Buying a home can feel overwhelming. You know you want to purchase a home but there are so many steps to the process that you may not know where to start. How will you decide on a good budget? How will you find the right realtor? And most importantly, how will you find the perfect home for you? Buying a home takes a lot of preparation and careful thought. Here is a step-by-step guide to buying a home:
1)Look into your credit
There are three major credit agencies: Equifax, Experian, and TransUnion. These agencies keep credit reports, which indicate whether you have ever run into any serious issues with credit and whether you tend to be late with payments. Credit scores are calculated from a formula based on the information found in your credit report. Each person has three different credit scores, one to correspond with each of the person’s credit reports. If you have a low credit score, you may struggle to get a good interest rate, or to get any financing at all. If you find any errors in your credit report, make sure you contact the agencies directly and correct the mistakes. This can take two or three months to resolve.
2) Set your budget
Once you’ve got your credit score figured out, it’s time to figure out how much you can spend on a house. A good starting point is using an online calculator. While these calculators are helpful, you will get a more accurate figure by asking to be pre-approved by a lender. This lender will assess was kind of loan is right for you by looking at your debt, income, and credit. If you are looking for a rule of thumb, you can multiply your gross annual salary by 2.5 and use that number as a guideline for the cost of your home. In addition, all of your monthly home payment should be no more than 36% of your gross monthly income. You will also need to take into account the size of your down payment.
3) Get some cash ready
For your down payment and your closing costs, you’ll need to come up with some cash. Lenders typically see a down payment as 20% of a home’s price. If you are able to put down more than 20%, your lender may approve a larger loan. If you don’t have 20%, you will need to search for loans that will help you. Low down payment mortgages can be provided through a number of private and public agencies, such as Freddie Mac, Fannie Mae, the Department of Veterans Affairs, and the Federal Housing Administration. If you qualify for these mortgages, it is possible that you will only have to pay 3% up front.
However, if you have a down payment lower than 20% you will probably need to pay for private mortgage insurance, which is essentially a safety net that protects the bank in case you do not make your payments. With private mortgage insurance, about 0.5% of the total loan amount will be added to your mortgage payments for the year.
So you’ve considered the down payment. But you still need to make sure you have enough cash to cover fees and closing costs. This includes loan fees, inspection fees, the appraisals fee, attorney’s fees, and the cost of a title search. This may add up to a sum of more than $10,000, and it will often make up 5% of the mortgage amount.
If you don’t have enough cash available to cover these needs, there are many options available to you. If you have a first time homebuyer, you can withdraw up to $10,000 from an Individual Retirement Account if you have one. There is no penalty, but you need to pay taxes on the amount. Another option is receiving a cash gift of up to $14,000 per year from each of your parents. There is no gift tax.
You could also figure out whether your employer can help, especially if you work at a big company. Many big companies will help contribute to a down payment or help an employee get a low-interest loan from certain lenders. Another option is tapping a 401(k) or similar retirement plan so you can get a loan from yourself.
4. Get an agent
The majority of home sellers list their homes via an agent. Those agents, however, work for the seller rather than the buyer. They are paid according to a percentage of the purchase price, typically 5 to 7%, so usually they will try to get you to pay more. When you need in an “exclusive buyer agent.” These agents are either paid directly by you, on an hourly or contracted fee, and other times the commission that the seller’s agent gets upon sale is split. A buyer’s agent will have allegiance only to you.
5. Look for a home.
The first part of looking for a home is figuring out what city or neighborhood you would like to live in. When searching neighborhoods, you should look for indications of economic vitality. This includes low unemployment, good incomes, and a mixture of young families and older couples. Whether you have children or not, you will want to pay attention to districts that have good schools. When the time comes that you will want to resell the property, living in an area with a good school system will allow your home to keep its good value.
It’s also a good idea to figure out the real estate market in the area. If homes in the area are selling near or even higher than the asking price, this means that the area is desirable. Doing your house hunt in the colder months of the year is a smart plan if it is possible. This is the “off season” for housing hunting, and you will have less competition, meaning that sellers are more likely to negotiate with you.
Just make sure your search criteria aren’t too restrictive. Make sure your price range is 10% above and 10% below your true range. In terms of location, search in a 10-mile radius of the location you specify.
These tips will help you to buy a the right home for you. Stay tuned for part 2 of the guide to smart home buying.