If you are new to the entire home buying process, you might be intimidated by the entire idea. The thought of finding a home, getting a mortgage and paying for closing costs can be overwhelming. But if you know what to expect, the home buying process is not that complicated. Here is some helpful advice for what you will deal with throughout the home buying process.
Checking Your Credit Score
Before you even start looking at homes or mortgages, you need to review your credit situation. How much your home will cost you is somewhat dependent upon how good your credit score is. It is possible to get a conventional mortgage with only a 620 FICO score, and an FHA mortgage with a 580-FICO score but having a better credit score is always preferable.
Experts say that someone with a 620-credit score on a conventional loan will pay $82,000 more in interest on a $250,000 loan. That is big bucks! So, find out your credit score; you are entitled to one free credit report per year from several online credit report services. Once you know your score, you know what you need to do to improve it. Usually, improving your score means paying down debt, paying bills on time, and disputing any incorrect information on the report. You should aim for at least a 680-credit score if you are getting a conventional mortgage, and scores above 740 get the best rates. Read more about the minimum credit scores on home loans inthis present market.
Determine the Budget
You can get a mortgage sometimes where the payment eats up 45% of your monthly gross income. This does not mean you should do it. In the real world, 45% of your gross monthly income could be nearly all of your after-tax income! Who wants that? Figure out how much home you can afford after you factor in all other monthly debts. Many financial experts recommend not paying more than 30% of your pre-tax monthly income on a mortgage payment.
Look at Loan Options
You do not have to have great credit to get a home loan, but it will make the process easier. Conventional loans are the most common; they can be had with a 3% to 20% down payment.
One of the costs you will have is mortgage insurance if you have less than 20% equity in the property. If you can swing it, put down 20% so you do not have to pay for PMI each month. This can save you $100 or even $200 per month year after year.
FHA home mortgages are great for people with lower credit scores and can be had with a 3.5% down payment.
Determine Down Payment and Closing Costs
Another major cost of the home buying process is the down payment. With the exception of VA and USDA loans, you will need to have at least a 3% or 5% down payment. But you can get some or all of the down payment for some loans as a gift from relatives or friends.
Also think about where you will get your closing cost funds from. You will have 1-3% of the loan price in closing costs. Many lenders also want to know you have some cash reserves to cover mortgage payments if you are not able to work for several months.
When you apply for a loan these days, you need to have proof of employment and income. This is one of the changes after the last financial crash. There are really no more ‘no doc and stated income’ loans. At the minimum, expect to need two years of tax returns, bank statements for three months, SS number and driver’s license, pay stubs, and a profit and loss statement for the self-employed.
Before you look at homes, get a pre-approved mortgage as a first time home buyer. The lender will verify your credit score and income and determine how much you can qualify for. Once you have this done, you will know the types of homes you can afford. Having a pre-approval is critical in most cases for getting access to home sellers; most people only want to talk to those who are pre-approved.
Get an Agent
You do not need an agent, but it is easier. The real estate agent will handle research, contracts and other details of the process. In terms of payment, the seller normally pays the commission, so you should not be charged for their services.
Find a Home and Make an Offer
Your agent can help you find a home and make a reasonable offer on the property. He or she can determine what a fair price is without overpaying.
Do an Inspection and Close
After the seller accepts the offer, you have an inspection period of a few days. You should have an inspection done to ensure the home is in decent condition. This will cost you a few hundred dollars. Those are the basic steps of buying a house, as well as what it will cost you.