Home Buying 101: Your Roadmap to Homeownership

Introduction

The idea of having a space of your own has perhaps never been more appealing. A home can provide a slice of stability and comfort in an unpredictable world. If you’re currently renting, the transition to homeownership comes with several benefits, including the ability to build equity and receive tax breaks, the option to customize and remodel your living space, and the potential for additional income if you decide to rent out or sell your home down the line.

Unfortunately, homeownership is not a milestone you can achieve over a long weekend. It’s a journey. And as with any journey, it’s helpful to have a roadmap. In this guide, we incorporated the advice of a veteran loan officer who has purchased and sold more than 25 homes. Using his depth of experience, we plotted a route anyone can follow to successfully buy a home. It’s not necessary to follow this guide to the letter, but it can provide you with a solid overview of the three main stages of the home-buying process: preparation, the home search, and finally, closing and moving into your new home.

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Home Buying 101

Chapter 1

Preparing for the Home-Buying Process

Even if you’re set on buying a home, don’t start shopping for your dream home right away. Getting attached to a home at this stage can set you up for disappointment when you realize that you don’t have everything lined up yet. There are a few things you need to square away first, so you can move quickly once you locate the home you want.

Understand Your Starting Point

Before you do anything, you should take a look at your current financial situation and make sure you’re prepared to add a mortgage to your plate. When considering your mortgage application, lenders look at your credit score, debt-to-income ratio, employment status, and cash reserves. According to a report from the National Association of REALTORS, the top reasons mortgage lenders denied buyer applications were debt-to-income ratio, followed by credit score, so pay special attention to these two numbers.

Knowing Your Credit Score

If you’re not sure what your credit score is, there are a few different ways to check it without causing a drop in your score. Some credit cards provide free estimates for account holders. You can also request your credit score once annually from each of the big three credit agencies: Experian, Equifax, and TransUnion.

Your credit score is important to lenders because it gives them an idea of how big of a risk you are. Those with good credit are considered more likely to repay the loan than those with low, or poor, credit. Scores above 620 are usually considered prime, while scores below 620 are considered subprime. If you have subprime credit, you will likely have a harder time securing a mortgage loan, but it’s not impossible. Government-backed mortgages, like the FHA or USDA loans, allow for lower credit scores. If your score is subprime, you may want to hold off on buying a home and work on increasing your score, because those with higher scores typically receive lower interest rates. You can improve your credit score by:

  • Signing up for a credit card and regularly paying it off
  • Increasing your credit limit or spending a smaller percentage of your limit each month
  • Refraining from making any major purchases
  • Avoiding any hard credit checks, which occur when you open any new lines of credit

Saving Up for a Home

Another major hurdle for prospective homebuyers is saving enough money for a down payment. Although 20 percent of the purchase price is commonly cited as the minimum down payment needed, this is absolutely not required. A down payment of as little as 3 percent can get you into the home of your dreams, although you will most likely have to pay a mortgage insurance premium if you put down less than 20 percent.

In addition to the down payment, you also need to cover closing costs, which average between 2-5 percent of the loan amount. Closing costs include things like a home inspection, appraisal fee, application fee, property taxes, and title fees. To get a better idea of whether you can afford a mortgage, plug your information into a calculator. You’ll want to make sure you have additional savings left over after accounting for a down payment, closing costs, and a few months of mortgage payments in case any unexpected expenses arise after you move into your home.

If you’ve done the calculations and realized you need to save more money before buying a home, there are several ways to quickly grow your bank account:

  • Use automated tools and apps like Acorns, Simple, and Qapital to help improve your saving habits and grow your money through small investments.
  • Track spending and cut unnecessary expenses. Log every expense, no matter how small and eliminate things like subscriptions you don’t use and things you don’t need (think: extra clothes, the newest electronics, and eating out).
  • Refinance any current loans, such as your car payments and student loan debt; 51 percent of all buyers surveyed by NAR responded that student loan debt delayed their saving for a down payment or home purchase. By refinancing your loans, you can save money and lower your debt-to-income ratio.

