If you’re a first-time home buyer, or maybe need a refresher, an organized checklist can help keep you on track as you look toward closing. A checklist can also help you avoid common mistakes by laying out a clear plan and set of strategic steps to monitor progress.
While it’s not required that you hire a real estate agent to purchase a home, they can make it much easier to find the home that’s perfect for you. Realtors are trained in every aspect of the home sale process.
They can help you find a property in your budget and seal the deal at closing. They should have your best interests at heart, can advise you on how much to offer for a property and will help you submit an offer.
Also, a real estate professional can help keep you within your budget.
The second step to purchasing your first home is a crucial one, and that is figuring out how much house you can afford.
A lender will only offer you the amount you’re able to afford to pay monthly toward your mortgage. You should know how much you can afford to spend on a home so you can narrow your personal home search. Providing your real estate agent with this figure will also help them find properties that you can afford.
Understanding Debt-To-Income Ratio (DTI)
The first step to figuring out how much home you can afford is to understand your debt-to-income (DTI) ratio. Your DTI ratio is how lenders compare the amount of debt you have to your income. If your DTI ratio is too high, you’re more likely to default on your home loan. A high DTI ratio makes it more difficult to find a mortgage at the best interest rate.
You’ll need to add up all of your recurring monthly expenses to calculate your DTI ratio. Include things like rent, student loan payments and minimum credit card payments. Don’t include household expenses that vary from month to month, like utilities or grocery bills.
Calculate Your DTI
Divide your total monthly debts by your total monthly pre-tax income to find your DTI ratio. For example, if your total monthly household income is $5,000 and you pay $2,000 a month in recurring expenses, your DTI ratio is 0.40, or 40%.
Most lenders like to see applicants with a DTI ratio of less than 50%. If your DTI ratio is more than 50%, you may want to take some time to pay down debt before you apply for a mortgage. If your DTI ratio is less than 50%, think about how a monthly mortgage payment would fit into your budget.
Understanding Home Buying Costs
Determining how much you can afford to spend each month on your loan will mean factoring in a variety of costs related to getting a mortgage, making monthly mortgage payments and maintaining your new home. Your calculation should include costs such as principal, interest, property taxes and insurance (PITI); down payment; private mortgage insurance (PMI) and home maintenance costs.
If you need some help, contact us. We can help walk you through this.
Next on the list, it’s time to get pre-approved for a mortgage. A mortgage preapproval gives you a good idea of how much house you can afford, your interest rate and the type of loan programs you qualify for. A mortgage pre-approval also tells sellers and real estate agents that you won’t have trouble finding funding for your home purchase. This gives your eventual home offer more weight.
Keep in mind that a pre-approval is different from a pre-qualification. When you get prequalified for a loan, your lender doesn’t verify the claims you make about your credit and income. On the other hand, a pre-approval requires checking your credit report and sometimes underwriting. Credit score requirements vary depending on the lender and the type of mortgage (e.g., conventional loan, U.S. Department of Agriculture (USDA) loan, etc.) you're getting.
A pre-qualification holds less weight than a pre-approval because it often doesn’t include those details. When you get a pre-approval, you get the most accurate information about how much of a loan you can obtain. This benefits everyone involved with your home search.
Look for a lender who’s responsive to your questions and offers an easy way to apply for a mortgage. An approval from Pathway Mortgage offers a quick application process and approval online. Get approved before you begin your hunt for the perfect home.
With your pre-approval in hand, you can start searching for homes within your budget.
Most properties will be listed online. You can use online real estate databases to help you find properties within your budget that fit your needs. Your real estate agent will be a big help as you look for homes.
Real estate professionals are experts in your local housing market and may have insider knowledge on which homes you might like. Tell your real estate agent about the top qualities you’re looking for in a home and ask them to suggest properties for you to view.
Things To Look Out For When House Hunting
When you view a home, look at more than just the location or features of the house. Don’t be afraid to test the home’s plumbing and electrical system by running water from faucets and flipping light switches.
If you really like a home it’s good to look at the home's gutters, chimney and trees, noting their condition. Don’t be afraid to ask if the home has had radon, lead paint or carbon monoxide inspections – and ask to see the results.
A home inspector will see and record many of these issues for you when you make an offer on a home. You can save time and stress, though, by spotting deal-breakers while still in the viewing stage.
It’s never a bad idea to be proactive. When preparing to buy your first house, you’ll need to submit financial documentation to your mortgage lender, so you should have it on hand.
These required documents include (but are not limited to):
Once you’ve followed those first five steps, you can now put in an offer to buy a property that checks all your boxes. It can be difficult to decide how much you should offer, so ask your agent to help you. They’ll compare sales data and other local property values to help you make a reasonable offer. Your agent will also draw up an offer and submit it to the seller or the seller’s representative.
Keep in mind that you can ask for more than just a home sale in your offer letter. Depending on the condition of the property, you may want to request repairs or make your offer contingent upon a successful inspection. You may also ask that the seller add upgrades to the home (like new carpeting or appliances), but keep in mind that this can drive the price up.
Making An Earnest Money Deposit
When you put in an offer on a home, you make a promise that you’re serious about buying it. You’ll include an earnest money deposit with your offer to prove just that. An earnest money deposit is a small advance you make toward your down payment to the seller. Your earnest money deposit is usually equal to 1% – 3% of the purchase price of your home.
You’ll need to be 100% sure you want to purchase a home before you submit an offer, because if you back out of the purchase last-minute, you could lose your earnest money deposit.
After making your offer, you’ll simply wait for the seller to respond. The seller has three choices:
After you reach an agreement with the seller, it’s time for the appraisal and the inspection. Appraisals and inspections vary in a few important ways.
Home Appraisal
An appraisal only gives you an estimate of how much your home is worth. An appraiser looks at factors like overall property values in the neighborhood and the general condition of the property. Mortgage lenders require appraisals because they need to know that they aren’t lending you more money than your home is worth.
You have a few options if your appraisal comes in lower than what you offered on the home. You can:
Home Inspection
A home inspection gives you a more intimate look at the inner workings of your home. During this process, a home inspector will walk through your property and test things like the electrical system, plumbing and other amenities.
They’ll also look at the condition of the home’s roof, foundation, attic and basement. At the end of the inspection, the inspector will present you with a list of everything they’ve found. You can use this list to request repairs from the seller before closing.
Though an inspection isn’t always a requirement to get a mortgage, it’s a good idea to include a successful inspection contingency in your offer. A house is a major purchase. The last thing you want is to buy a property with major issues you don’t know about.
After your home passes inspection and undergoes an appraisal, you’re ready to close. Closing involves signing all the necessary paperwork on your mortgage and taking control of the property.
Before closing, you’ll receive a document from your mortgage lender called a Closing Disclosure. These documents include the final terms of your mortgage loan, what you owe in closing costs and your interest rate. It’s important to read and acknowledge your Closing Disclosure. Pathway will arrange a closing meeting once they know that everything looks correct.
Bring your ID, Closing Disclosure and cashier’s check or proof of a wire transfer for your down payment and closing costs to your closing meeting. A neutral third party called a closing agent will lead the process. You’re officially a homeowner as soon as you sign all of your paperwork!
To qualify for a mortgage, lenders typically require that you have a debt-to-income ratio of “43/49.” This means that no more than 43% of your total monthly income (from all sources, before taxes) can go toward your new mortgage payment, and no more than 49.99% of your monthly income can go toward your total monthly debt (including your mortgage payment). VA and FHA loans even allow for higher debt ratios on a case by case basis.
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