Home prices have fallen so low in many areas that affording a house is now easier than ever. Mortgage rates are also very low right now, making the deal even sweeter. However, buying a home is a complicated process. To minimize frustration, you need to know what to expect at every stage. There are ways to prepare yourself for buying a home, and it will be much easier in the long run if you take the time to do these things.
Should You Buy?
First, you should evaluate whether this is the best move for you. Most people think buying a home is always better than renting. In many situations this is true, but there are always exceptions to the rule. For people who move frequently for work or other reasons, buying a home is a complicated and risky investment. You can even lose money if you purchase a home and then have to sell it too quickly. Most of your payments early in the life of your mortgage go to to interest, not the principle balance of the loan. If you have to sell in the first year or two and pay closing fees, you can actually come out of the deal owing money. If a move is likely any time in the next few years, buying a home is probably not the best move to make unless you get the home at an unusually low price.
Buying a home right now may not be a good idea if your job is unstable. You may feel you are trying to make a smart investment, but if something happens and you face foreclosure, you won’t be able to purchase a home again for many years. People who currently pay very low rent may also want to wait a bit longer before purchasing. You can use this time to save up a larger down payment, which will help you end up with a more affordable loan in the long run.
Prepare Your Finances
Buying a home may require more cash on hand than you think. Some people are under the impression that since you are borrowing the money, it’s simply a matter of picking a house, signing the papers, and handing over the first month’s payment. If only it were that easy! In reality, you will need a down payment for your home purchase. This may be as little as 3 percent of the total purchase price, or may need to be as much as 10 or 15 percent. The main thing to remember is to save as much money as possible, and remember to account for moving expenses.
Another very important thing to do is manage your credit wisely. The days of easy lending for home loans are over. Your credit score will need to be in the good or excellent categories to even qualify for a mortgage. Your credit score will impact more than just whether or not you get the loan. It will also help to determine your interest rate and loan terms. Saving money on each monthly payment adds up to thousands of dollars over the life of the loan, so getting your credit in great shape before borrowing is the best idea. For at least six months before purchasing a home, you can take steps to raise your credit score and pay off other debts.
If your credit is poor, you may need debt counseling to clear up some problems on your credit report before pursuing your home purchase. It is important to keep an eye on your credit report and dispute anything on it that may be an inaccurate report. Sometimes negative reports can be removed if you contest them. Other times you may be able to make payment arrangements with creditors in order to improve your credit report. Follow a credit counselors advice when doing this, however. Some negative reports are not removed even after you pay them, and all you have done at that point is spend part of your down payment money.
While you are preparing your finances, don’t take out loans to make other big purchases. Even if you have an excellent credit score, a bank can deny you if your income-to-debt ratio is too high. This means that your monthly payments are more than you can afford, making giving you a mortgage too much of a risk for the bank.
Mortgages can vary greatly in terms including length of the loan, monthly payment amounts and interest rates. It’s important to understand the different types of mortgages, especially a mortgage you are being offered. Once you sign on the dotted line you will be committed to the terms of the mortgage, good or bad. For this reason it is very important to learn about the different types of mortgages available, and evaluate the pros and cons of each.
To get started, visit your bank and ask to speak to a mortgage specialist. He or she can teach you about the different loans available at that bank. Then you will be pre-approved for a loan. It is important to remember that a pre-approval does not equal a guaranteed approval, but it is a good starting point for your home search. After this appointment you will have a very good estimate of how much you can afford to spend on a home, which will help your realtor narrow down your search. You will also have an idea of your monthly payment, so that you can plan and budget accordingly.
Loan officers estimate how much you are able to borrow based on several different factors. Obviously your credit rating is important; those with lower credit will appear to be a bigger risk, and will not be loaned as much money. You also, in most cases, cannot borrow more than a house is worth. That may seem obvious, but it can be a problem later in the purchase process if the home you have selected does not appraise for the purchase price. This can work in your favor in some cases, because you may be able to negotiate a lower purchase price. In other cases it will cause the deal to fall through, because the sellers owe too much on their home to lower the price. The bank will also consider the amounts you owe on other loans, so if you drive expensive cars or have a lot of credit card debt, this can lower the amount you are able to borrow for a home.
Your mortgage specialist will advise you on the amount of down payment you will need to purchase your home. This often depends on the type of mortgage you are given, as well as your credit rating. If you have the appropriate amount saved for your down payment, and you are pre-approved for a mortgage, then you can begin shopping for a home.
Remember that purchasing a home is not as simple as saving up a down payment and signing some forms. Aside for the down payment and your monthly payment, there will be closing fees when you finalize your purchase. This can mean various bank fees, payment to the real estate lawyers who handle the closing, and a fee for the real estate agent who sold the home. Think twice if you are asked to pay all of the closing fees involved in the transaction. You will, of course, be responsible for your own bank fees, but the sellers should pay part or all of the agent and lawyer fees.
Sometimes a bank will require certain repairs to be done on a home before the loan is approved. Occasionally home buyers have felt pressured to pay for these repairs because they are desperate for the sale to be completed. These repairs are not your responsibility, and should be paid for by the sellers of the home. There have been occasions when the buyers paid for repairs on the home, and then the sale fell through for other reasons. They essentially paid to repair someone else’s home. If anyone asks you to do this, be very suspicious.
Other expenses you should keep in mind are the costs of moving and transferring utilities. Make sure to estimate these accurately before budgeting for your home purchase and move. You don’t want to be surprised with large utility transfer fees after you have spent your last dime on the down payment.
Purchase Your Home
Once you have a budget, have saved enough money, and have been pre-approved by a bank, the fun part can begin. Find a real estate agent who is well acquainted with the area you want to live, and tell him or her your budget and requirements for a home. Remember that you do not have to buy the most expensive home you are approved to purchase. Keep in mind your own values and lifestyle; just because a bank says you can afford it does not mean you will be able to do some comfortably. If you like to take a lot of vacations, eat out frequently, or enjoy expensive hobbies, you will not want to stretch your budget so thinly that you can no longer enjoy these things. Remember that ultimately, you are in charge of your budget and your decisions, and you know what is best for your financial health.
Once you select your new home, it usually takes about a month for the process to be completed. The loan has to be processed and receive final approval, and an appointment has to be made for the closing. In the meantime, your real estate agent, the lawyers, and the bank personnel will be preparing documents for you to sign and taking care of all the legal aspects of your purchase. For the most part, your hard work is over. You may be asked to sign a few additional papers or bring a document or two to the bank in the meantime. Once you go to closing, make sure to read each document carefully before signing, and watch for hidden fees and penalties. Once everything is signed, you will receive the keys to your new home, and you can celebrate making it through one of the biggest decisions of your life.