This article will guide you through buying a house for the first time (or second or third…) in modern times, and I will share my knowledge from both ends of the spectrum. As a young family man, I have just purchased my first house, and as a loan officer, I have guided people through the process and seen it from the financing end.
As a fellow FTHB, I feel compelled to tell you: “What are you waiting for?! If you’re reading this before December 1, 2009, or even close to that date, you’re missing one of the best windows for FTHBs, ever! Low rates, home prices, and tax credits are up the wazoo. It’s time to go.”
You’ve come to the right place if you’ve decided to buy your first home while interest rates are still historically low and home prices are at their lowest point in years. I’ll walk you through the steps you need to take (and some you might not, but hey, since when has too much information been a bad thing?…you’re right when Aunt Gertie is recounting her latest BM, that’s too much… sorry).
As a final note, please remember that this is not the definitive, all-encompassing solution for everyone reading this. Every home is different, and so is every person’s financial situation, every state, and every city. You can use this as a complete road map to success, and I certainly hope you do.
Finally…
First, take an honest look at your finances.
Putting down a 0% down payment and rolling your closing expenses into your mortgage means that, nowadays, almost anyone can afford to buy a home.
But if you want to do it the old-fashioned way and avoid paying mortgage insurance, you must put 20% down. That’s right, 20%. If you are looking at a $150,000 home, that’s $30,000 you’ll need in your bank account, plus another $5,000 to $8,000 for closing costs (we’ll get into those later).
Let’s play with the numbers again, assuming a $150,000 home. Thank goodness for government initiatives like the Federal Housing Administration’s (3.5% down) and the United States Department of Agriculture’s (0% down)!
An initial down payment of $12,000 is required for a 3.5% FHA loan of $150,000 ($5,250).
10% off a conventional loan equals $15,000, plus closing fees of $3,000, for a total of $22,000 due at closing.
Yes, there are options for getting into a home with less money but know that your monthly payment and insurance premiums will increase. If you’re interested, email me, and I’ll gladly advise you further.
Lenders typically require an excellent credit score of 700 or above. Again, it’s usually possible to buy a home with a credit score of 680 or even 580, but you’ll pay for it in other ways, like with a higher interest rate.
Get Pre-Qualified, 2nd Step
If all of that seems too much to handle, a loan officer can help you get pre-qualified by checking your credit, balancing your income and debt, and providing a number that represents how much you can afford to spend. Most will do this for free, and you can visit my website if you live in Southwest Florida to get started immediately.
The process involves the loan officer considering all your income and assets, dividing that number by all your debts, and arriving at a debt-to-income ratio. 40% is the magic number, and most banks will lend you as much as you can afford as long as you stay below that threshold.
A pre-qualification is not the same as a pre-approval, where the bank tells you exactly how much they are willing to lend you, but it will make the entire process much easier because you will know what you can afford, where you can buy and how to plan accordingly.
Third, decide on the style of dwelling you wish to purchase.
This may not be a problem if you only want a specific kind of home. Still, suppose you live somewhere like SW Florida. In that case, you’ll likely have to sort through various housing options, such as single-family houses, townhouses, villas, condos, coach homes, manufactured homes, gated communities, and who knows what else.
Fourth, decide which neighborhood(s) you’d like to call home.
Determine what you can afford, where you’d like to live, and what kind of home you want. This information lets you begin perusing real estate books, websites, channels, etc. I prefer Real Estate websites, especially those with a map search, but you may also choose to enlist the services of a real estate agent, as described in the following section.
Step 5: Contact a local real estate professional.
Ask around to find an excellent real estate agent, or if you’re in Southwest Florida, ask me, and I’ll point you in the right direction. Real estate agents are easy to find; the next time you drive by a house for sale, look at the sign in the yard; it probably has the name of some hotshot real estate agent in your area.
An excellent real estate agent will take you around town and show you all the houses that fit your criteria in terms of price, location, and style. He or she will also submit your offer to the sellers or banks of the houses you’re interested in buying.
