Whether you're a first-time homebuyer, or it's been a while since you've bought a home, the prospect of finding and buying a home can be daunting. Here's a step-by-step game plan that makes it simple.
1) Determine What's Affordable
Although not a hard and fast rule, consider limiting your monthly mortgage payment - including taxes and insurance - to 28% of your monthly gross income. Look at your monthly budget first to see what fits most comfortably for your situation, since a higher payment may limit your ability to meet your other obligations and goals.
Once you've figured out your desired monthly payment, you can work backward to get a target purchase price and help narrow your home search. A licensed loan officer can look at your situation and help you decide what may fit your needs.
Make sure you have sufficient cash available for the down payment and closing costs. While a 20% down payment will help you avoid paying for private mortgage insurance (PMI), there are loan options available that let you put as little as 3% down - 0% for veterans. In most cases, you'll also need around 3% of the purchase price for closing costs.
You also want to keep some cash on hand after closing for other expenses like moving costs, redecorating and unforeseen emergencies.
2) Determine the Kind of Mortgage That's Appropriate for You
Look for a mortgage lender with a reputation of superior service and timely closings. You'll then need to decide the type of mortgage that best suits your needs.
There are two major types:
A fixed-rate mortgage, which locks in your interest rate and payments for the duration of the loan
An adjustable rate mortgage (ARM), in which your rate and payments are fixed for an initial term, then fluctuate along with changes in the market.
Since they typically have lower initial payments, ARMs can be appealing from a cash flow standpoint, but they can be risky if you intend to keep your home beyond the initial fixed-payment period. If rates rise, you could get stuck with a monthly mortgage that's unaffordable.
3) Apply for Preappproval
Most real estate agents need you to get preapproved for a mortgage before they'll take you to look at homes. Doing so lets you shop with more confidence, your offers will have a lot more credibility with buyers and you'll speed up the process once your offer is accepted. Before making a decision, the mortgage lender will study your credit report, credit scores, income and assets.
4) Decide Which Features You Really Need
Do you really need three bedrooms, or could you function fine with only two? How many bathrooms are necessary? It all depends on the size of your family, your lifestyle, and above all, your budget. Separate the "must-haves" from the "nice-to-haves."
5) Find a Reputable Realtor®
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6) Go House Hunting
A professional real estate agent will have a firm understanding of the market and help guide you in your home search. Be sure to stay within your original price range and not get emotionally swept up in the process. You can save time and narrow your choices by doing some preliminary shopping on the web. My website has EVERY property that is currently listed on the market for sale.
7) Make an Offer
You don't want to lowball the seller, because you could lose the home to other buyers who are willing to pay more. But you also don't want to overpay.
Ask your real estate agent for details on recent sales of similar homes in adjacent neighborhoods - what price per square foot did they sell for, and did they sell above or below the original asking price?
Also consider how long the home has been on the market and get a feel for the seller's motivation. Do they seem desperate to sell? Have they already lowered the asking price? Once you have an accepted offer, complete the mortgage application. Your lender will need you to provide documents like pay stubs, bank statements and tax returns to verify your income and assets.
This step can be time consuming, so it's important to stay on top of any document requests to avoid a delay in closing.
8) Nail Down the Inspection and Insurance
Once you've found your dream home and started the mortgage application, it's time to have a certified inspector carefully inspect the property to identify any deal-killers or anything that should be repaired. The inspection cost is generally paid by the buyer, and needed repairs can be negotiated with the seller. Your agent can recommend an inspector.
Home insurance is a must. Your lender will need the details on your coverage, and will typically incorporate the premium into your mortgage payments - you'll make your payment, and the lender will pay the insurance premium. When selecting your coverage amount, keep in mind that the cost to rebuild the home may be quite different from its market value.
9) Go Over the Loan Estimate
Review your closing costs, which may include a mortgage attorney's fee, title insurance and property taxes. And before moving to the final step - closing - visit the home one more time to make sure everything looks good and required repairs have been completed.
10) Closing Day
Closing usually takes place at the office of a local settlement agent. You'll want to make sure you have personal identification, any other required documents, and a certified check or wire transfer to cover your closing costs and down payment.