When it’s over—which could take a few hours, so plan on taking the day off from work—you’re a homeowner. Depending on your agreement, you might get the keys and be able to move in that day. Certain counties won't let you move in until the title's been recorded with the local government, which can take a few days, but your Realtor should know that law and brief you beforehand, if that's the case.
FHA Loans – FHA loans are the most popular type of home loan used by first-time homebuyers. This is because they are easier to qualify for and have a low 3.5% down payment. FHA home loans allow for higher DTI ratios making it easier to qualify for a home loan with low income. They also have the lowest credit score requirement of any mortgage, you need just a 580 credit score with 3.5% down.
You can buy a home without a Realtor, but there’s really no reason to do so. Because in most cases, the seller of a home pays the real estate commission. So, as a buyer, you have nothing to lose. (Some real estate firms do charge a fee to buyers; if you don’t want to pay for their services, look for a Realtor that charges sellers exclusively.) And having a Realtor on your side can help you all the ins and outs of buying a home, which can be confusing.
Once the seller accepts your offer, it’s time to apply for a mortgage. You typically have 45 to 60 days to fulfill your purchase contract, so you need to move fast. Within three days of submitting your application, your lender sends you a loan estimate, including your approximate interest rate, monthly payment and closing costs. Review this document carefully. To move forward, you need to verify your income and assets. This requires extensive documentation, which is necessary for the lender to ensure you’ll be a successful homeowner who can handle loan payments over the long term.
Speaking of mortgages, Gilmour recommends that payments generally not exceed 28% of your monthly gross income—but if you have other high costs, such as private school tuition, it can be wise to pare down this percentage even more. If you're not sure what's realistic, consider seeking help from a financial professional, who can help walk you through an appropriate breakdown, based on your individual situation.
You can also order a free copy of your credit reports from each of the credit bureaus at annualcreditreport.com as long as you haven't done so in the last 12 months. One study showed that about 70% of credit reports have errors in them so check to see if there are any in yours that could be hurting your credit score and if so, be sure to have them corrected. It’s bad enough to suffer from your own mistakes. You don’t want to suffer from someone else’s too. Finally, you may want to put a security freeze on your credit reports to protect you from identity theft.
How to avoid this mistake: Ask a mortgage lender about your first-time home buyer options and look for programs in your state. You might qualify for a U.S. Department of Agriculture loan or one guaranteed by the Department of Veterans Affairs that doesn’t require a down payment. Federal Housing Administration loans have a minimum down payment of 3.5%, and some conventional loan programs allow down payments as low as 3%.
Many first-time buyers wait until they’ve found a home they want to buy before taking to a lender, but there are many benefits to getting pre-qualified early. Pre-qualification can help you shop in your price range, act fast when you find a house you want to make an offer on, and catch — and correct — any errors on your credit report before they cause a problem with your loan. This could help save you thousands in the long run because an error on your credit report could result in a lower credit score, leading to a higher interest rate.
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You can get pre-qualified for a mortgage, which simply gives you an estimate of how much a lender may be willing to lend based on your income and debts. But as you get closer to buying a home, it’s smart to get a preapproval, where the lender thoroughly examines your finances and confirms in writing how much it's willing to lend you, and under what terms. Having a preapproval letter in hand makes you look much more serious to a seller and can give you an upper hand over buyers who haven’t taken this step.
8. Secure a loan. Now call your mortgage broker or lender and move quickly to agree on terms, if you have not already done so. This is when you decide whether to go with the fixed rate or adjustable rate mortgage and whether to pay points. Expect to pay $50 to $75 for a credit check at this point, and another $150, on average to $300 for an appraisal of the home. Most other fees will be due at the closing.
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And so, on a 30-year mortgage, our homebuyer, given an excellent credit profile, would take on approximately $1,762 in monthly payments (at a 5% interest rate, including 78 mortgage insurance payments of about $113 at 0.5%, and blending property tax into the payments at 1.25%). That's based on an initial savings of $30,000, used as a down payment on a $300,000 house.
When you’ve found a local lender, you’ll have to submit your financial information to get pre-approved, including tax forms and W-2s, recent pay stubs, savings, retirement accounts, and debt obligations. After reviewing all of this information, the lender will let you know the size mortgage for which you can qualify and provide a letter that shows you’re pre-qualified. In the meantime, keep track of all those financial forms and add new pay stubs and bank statements to the file, as you’ll need them again. That pre-approval letter usually expires after 60 or 90 days, so if you haven’t found your home before it expires, you’ll just have to resubmit the paperwork.
Escrow is an account held by a third party on behalf of the two principal parties involved in a transaction. Since home sale involves multiple steps which takes time that can span weeks, the best way to mitigate the risk of either the seller or the buyer getting ripped off is to have a neutral third party hold all the money and documents related to the transaction until everything has been settled. Once all procedural formalities are over, the money and documents are moved from the custody of the escrow account to the seller and buyer, thereby guaranteeing a secure transaction.
During your house hunt, you may find a house that looks great at first glance. Then, as you walk through a few of the rooms, you notice problems with the house — maybe the floors squeak or the kitchen island is off-centered. After walking through the house, you come to realize that someone simply put lipstick on a pig, and this house is in questionable shape.
While getting pre-approved for a mortgage is not necessary to close a deal, it can help you close the deal quicker. In turn, being pre-approved can give you more bargaining power when negotiating as it signals to the seller that you have strong financial backing. Getting pre-approved for mortgage also allows you to know the limit up to which you can go for purchasing a property. It helps in saving time and effort while searching for the properties that fit into your budget.
Closing costs: These are fees you have to pay when you close on your mortgage. They’re based on the individual purchase, but can vary from 2% to 7% of the purchase price of the home, but they’re often split between the buyer and seller. According to Realtor.com, buyers typically pay 3% to 4% in closing costs and sellers typically pay 1% to 3% (you can try to negotiate who pays which closing costs). With some closing costs, you have to use a certain service, but with others, you’re allowed to shop around for a better price. Here are some common closing costs.
The best way to pay for a home is with cash! Not only does it set you up for building wealth, it streamlines the real estate process. If you did get a mortgage, you’ll have a final step before you can close on your home: getting final approval. Your lender will dig through the details of your finances to finalize your mortgage. Whatever you do, don’t open a credit card, take on more debt, or change jobs once you’re under contract. That’s a stupid idea anyway! Plus any changes in your financial situation can jeopardize your loan process.
If you're thinking about making an offer on a home, take another look at your budget. This time factor in closing costs, moving expenses and any immediate repairs and appliances you may need before you can move into the home, notes Felipe Pacheco, President/CEO of Avanti Mortgage, who is based in the greater Salt Lake City area. Don’t overlook hidden costs such as the home inspection, home insurance, property taxes, homeowners association fees and more.
To begin, check your credit report to make sure there are no errors on it. Credit reports from each of the three major credit reporting agencies: Equifax, Experian and TransUnion, are available for free once every 12 months. If there are errors, then contact each agency and report the mistake. You can also check your credit score for free with Bankrate. The goal is to raise your credit score before you shop for mortgages.