*As of April 20, 2020, Quicken Loans® isn’t offering conventional adjustable rate mortgages (ARMs).
Want to make a move? The good news is that there is no “right” or “wrong” time to buy a home — it all depends on when you are ready, personally and financially.
Be prepared: While reality TV shows make home buying look like a snap, in realreality it can be an involved process. And it’s normal have questions; after all, you’re probably preparing to make the most expensive purchase of your life. But the great news is that you don’t have to feel overwhelmed.
Why’s that? Because we’ve prepared a checklist designed to help you successfully manage and complete every step of the home purchase process.
1. Determine How Much Home You Can Afford
The best way to start your home buying process is by determining your budget. After all, this progression can be complex enough without looking at homes that are outside your price range. And who wants to fall in love with something that’s unattainable?
By identifying a realistic budget, you can embark on your search with a firm understanding of your price range.
First you’ll need to determine your debt-to-income (DTI) ratio, which is just what it sounds like — your monthly expenses versus your monthly cash intake. This includes all the bills you have to pay, divided by your gross monthly income. When you consider your debts, include any recurring bills, such as student loans, car payments, child support payments — anything that you pay on a monthly basis.
In order to secure a qualified mortgage from most lenders, your DTI should be no higher than 43%. But, remember that’s the “outside” number you can spend — and doesn’t mean that you necessarily should.
Have you ever heard of being “house poor”? That means that you spent so much money on your home that you don’t have funds left over for activities, such as eating out or traveling, or even the many expenses that will come on top of your mortgage. You’ll want to budget for the fun stuff, like furniture, fresh paint and plants for your new patio pots, but also the “unfun” stuff that inevitably comes along with home ownership, such as routine maintenance and even unexpected big-ticket items like a new hot water heater.
By building breathing room into your budget, you’ll be able to enjoy your new home without having it become a source of financial stress. This handy “how much home can I afford” calculator will give you a great place to start!
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2. Save For A Down Payment
Your mortgage payment is only one piece of the puzzle. It’s also important to save up so that you can make a sizeable down payment, which will save you a good chunk of money over the life of your loan. Here’s how:
- A down payment of 20% or more will exempt you from private mortgage insurance (PMI). That’s a fee your lender will typically require with a down payment of less than 20%, in order to make sure you don’t “default” on the loan (meaning walk away from the home). While the cost of coverage is based on risk factors, such as your DTI, credit score and more, it’s just one more expense that any homeowner would prefer not to have.
- A bigger down payment will often result in a lower interest rate; that’s because a lower “loan to value” (LTV) decreases your lender’s risk.
- The bigger the initial payment against principal, the less interest a borrower will pay over the life of the loan, potentially saving thousands of dollars.
- A bigger down payment results in smaller monthly payments because there’s that much less that you owe on the house.
- Smaller monthly payments could positively influence future borrowing power, which means you’re more likely to qualify for a car loan, credit or other financing.
Knowing that a bigger down payment will result in paying less over the life of your loan can make it less painful to save. Not sure where to start? Here are some ideas:
- Build a budget. It’s hard to save money when you don’t even know where it’s going. By developing a budget and tracking your outflow, it’s easy to see where you can plug the holes — perhaps by eating out less or putting a moratorium on online shopping.
- Set up automatic savings. You’ve heard the adage “pay yourself first.” By setting up automatic savings through your bank account, it can be easier to save that money because you’ll never even see it.
- Get a side gig. Whether you can tutor kids or deliver food for nearby restaurants, there’s likely something you can do to earn some extra cash to put towards that down payment. This also could be a good time to find out about some “passive income” opportunities that can help you build your bank account 24/7.
The best part about any of these tactics is that they will help you increase your credit score, which will be a benefit not only now because it increases the likelihood of securing a mortgage, but it can save you money in the future by potentially qualifying you for a lower interest rate.
3. Find A Real Estate Agent You Can Trust
While you might want to do some looking on your own, whether you’re browsing online listings or attending open houses, it’s in your best interest to find a trusted real estate agent. They do far more than scout out prospective homes.
Lean on them for everything from information about the market — such as whether an asking price is appropriate and which are the up-and-coming neighborhoods — to financial know-how, such as where to look for a mortgage and what pre-approval amount to request for a particular purchase offer.
An agent will be your ally in sizing up the pros and cons of various homes and can even offer interior design advice. In short: A good agent is imperative to guiding home buyers through many of the later steps on the home buying checklist. They are the ones “on your side” watching out for your best interest.
4. Get A Mortgage Pre-Approval And Choose A Lender
This might seem premature, but we assure you, it’s not. Before you even start looking at homes, you should shop around for mortgage lenders, and/or let a mortgage broker handle the shopping for you. In today’s housing market, the seller wants to have confidence that you will be able to purchase the house if you make an offer, and that comes through a “pre-approval.
That’s because they do much of the paperwork up front — they pull your credit report, decide (at least tentatively) on a pre-approval amount, and help you choose a loan type (fixed-rate, ARM, FHA, etc.) and loan “term” or length (15 years, 30 years, etc.) that’s right for you. That can put you one step closer when it comes time to making an offer on your dream home.
It’s important to note that a letter of pre-approval does not imply a commitment to a particular lender. In fact, it’s in your best interest to ask a variety of potential lenders to compete for your business, allowing you to find the loan that’s most financially advantageous.
