- Buying Your First Home
Buying Your First Home: What You Need To Know
Wanting to buy your first home is very different than being prepared to buy your first home. It’s fun to browse home listings and dream about what you want. It’s even better to get an idea of what’s possible.
Put yourself in the best position to be approved for a mortgage and understand the home buying process before you jump straight into your home search.
Getting Ready To Buy Your First Home
Many renters assume that if their monthly rent is more than the cost of a mortgage payment, it’s a better idea to buy. Why toss money to a landlord when you could be putting that money into your own home, right? Yes, but it’s not quite that simple. There are a few other things first-time home buyers need to consider.
Saving For The Future
The largest cost associated with buying a home is the down payment and closing costs. A down payment is a percentage of your mortgage that you’re required to pay upfront to get your mortgage.
You may have heard that you need at least a 20% down payment before you even think about buying a home. A down payment of 20% or more does get you off the hook for mortgage insurance. It’s an extra fee added to your monthly mortgage payment that’s insurance for the lender if you default on your loan.
Luckily, it’s possible to get a mortgage with a much lower down payment. One example is the government-backed FHA loan, which you may be able to get with as little as 3.5% down. If you’re a veteran or serve in the military, you may qualify for a VA loan and not need a down payment at all; you’ll just need to save for closing costs. No matter what kind of loan you get, you can expect to pay between 3% and 6% of your total home loan in closing costs.
Getting ready to buy a home means saving for after you get a mortgage, too. Your lender may require you have enough funds to cover at least a few months of mortgage payments. Lenders also want to know you can afford your mortgage payments, so they look hard at your debt compared to your income before they give you a mortgage.
But it’s up to you to think about and be prepared for the inevitable expenses that come with homeownership, like that $3,000 furnace that breaks down in the middle of winter. It’s a good idea to have a solid emergency fund to fall back on before you purchase a home.
Decide What You Want In A Home
Unlike a car, you usually don’t get to try a home before you buy it, and yet it’s a much larger purchase. That’s why it’s important to spend time figuring out what you want. How close to public transportation do you want to be? How long of a drive are you willing to make to get to work every day?
If you have children or you’re ready to start a family, you’ll want to pay attention to the school district. How many bedrooms and bathrooms will you need? Is a large backyard a must-have?
A defined set of criteria will help make your house-hunt easier and more efficient. A good real estate agent can then help guide you to the homes that meet your needs.
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An Overview Of The Home Buying Process
Now that you have an idea of how to prepare for finding the right home and having the money to purchase it, here’s a look at how the process works from start to finish.
Step 1: Get Approved For A Mortgage
You may wonder why you’d do this first. It has a lot of advantages, and even if you go to a real estate agent first, most will expect you to get approved before showing you homes.
What’s a mortgage approval? It’s providing financial information to a lender so they can decide if you’re a good candidate for a mortgage. Your approval letter usually gives you an estimate of your maximum loan amount, your interest rate and potential monthly mortgage payment. It’s not a guarantee you can get a mortgage. But it does help you and your real estate agent know how much home you can afford. It shows sellers that a lender has reviewed at least some of your finances and is willing to consider you for a loan.
You may hear approvals called preapproval or prequalification. Whichever it’s called, the more financial information your lender verifies about you, the better position you’ll be in to make a strong offer on a house.
Step 2: Find Your Home
Your real estate agent is your best resource during this part of the process, from the first open house to signing the purchase agreement. Here are just a few of things you can expect from an agent:
- Expertise in the region where you want to live
- Able to find houses that have the features you want where you want to live
- In-depth knowledge of the mortgage process and can explain it to you
- Paperwork management
- Will submit your offer to sellers and negotiate for you
The last one is a big plus for first-time home buyers, since making an offer can be daunting. Should you offer less than the asking price? Will someone else outbid you? Your real estate agent can help you throughout this process until you find the one and the seller accepts your offer.
Step 3: Inspection, Appraisal And Underwriting
After you sign a purchase agreement with a seller, this step is about all the things that have to happen in order to get you ready to close the loan. It has three main parts: the home inspection, appraisal and underwriting.
A home inspection isn’t required, but it protects you from buying a home with a lot of expensive problems because it looks at things like structural components, heating and cooling systems and appliances. You can also walk through the home with the inspector and ask questions. You’re responsible for hiring and paying an inspector; your real estate agent can recommend one. The cost of the inspection can vary from about $200 to $500.
An appraisal is required. It protects you and your lender, but it’s not the same as a home inspection. It’s meant to establish the home’s market value, so that you don’t end up buying a house for more than it’s worth. Your mortgage company will order the appraisal from an independent third party; you’ll be responsible for paying the cost of the appraisal, around $250 to $600.
Underwriting is done by your mortgage company. It’s the process of verifying all your financial details so they can give you a final approval. Expect to get requests for information and documents from your lender during this phase.
Step 4: Close On Your Loan
Closing is the last step to getting the keys to your new home. It starts with receiving your Closing Disclosure. This legally required document is important to review for two reasons:
- It’s your chance to make sure that everything is accurate on your loan and you’re getting exactly what you expect.
- The sooner you review your disclosure, the sooner closing can be scheduled.
Once closing is scheduled, in most cases you’ll get the chance to do a final walk-through of the property to make sure everything is in order. Then all that’s left is the big day: closing. That’s when you’ll sign all the final paperwork, the lender collects or validates your down payment and closing costs and you get the keys. Congratulations, you just bought your first home.
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