Ready to make the move to home ownership? There is no right or wrong time to buy, it all depends on when you are ready personally and financially. While many of the shows on HGTV make it look quick and easy, the reality is the home buying process can be complicated. But relax! We have prepared this checklist to guide you every step of the way.
- Decide how much home you can or want to afford.
Take a good look at your budget and decide how much of a payment you can afford. Remember to include your current rent since you won’t have to pay that anymore. We’ve included some mortgage calculators in the resources section below to give you a rough idea of how much mortgage you can afford.
Next, you want to think about your total Debt to Income ratio. Add up all of your debt payments including student loans, car payments, child support payments, etc. Include any debt payments you make on a monthly basis. Then, divide all your debt payments by your total monthly income. Lenders look for a total ratio, including your house payment, of no more than 30-40%.
Finally, consider how much of a house payment you want and not just the maximum you can possibly afford. There is a condition called being House Poor, where you spend so much on housing that you don’t have anything left over for fun stuff – like traveling or eating out. Keep in mind that when you own your home you are responsible for the maintenance.
2. Talk to a lender.
This may seem awfully early, but it’s not a bad idea to speak with a lender now. A good lender will be willing to sit down with you and go over your financial situation in detail. In addition to just calculating how much of a loan you qualify for, a good lender will also be willing to work with you almost like a coach to help you get ready to purchase a home. A good lender won’t tell you no – but may tell you “not right now – here’s the plan to get ready.” You can get a loan from any lender licensed in your state, but we recommend talking with one locally based. There are a number of state and local programs that will help with making the down payment and a local lender is more likely to be familiar with these programs.
3. Save for a down payment.
You will need to save up for the down payment on the loan. Most types of loan require you to pay some portion of the loan up front to ensure you have some skin in the game. The ideal situation is to have at least 20% saved up for the down payment. A 20% down payment will give you the most favorable loan terms. But if that’s too much fear not. The different loan programs available have different down payment requirements, which can be quite low. Some of the loan programs also have various fees, some of which must be paid up front. As mentioned before, there are some state and local programs available to assist qualified buyers with the down payment. Your lender will be able to explain this in detail.
4. Hire a great real estate agent.
A good real estate agent is intimately familiar with the housing market and available inventory. A good agent has deep local knowledge that the big real estate websites don’t have. A good agent will work with you on a confidential, client basis to help you find the best home for your particular situation. An agent will work with you to find out in detail what type of home you are looking for. An agent will be able to analyze prospective home prices based on actual sales data and determine if the listed price is a fair one or not. And best of all, an agent won’t cost you anything since their commissions are paid by the seller.
5. Get pre-approved for a mortgage.
A lender will issue you a pre-approval letter that outlines how much of a loan you qualify for. This letter puts you in a much better negotiating position since it demonstrates to the seller that you are serious about purchasing the home and you have a lender ready to write you a loan. If you don’t already have an established relationship with a lender, you should consider comparing different lenders to see which one gives you the best deal. Ask each lender for a Fee Sheet, which is a detailed estimate of the loan details. The Fee Sheet will show you how much cash you will need to provide at closing to cover the down payment and up-front fees, as well as what your total monthly payment will be.
6. Go shopping for a home!
This is the fun part. Now you can go look at homes with your agent, confident in the knowledge that will be able to purchase the homes you look at. Your agent should have already spent the time to find out what you want and compare your needs to the available inventory. This effort up front will ensure that you don’t waste your time going from house to house to house trying to find one you like. It’s important to work closely with your agent and provide honest feedback so he or she can refine your search to rapidly narrow down to the one that’s just right for you.
7. Negotiate an offer
This is where your agent’s local expertise will shine. Once you’ve found your (hopefully) new home, you agent will conduct a detailed price analysis based on actual sales data to determine a good offering price. Your agent will also ensure to include such things as a home warranty and will also be able to recommend how much to ask for in closing cost contributions. Your agent will work you to field any counteroffers and settle with the seller on a final offer package that gets you the best deal possible.
8. Close
We won’t go into all the details here, but your agent will work with you to skillfully shepherd the deal all the way to the closing table where you will get your keys. Contact the Daniels Team to get started on this exciting journey!
Resources