There are 127 million homeowners in the country, according to the U.S. Census. To join their ranks, here are 11 steps you should follow that will help you achieve homeownership:
- Check your credit score
- Create a budget
- Hire a real estate agent
- Shop for a mortgage
- Make time for open houses
- Sign a contract
- Interview your home inspector
- Review your home inspection report carefully
- Negotiate any repairs
- Do a final walkthrough
- Close on your house
A good credit score will get you a good interest rate. A great credit score will get you a great one. Lenders use credit, or FICO, scores as one factor to determine how much interest they charge borrowers. Borrowers who have excellent credit pose less risk of defaulting on the mortgage, so their reward is paying a lower mortgage interest rate.
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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.
Some other things home buyers can do to turbocharge their scores is to bring any past-due credit card balances current and stop using credit cards altogether — but don’t close the accounts once you pay off the balance. It looks good for you to have established and available credit, as long as you don’t use it. That means keep that Old Navy card and Visa gas card open, even if you no longer use them. The longer you’ve had the account, the more it enhances your score.
Finally, shoot for a 36% debt-to-income ratio, or DTI. This is how much debt you have versus income. Bills that are counted in your DTI include debt like student loans, car payments and credit cards. Utility bills, for example, are not included in the DTI.
This step might take the longest (it’s up there with saving for a down payment), so get started on improving your credit before you do anything else.
This is the part where dream house meets reality. It’s time to figure what your needs are and what your budget can afford. The general rule of thumb is that you shouldn’t spend more than 30 percent of your gross income on housing. This not only includes your mortgage payment, but your insurance and property taxes, as well.
If you don’t already have a down payment, now’s the time to start saving up. For folks with less than 20% saved, they will have to get private mortgage insurance, or PMI. If you can save up enough to skirt the PMI requirement, you’ll save big bucks. Generally, PMI costs 0.5% to 1% of the entire loan on a yearly basis.
Keep in mind, there are programs that require as little as 3% down and some programs, like VA and USDA, require no money down. Navy Federal offers a loan with no money down and no PMI, but charges a 1.75 percent funding fee.
Part of your house budget is knowing what kind of house you can afford. Create two lists, one for features you must have, for example: walking distance to school or three bedrooms, and the second list should outline the features you would like to have, but can live without.
Once your wish lists are complete, you can begin researching what’s on the market. You might find that your market is reasonable enough that you can afford your dream house. The opposite could also be true: a modest house in your desired area is unaffordable, so you have to adjust where you look or the type of house you buy.
Whatever the case, your budget is your blueprint for making a decision you won’t regret later.
A good real estate agent is like a skeleton key that can unlock the door to the multiple resources you need to buy a house. An agent can refer you to lenders, appraisers, title companies and, of course, buyers.
Before you hire an agent, make sure you find out what their sales track record is, how many houses they can show you each week (some agents are overscheduled), and how they’ll handle multiple offers.
Find out how familiar the agent is with the areas you want to look at. If they have little expertise and no network in the neighborhood, then you won’t get the agent advantage of being the first to see a house (sometimes even before it’s listed) or getting expert advice on price. Plus, neighborhood knowledge saves the buyer time because an agent will likely know exactly where to look and what houses to show based on your needs.
Before you start looking for a house, you need to have a prequalification letter in hand. This letter is basically proof that a lender will loan you a certain amount of money. This is your ticket to putting an offer on a house. People with excellent credit scores, can have their pick of lenders and the most competitive rates. If your score is somewhere in the middle, you might have to spend more time shopping around to get the lowest rate.
Borrowers with lower credit scores and smaller down payments might have to get an FHA or VA loan. These loans can be the best way to get into a house for some folks, but they do come with restrictions and extra costs, so be sure you weigh your options carefully.
If you want to find a house quickly, the best thing you can do is to keep your schedule open. A proactive real estate agent might ask you to see a house that just hit the market within the next hour. To get an edge on other buyers, you’ll probably want to drop everything and see it.
Keep your options open. Some homes might be listed as a two-bedroom, but if the square footage is in the same range as three-bedrooms you’ve been looking at. This could be a sign that it’s a hidden gem with a “secret” third bedroom. Secret bedrooms are often sunrooms that can be easily converted into a bedroom or an extra-large master that could be divided with some drywall.