Pre-approval is the sixth step.
You have a good chance of being pre-approved if you have already been pre-qualified, provided all the information you provided to the loan officer is verifiable. This is particularly true if you are self-employed.
two years’ worth of W-2 forms
Paystubs from the last two months
For the self-employed, see Form 1040.
*Two most current bank and asset statements
*Real estate agent, insurance agent, title firm, or attorney contact information
License/Social Security certificate photocopies required*
Appraiser’s Check Required*
The pre-approval is essential because the seller will ask how you intend to pay for the house when you make an offer. For example, if the home is worth $150,000, you will want to hand the seller this piece of paper to show that he isn’t wasting his time with you.
Seventh, make a bid on the perfect home.
In a buyers’ market, you might bid for $130,000 for $150,000, wait a week, and have the seller accept because nobody else will touch that house, but in my experience, you might still have to contend with investors. The bidding process could go very differently depending on the location and market state.
A bidding war is possible in a seller’s market. Consider the following scenario, which is very similar to one I experienced recently: You bid $138,000 on a $150,000 house the day it comes out on the market. Depending on your realtor, he may be able to tell you if there are other bids and approximately what they are.
The eighth step is to wait.
A lot is happening behind the scenes while you wait, and I’ll quickly go over the three common kinds of sales that occur these days.
In a standard seller-to-buyer sale, the buyer and seller deal directly. However, the seller may still owe money to the bank and will need to work out payment terms with the bank. This can take some time, as the seller’s bank will want to speak with your lender.
When a seller owes more to their original lender than the sale price of their home brings in (known as a “short sale”), the seller must submit a “letter of hardship” pleading with the bank to forgive the difference. If the bank agrees, they will get back to the buyer eventually (since they have no incentive to prioritize your deal if they lose money on it).
With other types of sales, you can usually negotiate for the seller to fix that hole in the wall, pay for some of the closings, or get that gnarly smell out of the kitchen. With a foreclosure, however, it’s all on you, and the bank will let you know in the AS-IS contract that they are not responsible for anything wrong with the home.
Your loan officer may take care of the appraisal, but you should expect to pay for it during closing. Lenders require an appraisal to know how much they can expect to recoup if you sell the house and use the proceeds to pay off their loan.
Phase 9: Concluding Statements
The closing table is the last stop before you become the legal owner of the property, and the seller hands over the keys and the deed. The closing date is typically set a few weeks after your bid is accepted.
At the closing table, you’ll hand over your down payment and any other funds necessary to finalize the home purchase. These funds could be as little as $1,000 or as much as hundreds of thousands of dollars, depending on the cost of the home, the type of loan you get, the seller’s concessions, and your financial situation.
Transcontinental Lending Group senior loan officer Ryan Shore.
What do all these strange terms mean?
A home’s value in a standard, competitive market is determined by an appraisal.
Payments made at the closing table, such as those owed to the lender, vendor, and loan officer (and possibly to an escrow company).
Fannie Mae or Freddie Mac backs a conventional mortgage with a fixed interest rate and term of either 30 or 15 years.
The debt-to-revenue ratio is the proportion of monthly income required to service monthly debt payments.
A 3.5% down payment is required for a credit insured by the Federal Housing Administration (FHA).
Those considered “first-time homebuyers” have never purchased a home before (obviously) or, according to the United States government, those who have not possessed property in the preceding three years.
The bank now holds the house in foreclosure.
The lender is the financial entity from which the homebuyer borrows funds.
If you do not have the cash to make a 20% down payment, you must pay for mortgage insurance in the form of Mortgage Insurance premiums (MIP) and Private Mortgage Insurance (PMI) each month.
When a homeowner attempts to sell a property for less than what is owed on the mortgage, the transaction is known as a “short sale.”
The title is proof of possession; title insurance shields the document from unauthorized use.
The US Department of Agriculture (USDA) provides first-rate home loans to citizens of rural and peri-rural areas with no down payment or closing fees.
Read also: Real-estate – How to Sell Your House
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