Getting Prequalified

Once you’ve gotten your finances in order, the next step is to meet with a lender and get prequalified for a mortgage loan. During the prequalification process, a lender will take a general look at your financial information and give you a ballpark idea of how much money they might be able to loan you. This process can be done in person or online through the radius online portal.
  

Getting Pre-Approved

Once you’ve decided to move forward with the mortgage loan process, you should get pre-approved for a loan. Pre-approval is essentially a solidified version of a prequalification, and it requires a hard credit check and a review of all your financial information by an underwriter. 

Pre-approval is all but essential if you want sellers to take your offer seriously, especially if you’re in a competitive real estate market. It’s important to note that a pre-approval is only good for 60-90 days, so you’ll only want to complete this process when you’re ready to actively search for a home. It’s also part of the reason why you shouldn’t engage in activities that will risk your pre-approval, such as:

  • Making large purchases that will lower your credit score
  • Leaving your job
  • Taking on additional debt  

During the prequalification process, a lender will need to see relevant documents that prove your income, such as:

  • Your two most recent pay stubs
  • Two years of your most recent W-2s or 1099 forms
  • Your two most recent bank statements
  • Monetary gift letters, if applicable (for example, proof of money given to you by your parents)

Any income you report on your taxes will be looked at, meaning unreported income from a side hustle does not count toward qualifying you for a home loan, unfortunately. Loan officers recommend meeting with a financial planner or filling out a budget sheet to see what your true expenses are on a monthly basis and determine whether you're in a good position to add a mortgage to that.

"Any income you report on your taxes will be looked at, meaning unreported income from a side hustle does not count toward qualifying you for a home loan."

Choosing the right lender

Choosing the Right Lender

When selecting a mortgage lender, you should find someone who is going to have your best interests in mind and has the capacity to handle another client. One of the main downsides of working with a lender who is overloaded with clients is that the pre-approval process can take longer than necessary and it might be a hassle to get your pre-approval letters in time to place an offer on a home.

Another major factor when choosing a lender is the interest rate they can offer. You should always meet with multiple lenders to make sure you’re getting the best rate and service quality. Additionally, you don’t have to stick with the lender who processed your pre-approval. You can take out a mortgage from a different lender if you find another one you prefer.
  

Selecting the Right Mortgage

You will work with your lender to select the best mortgage for you based on your credit score, income level, property location, and other factors. Here are a few different types of loans to consider:

  • Conventional mortgage: A mortgage that abides by the lending rules outlined by Fannie Mae and Freddie Mac.
    • First-time homebuyers can put as little as 3 percent down with the purchase of mortgage insurance.
    • You will need good credit (620 or above), a low debt-to-income ratio, and secure employment.
  • Government-backed loans: With government backing, lenders are able to offer loans with more flexible underwriting requirements and lower down payments.  
    • FHA: Ideal for those with low credit or a small amount of savings
    • USDA: For those interested in properties located in designated rural areas
    • VA: Great for veterans, service members, and their families
  • Jumbo loans: For financing homes worth more than the conventional loan limit ($510,400 for most areas).
  • Adjustable-rate mortgage: Has a fixed rate for the first few years of the loan, and then a rate that fluctuates at set intervals. Might be right for you if you plan to sell the mortgage after a few years, otherwise a risky move.

The best mortgage for you will, of course, depend on your specific situation, but if you have a good lender, you should be able to find the right fit.

Hiring a Real Estate Agent 

Hiring a real estate agent is not required, but it’s certainly recommended. A good buyer’s agent knows the housing market in your area and can help you find a home that fits your needs. They are also well-versed in contract language and know how to negotiate. Plus, the seller pays the agent’s commission, so you really have nothing to lose. 

If you’re looking for a good agent, start by asking your home-owning friends and family for recommendations. You can also scour the internet for reviews of agents in your area.