Don’t look at houses outside of your budget. The last thing you want to do is be house rich and cash poor. If you max out your budget and push your paycheck to the limit, you could risk your house and financial well-being if your income falls.
Now that you’ve found a home you want to buy, it’s time to agree on a price and sign a contract. Depending on the market you’re in, you might be able to negotiate with the seller on the price or extras, like appliances and other goodies. If there are multiple offers on the house, then your negotiating powers are all but nil. This is where you can rely on a trusted, knowledgeable real estate agent to guide you.
Once you and the seller agree on a price, then the seller’s agent will draft a purchase agreement, which is a legally binding contract that includes agreed-upon terms, such as the estimated closing date and the price.
At this point, the buyer will also put up earnest or “good faith” money. This is usually around 2% of the purchase price. So on a $300,000 house, a buyer would put up $6,000 in earnest money. If the buyer breaks the contract, the seller could keep the money.
This is where contingency clauses come in; these are important conditions designed to protect the buyer.
Common contingency clauses include appraisal, financing and home inspection. For example, if the appraisal comes in lower than the sale price, the appraisal contingency allows the buyer to back out of the contract. The same goes for financing and home appraisal. In the event the buyer’s loan doesn’t go through or the inspection report shows significant problems, the buyer can get out of the contract without losing their earnest money.
Homebuyers often rely on their real estate agent to appoint a home inspector. While this can be helpful, buyers should also check the inspector’s credentials and read reviews themselves. Since this is the person responsible for ensuring your investment is sound, you want to make sure they’re thorough and have solid experience.
Make sure the inspector is bonded or insured, ask for referrals, find out what the inspection includes and whether they have any specialties (such as chimney or HVAC expertise).
If there are special considerations, such as for historic homes or homes in flood plains, find out how the inspector will approach that scenario.
Big-ticket items like roofs, HVAC systems, and structural integrity, are things you want to look at carefully. If your inspector hast a question about any of them, it’s worthwhile to get a second opinion by a specialist. If major problems do surface, this is when you have to talk to your agent about negotiating repairs or the sale price.
Other home problems that might require home inspectors who specialize in those areas are: chimneys, sewers (chronic plumbing problems can come from poor installation of sewer pipes), pools, asbestos, mold and termites.
Chances are your home inspection report will turn up some problems with the home — but, keep in mind, not all repairs are created equal. There are major issues that will likely need to be dealt with before a lender will honor a home loan, such as structural problems and building code violations. In these cases, the homeowner is responsible for repairs before the sale can go through.
In a seller’s market, experts advise buyers to overlook cosmetic issues, such as loose fixtures, water stains (as long as it’s not the symptom of a larger problem), failed window seals and cracked tiles. However, some buyers might be in the position to negotiate these repairs with the seller. One option is to ask for a cash-back credit at the close of escrow. This will save you some money and you can oversee the repairs yourself.
The final walk through is your last chance to see the property before you buy it. This is an important step, so don’t dial it in. Come prepared with your checklist — which should include repairs the owner agreed to make, post-inspection report.
It’s a good idea to do the walk-through with your agent, who can act as witness and help answer any questions you might have. Make sure you document any problems with a camera and time-stamped notes.
Check for issues like mold (which can appear within a matter of days) and plumbing issues. Make sure sinks drain properly and verify that electrical outlets as well as the heater and air conditioning are working.
The closing process is the last lap before you reach the finish line. At closing, the home is transferred from the seller to the buyer.
Before you actually close on the house, you’ll have a chance to do a final walkthrough to make sure all the agreed-upon repairs were made and that the seller has vacated the property.
Once you’ve made sure the property is in the agreed-upon condition, you’ll set a date to meet with the required parties. Different areas have different requirements as to who must be present, so you might meet one or all of the following: the escrow or closing agent, the attorney — who could also be the escrow agent, someone from the title company, the mortgage lender, and the real estate agents.
During this meeting, you’ll be required to sign a variety of legal documents (which can be provided to you to review before closing). This is also when you’ll pay all of your closing costs and escrow fees. In some instances, you can roll the closing fees into the mortgage, but this should be arranged before closing.
Finally, bring all the required identification such as a driver’s license or passport and any other identification required.