Buying a home can be a bit overwhelming if you’ve never done it before – and sometimes even if you have – but below we break down home buying in just 10 steps. From perfecting your credit score and determining your budget to conducting an inspection and closing on your new home, you’ll find all you need to know about buying a home from start to finish. So whether you’re buying a home for the first time or you just need to refinance, these tips should help you along your home buying journey.

1. Get Your Credit Score in Line

Your credit score is one of the most important factors in buying a home because it weighs heavily with lenders. Banks and other financial institutions want to know that they’re lending to a responsible, creditworthy person with a long history of on-time payments. Plus, with a better score, you get lower interest rates, which leads to considerable savings over the life of the loan. So take some time to improve your credit score before you think about qualifying for a mortgage loan because most traditional lenders require a FICO score of 620 or higher.

Remember, the higher your score, the lower your rate.

First-time homebuyer programs can provide assistance with only a three percent down payment. If you’re not sure how to calculate your down payment, find a down payment calculator online that can help you figure out how much to save. Remember, the amount that you put down on a house affects your monthly mortgage payment and interest rate. The more you put down, the lower your monthly payments and interest will be. Research local and state assistance programs to see if you qualify for assistance with your mortgage loan.

2. Calculate Your Budget

A home is likely the most expensive thing you’ll buy in your lifetime, which is why it’s important to do it right. When thinking about the prices of homes, it helps to have a budget in mind so that you don’t end up missing payments and potentially losing your home.

Calculating your budget means figuring out exactly how much you can afford to pay monthly on a home mortgage, including Homeowners Association dues (if applicable), homeowner’s insurance/private mortgage insurance, and property taxes. Write out a list of all of your monthly expenses and determine how much you can comfortably afford to spend on your mortgage, down payment, and other housing expenses. Be sure not to spread yourself too thin and always leave room in your budget for savings and emergencies. You also want to save enough for move-in expenses and budget for closing costs (usually between two and five percent of your loan amount).  

If you find that saving up for a down payment on your own is just not feasible, check to see if you qualify for an FHA or USDA down payment assistance program. To qualify for an FHA loan, you have to:

  • Have a FICO credit score of at least 580 (and 3.5% of the down payment)
  • Have a FICO credit score between 500 and 570 (and 10% of the down payment)
  • Have a debt-to-Income Ration of less than 43 percent
  • Provide proof of employment and steady income
  • Purchase Mortgage Insurance Premium (MIP)
  • Use the home as your primary residence (so you can’t use it as an investment property)

FHA loan credit requirements are about more than just your score. You’ll also be considered based on any prior foreclosures, bankruptcies, payment history, and any other information deemed to be an extenuating circumstance that might prevent you from making your payments on time.

USDA loan requirements state that you have to:

  • Be an American citizen, non-citizen national or Qualified Alien
  • Meet income eligibility
  • Have the legal ability to incur the loan obligation
  • Agree to live in the home as your primary residence
  • Buy a home that meets all program criteria
  • Be in good standing to participate in federal programs
  • Prove your preparedness to meet any credit obligations in a timely manner

3. Work with a Mortgage Lender

If you work with a mortgage lender, you can get pre-approved so that you know how much a lender might be willing to let you borrow you based on debts and income. It’s better to work with a mortgage lender to get pre-approval when you’re getting closer to buying your home. A pre-approval looks a lot better to a serious seller and could even give you a leg up on the competition. So find a mortgage lender to work within your area.

4. Conventional vs. FHA vs. USDA loans

When it comes to mortgage loans, there are a few options available, some of which include conventional, FHA, and USDA loans. Below, we break down exactly what you can expect from each type of loan.

A conventional loan is a traditional bank loan and requires borrowers to put down more money for down payments. It used to be 20 percent of the loan amount, but these days, conventional mortgage loans only require a five percent down payment. With a conventional loan, you don’t need to purchase homeowner’s insurance prior to approval.

An FHA loan is a Federal Housing Administration loan and does require that you purchase homeowner’s insurance prior to approval. The FHA loan is great for people who are just getting started buying a home, people who don’t have a lot of cash saved, or people who are in a little bit more debt than others. FHA loans allow you to borrow up to 96.5 percent of the cost of your home.

A USDA loan typically doesn’t require a down payment and interest rates are usually set by the lenders. However, rates are normally low. The Guaranteed Housing Loan Program allows buyers to roll lender fees, eligible closing costs, and allowable repairs into the loan, as long as they don’t surpass the value of the home.

5. Find a Realtor

Finding a good realtor can make all the difference throughout your home-buying journey because a good realtor will work in your best interest. Try to find someone you get along with who understands your needs because a realtor can help make your home search much easier. A good realtor should be self-motivated and honest. Your realtor should have great attention to detail, deep knowledge and understanding of the housing market and a strong network of connections.

