Proximity to amenities
Buyers need to consider whether the house they consider purchasing is reasonably situated near social amenities such as schools, hospitals, etc. Not only will these serve the buyers themselves, but they may determine whether the house attracts subsequent buyers in case the current purchaser opts to resell.
6. Make an Offer
Once a buyer has made up their mind on the house they wish to purchase, it is time to make an offer. That is typically done in writing and includes an indication of the price the buyer wishes to pay for the house.
The offer letter should also provide other details such as the buyer’s address, name, and the offer validity period.
The seller is expected to respond within the validity period. They may either accept the offer or present the buyer with a counter offer. In some cases, sellers may receive a barrage of offers on the same house and a bidding war may ensue between the buyers.
When a buyer finds themselves willing and able to top up on their initial offer or to accept a counter offer, they may do so. However, if they feel that the amount demanded outstrips their budget, they may decline the deal and move on to other housing options.
7. Get a Home Appraisal
Getting a home appraisal is one of the things to do before buying a house. A home appraisal is an unbiased opinion from a home appraiser detailing the current and projected value of the property.
Home appraisals are one of the key elements when determining what you need to buy a house. That is because they give a buyer an objective estimate of the actual current and future market value for the property. It thus allows a buyer has a better perspective on how much to offer for the house.
Home appraisals may also come in handy in the event a buyer decides to refinance their mortgage. That is because, through a home appraisal, prospective buyers can predict which mortgage loans are likely to go underwater (thus rendering them ineligible for refinancing).
Home appraisals may be done in two ways. One is a hybrid appraisal, where the appraiser does both a virtual and an actual site visit. The second type is the desktop appraisal which is purely based on public records and involves no site visit.
8. Do a Final Walk-Through
A final walk-through by the buyer is necessary to ensure that everything is in order and that any requested repairs have been affected by the seller. It also gives the buyer an opportunity to raise any issues they may have otherwise missed during their first inspection, such as an apparent termite infestation, etc.
A final walk-through also allows the buyer to ascertain that none of the fixtures and fittings have been changed for inferior ones by unscrupulous sellers.
Any minor issues noted during this walk-through may necessitate a renegotiation with the seller. The buyer may request repairs to rectify the issue or a reduction in the purchase price.
9. Close on Your House
Once the buyer is content with the condition of the house and its price, they can now move to close the deal. That involves obtaining clearance or loan approval from the lender.
It also involves ascertaining that all the terms of the loan agreement and the house purchase agreement are in accordance with what was agreed. Buyers at this stage may need to pay keen attention to the details in these agreements including the penalty clauses.
Ideally, the buyer may at this point consider being accompanied by an escrow agent or a real estate attorney who will help them vet the accuracy of what is contained in the agreements.
Although the house buying process is a complex exercise, taking the process step by step can make it easier to handle. Also, when buyers engage the right professionals, they are in a better position to get value for money and expert advice. Any grey areas that need clarification can be addressed and buyers should consider raising them whenever they arise.
In addition, bearing in mind that the entire process might involve an array of people, some patience on the buyer’s part often goes a long way towards the successful completion of the exercise.