Ready to buy your dream home? The home-buying process doesn’t have to be overwhelming. Buying a home is a significant investment, especially for first-time homebuyers who have never done this before, but our guide to buying your first home will make it easier.
Once you buy your home, you’ll also have to insure it. Use Insurify to compare homeowners insurance rates from different insurers and make sure your investment is protected.
Buying a Home: The Basics
Buying a house is a big financial commitment that you’ll be paying off for 30 years. Before you start house hunting and going to open houses, it’s essential to sit down and figure out what you’re looking for. Lenders will want to know these things before they give you a home loan:
Income and employment: All mortgage lenders will want to be sure you have a steady income so you can pay back your home loan. They may want to look at tax returns, pay stubs, or other proof of monthly income.
Debt to income ratio: How much debt do you have relative to how much money you make? How much are you carrying on your credit cards? Lenders want to know how much of your money is already going to pay down your credit card debt, your monthly student loan payment, and other debts so they can see whether you can afford to pay back your loan.
Liquid assets: You don’t have to make a huge down payment, but most homebuyers need to have some cash on hand to put down. You also need to have some money set aside for closing costs, which are fees paid to your lender for creating your loan. The closing costs you pay depend on where you live and what kind of loan you have. If you can put down at least 20 percent of your home’s value, you won’t have to buy private mortgage insurance (PMI), which protects your lender in case you default on your loan.
Credit: You don’t have to have perfect credit to buy a home, but the higher your credit score is, the better loan terms and interest rates you’ll qualify for. Most lenders want your credit report to show a credit score of at least 580 to issue a loan.
See Also: Homeowners Insurance Facts and Statistics
How Much Money Do I Need to Buy a House?
Figure out how much you can afford before you start shopping. Experts recommend limiting the price range of your home to three to five times your total household income. Figure out how much you can afford to spend on a mortgage payment every month, and remember to factor in other home-related expenses, like property taxes and homeowners insurance.
Once you know how much you can spend, it’s time to start house hunting. Start the home-buying process by getting preapproved for a mortgage. A mortgage preapproval is a letter from your mortgage broker that says what loan amount you’re approved to borrow based on your credit, assets, and income. Show this preapproval letter to your realtor so they can help you find houses within your budget. By using a mortgage calculator, you can see what ballpark your monthly payment may amount to.
You can get approved for several types of loans, such as:
Conventional loans. The federal government does not back these loans. They’re one of the most popular types of loans, and you can get one with a down payment as small as 3 percent of your new home’s value.
FHA loans: The Federal Housing Administration backs these loans. Lenders like them because they’re less risky; the government insures them if you stop making payments. You only need a down payment of 3.5 percent to get an FHA loan.
VA loans: These loans are for active-duty members of the armed forces and veterans. If you meet the requirements, you can get a VA loan with 0 percent down.
USDA loans: These loans are for people in rural and suburban areas. You can get a USDA loan with 0 percent down if you buy a home in certain rural areas and meet the department’s income eligibility requirements.
How to Buy a House with Bad Credit
You don’t need perfect credit to buy a house, but the lower your credit score is, the higher interest rates you’re likely to pay. Here are a few tips for buying a house if you have bad credit:
Work on repairing your credit. Get a copy of your credit report and look for any inaccuracies that could be affecting your credit score. Even a few points could make a difference in your mortgage rates, so it’s worth the work.
Save up for a down payment. A down payment shows lenders that you’re serious about affording your new home. A higher down payment can also help you get a better mortgage rate.
Look into an FHA loan. You may qualify for one of these with a minimum credit score of 580 if you can offer a 3.5 percent down payment.
Buy Your Dream Home
You’ve picked out your house after a long home search with your real estate agent. You’ve made an offer and maybe considered the seller’s counteroffer. You’ve done a walk-through and had a home inspector do a home inspection to make sure everything works. Now it’s time to actually buy your house and join the ranks of homeownership.
First, you need to have the home appraised. The lender will arrange for the appraiser to estimate the value of the house you’re about to buy. The appraisal lets everyone involved know that you’re paying a fair purchase price for the house.
A title company will do a title search to make sure that the seller is the rightful owner of the house and is legally able to sell the house to you. Note that the title company can occasionally miss things, however; that’s why it’s a good idea to buy owner’s title insurance, which protects you in the future if it turns out there are title problems with your new home.
You’ll then schedule a closing date, where you’ll sign all the paperwork required to buy your home. This can take up to a few hours. Bring a cashier’s check to cover your down payment and closing costs, which are usually about two to five percent of the cost of your home. After you’ve finished all the last-minute closing tasks, you’ll get the keys to your new home and begin your new life as a homeowner.
Congratulations—you made it!
Finding the Perfect Home at the Perfect Price
Your dream home can be yours with a little hard work and the right lender. You, too, can be a homeowner.