5. Find The Perfect Home For You
Well, finally we got to the good part, right? Of course, this is a matter of opinion. For some home buyers this step can be overwhelming.
That’s why it’s smart to ask your real estate agent to weigh in. They often can offer advice on subjects that you might not have considered, such as whether the home is in the right school district for you or if it’s been on the market a while (and therefore might have a potentially anxious seller who’s ready to deal).
But make sure to do your own looking, too, by checking out homes online and visiting them to get a better sense of your own tastes and needs. The options are limitless; you can drive around to find appealing homes in your neighborhood of choice, or use one of the many house hunting sites available to find possibilities.
While those tactics can expose you to a wide variety of homes, your real estate agent can help you narrow your search by using results from a multiple listing service, where listings tend to be more timely and accurate. Note that one disadvantage to the MLS is that it doesn’t include homes for sale by owner (FSBO).
As with any decision-making process, the more data you have, the less likely you are to make mistakes. So use every tool at your disposal to effectively hunt for the homes in your price range.
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6. Make A Smart Purchase Offer
So, you’ve settled on “the one.” And now we’re back to the finances and how to make a smart purchase offer. This is where your real estate agent will shine; make sure to consult with them when deciding how much to offer for a particular home.
Your agent can help put a vast array of criteria into perspective. For example, your offer number will depend on a number of diverse factors:
- How hot the housing market is, both nationally and locally
- How long the house has been on the market
- Whether there are already offers out there on the house
In a slow market, home buyers can reasonably hope for a small discount on the asking price, but in a more competitive market, making an offer below asking price might lead to your offer being rejected.
And remember that your offer includes more than just the round number of the purchase price. You also want to include “terms” such as how soon you need to be in the house, and “contingencies” such as whether you need to sell an existing house first.
This is also the time that your real estate agent will add your pre-approval to the purchase offer package, marking you as a serious buyer.
A purchase offer usually also requires including an earnest money deposit (often 1-3% of the home’s value) that will be put into escrow. That money will stay there in a third-party account until your offer is accepted, and then it will be applied to the down payment and mortgage closing costs.
However, if the sale falls through because you changed your mind, you may forfeit that money. The earnest money can be safeguarded through the contingencies you negotiate as part of your offer; one such contingency can be a clean inspection.
7. Hire a Real Estate Attorney
Yes, we are adding someone else to the cast of characters — a real estate attorney. In some states having a real estate lawyer required; in other states, they’re not mandated, but can still be smart to have, especially for complex legal situations.
For example, what do you do if there is an existing tenant or if you have questions about the title or an easement? Foreclosures and short sales are other tricky situations where a real estate attorney’s advice could be handy.
A real estate attorney is specially equipped with knowledge to answer all these legal questions, and also look over the purchase agreement, title documents and other paperwork to make sure it’s all in good order. While a real estate attorney adds one more expense at a time when you might feel overwhelmed, the peace of mind that one can provide can be well worth the investment.
Again, since a home is of the biggest purchases you’ll ever make, your home buying checklist should include ensuring that you have taken every step to assure your due diligence.
8. Schedule a Home Inspection
It’s impossible to accurately judge every aspect of a house’s integrity and fitness before making an offer. This is where a home inspection comes into play.
Although you will bear the cost, it’s well worth it in the long run because a home inspection will protect you from unforeseen costs and liabilities. For example, you’ll know how much “roof life” is left, whether the foundation is failing or if the electrical system is up to par.
The home inspection is also likely to reveal minor problems. Don’t worry, almost every inspection does, so there’s no reason to panic.
Instead, you can use these issues to your advantage as a bargaining chip for negotiating seller concessions or a reduced overall purchase price, given of course that you signed an inspection contingency. And check with your real estate agent to find out if this is appropriate; you want to be wary of nickel-and-diming a seller in a hot market.
In addition to a general home inspection, you should consider ordering “specialty” inspections, such as for radon or mold.
9. Prepare For Closing
Assuming that the inspection passes muster, you’ll soon be ready to close. This is when you want to make sure your finances are in order so that they are liquid when it comes time to pay all costs due at closing. You’ll also want to avoid making any purchases or financial changes that can affect your credit score.
During this waiting period, your lender will arrange to make their own appraisal of the property. If the appraised amount is significantly lower than the agreed-upon purchase price, buyers can ask the seller to lower the price or assume some of the costs due at closing.
If you are considering renovations and improvements to your future home, seek permission from the current owners to shop around for contractors, painters, carpenters and other tradesman who will complete the work. Not only does this sort of work take time, but it can be difficult to schedule professional workers on short notice, so you’ll appreciate the long lead time.
You’ll also want to look into homeowners insurance; while you’ll want it anyway, you’ll likely need show proof at the closing.
10. Close On Your New Home
And now the big day is here. Get ready to sign a lot of papers … but don’t worry, it will feel exciting in the end. You’ll also need to bring a lot of documentation to your home closing; your real estate agent and mortgage lender will help you with the specific list, but you’ll definitely need the following:
- Proof of insurance
- Checks or cashier’s check to cover closing costs
- Your patience (there are lots … and lots … of papers!)
And then, the magic moment comes when you get the keys to your new home. Congratulations!
It’s time to cross the threshold and enjoy the comfort and ambience of your brand-new home! You’ve earned it.
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