07 Jul 8 Steps to buying your first home
Sick of renting? Are your rental horror stories getting worse and worse? Whether your decision to quit the renting game is because you can’t take your nosey neighbors anymore or because you are ready to make your own rules, purchasing your first home is a big step!
As exciting as that pivotal moment is, it also brings a host of new considerations. Here are 8 steps to help make the process easier.
1. Whip Your Credit Score Into Shape
A strong credit score is crucial to securing a low interest rate on your mortgage.
An above-average credit score falls within the 680 to 740 range. Anything above 740 will secure you the best interest rates available.
If you have poor credit, don’t rush to buy a house just yet. You can improve your credit score over time by paying off debts (especially credit cards), lowering your credit utilization, and diversifying your credit portfolio responsibly.
2. Save for a Down Payment
Saving for a down payment while also paying off debts is challenging, but if you want to be a homebuyer, you’ll need to do both.
The age-old wisdom is that you need to save 20% for a down payment. But with the median home sale price at $232,700 as of February 2019, that would make the average 20% down payment $46,540. And in 2019, most first-time homebuyers do not have that kind of cash lying around.
In recent years, it has become more common to put as little as 10%, 5% or even 3.5% down. FHA loans, which are popular among first-time buyers (this millennial included), require only 3.5% down when your credit score is above 580.
VA loans, reserved for members of the military, veterans, and some surviving spouses, require no money down but typically require a funding fee of 2.15%, which can be financed into the loan.
3. Figure Out Your Price Range
How much house you can afford and how much you should actually spend on a house may be two vastly different numbers.
The golden rule: Never set your sights on a house that you could afford — but that will cause you to make other sacrifices you’re not jazzed about, like cutting vacations or ruling out education.
Similarly, if you or your significant other (if you’re buying with a partner) both work, but one of you is considering a career change that could result in less income or becoming a stay-at-home parent, you should not budget using your current combined income.
4. Get Preapproved for a Mortgage
Before shopping for houses, you should shop for a lender. You can compare mortgage rates online and interview prospective lenders to find the best deal.
Ask friends, family, and your real estate agent (if you already have one) for recommendations and try your own financial institution, but ultimately, go with the lender that will offer you the best interest rate on your home loan.
Then ask that lender for a preapproval letter. This is different from being prequalified. Lenders can typically prequalify you with just a few data points that they don’t verify to give you a ballpark range of the loan amount and interest rate they might offer.
But a preapproval letter is an official document that says the lender is committed to giving you a loan, assuming nothing changes in your finances. Getting preapproval takes more work because the lender will send all of your financial documents (W-2s, pay stubs, tax returns, etc.) to an underwriter for verification.
5. Shop for Your Dream Home
This is the most exciting step. Now you can actually set foot inside of homes and envision your life inside them. Visit open houses and go on private tours with your real estate agent, but also research houses on your own on sites like Zillow and Trulia.
But don’t be distracted by fresh paint and that hot tub in the backyard. When you’re house hunting, have a sharp eye for what really matters. If possible, bring along friends or family who know what to look for in a new house.
6. Make an Offer They Can’t Refuse
Once you have found a house that fits your needs and is within your budget, you and your real estate agent will submit an offer. Be prepared to negotiate the purchase price, especially if you envision needing to do some remodeling.
7. Get a Home Appraisal and Home Inspection
Your lender will typically coordinate the home appraisal to determine what the house is worth. If the house is valued at less than what you offered to buy it, the contract will likely need to be revised, because it is not a good investment for the lender.
It is your responsibility to coordinate the home inspection, which, though not always legally required, is something you should absolutely do. A home inspector will investigate the property, checking for structural issues, HVAC issues, and issues with the roof and major appliances. The average home inspection costs between $300 and $400.
8. Close on Your New Home
A few days before you officially close, you should do a final walk-through of the house to ensure everything is as you expected. Check that all agreed-upon repairs were made, and if the contract specified that certain appliances would be left behind, like the washer and dryer, verify that those are still present.
On closing day, drink lots of water and maybe do some hand and forearm stretches because there’s going to be a lot of paperwork to sign.
This will also be the day you write a massive check for the down payment and any closing costs that you’ve agreed to cover. It can be painful to watch that paper rectangle slip away from your fingers, but it’ll all be worth it when you are christening your new home with a glass of Champagne.