There are a lot of listings to sift through and as a buyer, getting a realtor costs you nothing. The seller has to pay about three to six percent of the sale price. So find a realtor that can help you find your dream home.

6. Search For Your Dream Home

Now, that you’ve cleaned up your credit, calculated your budget, found a mortgage lender, considered the various types of mortgage loans, and found a realtor, you can begin searching for your dream home. While searching, keep in mind your non-negotiables versus things you can actually compromise on to stay within your budget. Sometimes it might be better to go a little further out of the city for a better price. So think about what you’re willing to give little on when the time comes. You might not be willing to bend on things like neighborhoods with good schools.

Also, consider whether houses in the areas you’re searching are selling close to (and even above) the asking price. If so, it means that the area is desirable and you have more options when it comes to when you’ll do your house hunting. For example, during the winter months, you might be more likely to get a better price on the home you want because you’ll probably have less competition. So you’ll be in a better position to negotiate with the seller. Don’t be afraid to ask for what you need from the seller. For example, a seller might be willing to throw in a few repairs or give you a credit adjustment at closing.

7. Bid 

If you’ve never purchased a home before, you might be wondering exactly how the bidding process works. Well, once you find a home you want to make an offer on, bid on it as quickly as possible (especially if there is competition for the home). To figure out what you should be bidding, gather data on at least three houses in the neighborhood that have recently sold. Try to stick within the range of those three homes and whatever price you decide on, avoid lowballing your initial offer. Try to offer something fair and within your price range.

Once you’ve made your offer and you both agree to a price, the seller’s agent will write up an offer to purchase. This document typically includes an estimated closing date, which could be anywhere between 45 and 60 days from the time the offer is accepted).

8. Enter Your Contract and Secure Your Mortgage Loan

Get your lawyer to look over the offer to purchase before you do anything else. You need to be completely sure the deal is dependent upon the following:

  • A home inspection that reveals no substantial defects
  • You getting approved for a mortgage
  • A guarantee that you can conduct a walk-through inspection 24 hours prior to closing

Once you’ve entered your contract, it’s time to secure your mortgage loan. What you’ll need to do is call your lender or mortgage broker and let them know whether you’ll want to get an adjustable rate mortgage or a fixed rate mortgage. A fixed rate loan means the interest rate is set when you borrow the loan and won’t change. However, with an adjustable mortgage, the interest rate could fluctuate.

9. Conduct an Inspection

Conducting an inspection is one step many people mistakenly overlook, but it can help you determine if any further work needs to be done on the house prior to the move-in date. A thorough home inspection should test for things like mold, mildew, cracks, loose siding, rot or decay, leaks, rust, and stains, among other things. You can negotiate the cost of an inspection, but some things – like the previously mentioned – are legitimate health concerns that shouldn’t be negotiated. Don’t be afraid to ask the inspector to take a closer look at something if you’re not too sure. You can ask pretty much any question, other than, “Should I purchase this home?” Your inspector most likely won’t answer that question and instead may suggest that you look over the inspection reports and determine what the seller will fix. Make sure that the house is inspected thoroughly, including attics, basements, and crawl spaces. If your inspection does reveal an underlying problem, let someone know right away.

10. Close

It’s finally time to take ownership of your new home and now that you’ve gone through all of the hurdles, it’s time to think about moving in. But before you do that, make sure you have your homeowner’s insurance policy in place. Before you decide on a policy, shop around for the best deals. Make sure you know what’s covered in the policy and how much protection you’ll get. Also, flood damage isn’t covered by homeowner’s insurance, so if you live in an area prone to flooding, you might want to consider purchasing flood insurance separately.

Prior to closing, you’ll also want to make sure you’ve saved enough for moving expenses. For example, how will you pay for furniture and other items that you might want to fill your new home with like new carpet, new appliances, and new paint.

At closing, you’ll finally sign all of the paperwork to make everything official. You’ll have to sign your name quite a few times. Make sure to read the paperwork through before signing it so you have a better understanding of it. Don’t make the mistake of getting too excited and thinking everything is kosher on the other end of the deal. There are some very dishonest people in the real estate industry – just like in any other industry. So, you have to look out for your best interests. Start by reading through the paperwork with your lawyer present. Once you’ve signed the paperwork, you’ll put your money into an escrow account and usually, you’ll get the keys to your brand new home.

Now it’s time to move into your new home and furnish it to your heart’s desire. If any repairs need to be made that the seller didn’t agree to fix, take care of that prior to moving in (especially if the issue poses a health or safety risk). For example, you wouldn’t move into a home with broken stairs or a wobbly railing. So take care of what you need to before you move in.

With the above in mind, you can set your mind at ease when it comes to purchasing or refinancing your home. Follow these steps closely and your dream of home ownership will be a reality sooner than you know.

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