Chapter 2

Finding Your Ideal Home

For more than half of homebuyers (55 percent), the most difficult step in the home-buying process was finding the right property, according to NAR’s 2020 Home Buyers and Sellers Generational Trends Report. It's easy to experience love at first sight when you see a home that fits your needs, but buying a home is a decision you shouldn’t take lightly. Consider these factors that might not be immediately apparent:

Location

The home itself may be perfect, but if it’s in a less-than-ideal location, is it really worth it? When touring homes, it’s a good idea to walk around the neighborhood and get a feel for the area. You can also check to see how long your commute would be and how close the property is to parks, bars, and restaurants. Even if you don’t have children, you should make sure the home is located in a good school district because that will affect the home’s value.

Investment Considerations 

Speaking of home value, you should take a look at the values of other homes in the neighborhood. Does the neighborhood and town seem to be on the rise? If the home is an investment, these details are especially important.

If you’re a first-time homebuyer and you want to build a real estate portfolio, you might consider looking at multi-family homes. You can buy a 2- to 4-unit property with a minimal down payment (3.5-5.0 percent down), live in one of the units, and rent out the rest for additional income. If you try buying a multi-family property after you already own a home, the cost of entry goes up and you're going to put 15-30 percent down.

Structural Considerations

Does the home require a lot of costly renovations that you will need to pay for? Is the home in a flood plain or in the path of natural disaster that will require costly home insurance? These are factors you need to know before signing any contracts.  

"If you’re a first-time homebuyer and you want to build a real estate portfolio, you might consider looking at multi-family homes."

Structural considerations

 

Chapter 3

Making an Offer

You will work with your real estate agent to make an offer on a home you’re interested in. When determining the offer price, your agent will look at the value of other properties in the area and try to get an idea of how many other offers are on the table.

If you’re in a position to negotiate, you can request the inclusion of appliances or other non-liquid assets in the purchase price. You can also include contingencies, such as a home inspection. If you’re in a competitive area, try adding a personal touch like personalized letter to help set you apart from other interested parties.

You should consider hiring a real estate attorney to look over your offer and any contracts, if you haven’t already. The majority of homebuyers make offers without any legal advice, and sometimes, that’s a mistake.

Home inspection

Getting Your Home Inspection

Unfortunately, if you’re in a seller’s market, you may have to waive your right to an inspection in order to get the property. But if you’re lucky enough to have the home inspected, make sure the inspector is thorough and ask them plenty of questions to get an idea of the home’s condition.  

Buying Home Insurance 

You must buy home insurance before closing on a home. The price of insurance will vary depending on where the property is located. For example, if the home is located in a flood plain or in the path of hurricanes or other natural disasters, your insurance is likely to cost more than it would for a house in a more stable area. Make sure you buy enough home insurance to completely rebuild if the home is destroyed. 

"If you’re in a position to negotiate, you can request the inclusion of appliances or other non-liquid assets in the purchase price."

Chapter 4

Securing the Keys and Looking Ahead

Once you’re sitting at the closing table, the finish line is just around the corner. The closing process is the orchestration of the lender, attorney, and realtor, so if you're working with solid people in all of these areas, closing should go smoothly. On the other hand, if you're working with a large lender or a lender that is unorganized, there’s a higher risk of last-minute surprises or problems. If you’ve hired a real estate attorney, have them look at any contracts prior to closing day, and before you sign, ask them about anything you don’t understand. If you don’t have an attorney, your agent should be able to explain the documents to you.

The closing documents should specify the official move-in date, which can help you make your moving plans. If you still have some time in your current rental or home, consider completing some renovations on your new home before move-in. Painting the walls and putting in new flooring can be a pain to complete when you’re surrounded by boxes of your belongings, so fit this in before move-in day, if possible. It’s also a good idea to set up utilities in advance so the home is fully functional right away.

Aside from that, all that’s left to do is make the home yours and enjoy home ownership!

"If you’ve hired a real estate attorney, have them look at any contracts prior to closing day, and before you sign, ask them about anything you don’t understand."

Ready to start the home-buying process

Ready to Start the Home Buying Process?

If you're ready to start looking for your dream home, make sure you're partnered with a lender that will have your best interests at heart. 

If you'd like to chat with one of our loan officers about achieving your homeownership goals, reach out to us by clicking the link below.

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Home Buying 101