Here are all the steps to buying your first home that you need to know about in this allegedly strong market. It’s apparently easier than ever to get a good mortgage, with low rates, but it’s still a sellers’ market out there—so come prepared!
Step 1: Know your financial boundaries
The first steps to buying a home begin with saving. You will typically have to pay down payment amounting from 3 to 20% of the home’s buying price. You can, however, opt for a no money down loan, pay more than 20%, or apply for DPA (down payment assistance) aid. Also bear closing costs in mind—they can run you additional few thousand dollars. Make sure you discuss with your Realtor the option of seller paying your closing costs (Seller’s Concession). Look for a home priced at no more than 3-5 of your per annum income, or a total DTI (debt-to-income ratio) of 45% at most.
Step 2: Get your credit report and pre-approval
U.S. laws allow you one free yearly credit report, which will show you your FICO credit rating (300 to 850 points). Make sure there are no mistakes in the report and amend any you do find. Then, get pre-qualified and pre-approved with your mortgage lender. For pre-qualification, they’ll need your income and asset info, as well as the info they need to retrieve your credit score. For pre-approval, you’ll need to file W-2 forms, pay stubs from work, federal tax return forms, and bank statements. In the long run, this will tell you what you can afford and show you’re serious about buying a home.
Step 3: Get an agent, find a home
Don’t ignore this one, of all the steps to buying first home, because we’re not talking car purchases here. This is likely the biggest investment you’ll make in your whole life, so you want a professional who is up-to-speed on all the latest yearly changes in legislation. Then, start visiting homes. Make sure to keep a home buyer checklist on you at all times, complete with all the aspects that are relevant to you and your family. Neighborhood quality, schools, and parking spots – they can all make a difference. It’s a seller’s market, so be thorough; consider taking pictures and videos, if you need to. Narrow the search down, spot the one home that’s right for you, then negotiate the offer, together with your agent. Once you and the seller agree on a price, you go under escrow or contract.
Step 4: Get an inspection and an appraisal
Always get an inspection—better yet, include such a contingency clause in your offer. Work with a licensed inspector (who will ask for $200-$600, depending on the home, and take about 2 to 8 hours to inspect the location). Once you receive the inspector’s report about the home, its structure and deficiencies, consider asking the seller to address the issues. An appraisal will tell you how the home matches up to similar homes in the area, through a licensed appraiser’s report, containing an “opinion of value”. This will tell you the home’s actual value and ensure you don’t pay too much on it. Bear in mind that your mortgage lender will probably order their own appraisal, via an appraisal management company (AMC).
Step 5: Get your loan approved
Submit your loan for approval, i.e. have it “go into underwriting”. This means your application will be reviewed by an underwriter working with specialized data analysis programs. Most loans are “approved with conditions” and there are three types of conditions in this scenario:
- Explanation and Correction of Anomalies. You will have to explain credit report inconsistencies and/or irregular tax statements, pay stubs, etc.
- Verifications and Attestations. Get your income, housing history and/or employment history verified.
- Supplementary Documentation. Provide further tax and/or business documents for clarification.
While the loan is underwriting, you’ll have to provide homeowners, or ‘hazard’ insurance. Depending on the age, type, and location of the home, the premium for this insurance will vary. At closing, your policy will need to be in effect—and to have this happen, you’ll have to pay the premium for the first year before closing. Once this is all covered, your lender will issue the Clear to Close.
Step 6: Close on your new home
“Closing”, getting a “settlement”, or “going to escrow” (different names for the same thing, depending on where you live), means you will receive a deed attesting your ownership over the house. The final Settlement Statement, or HUD-1, which soon will be replaced by Closing Disclosure, will look a lot like the preliminary settlement statement, which you will have received prior to this final step. This final simple step usually takes between 25 minutes to 2 hours.
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