Step-by-Step Guide to Buying A Home

Buying a house is a major commitment. Before you begin shopping for properties or comparing mortgage options, you need to make sure you’re ready to be a homeowner. Wondering if you should buy a house? Let’s look at some of the factors that lenders and homeowners alike should consider.

Income And Employment Status

Your lender won’t just want to see how much money you make. They’ll also want to see a work history (usually about 2 years) to make sure your income source is stable and reliable.

Preparing your income is all about pulling the right documentation together to show steady employment. If you’re on payroll, you’ll likely just need to provide recent pay stubs and W-2s. On the other hand, you’ll need to submit your tax returns and other documents the lender requests if you’re self-employed.

Debt-To-Income Ratio

Debt-to-income ratio (DTI) is another financial instrument mortgage lenders use to evaluate your loan application. Your DTI helps your lender see how much of your monthly income goes to debt so they can evaluate the amount of mortgage debt you can take on.

DTI is calculated by dividing your monthly debt by your gross monthly income. For example, if your monthly debts (credit card minimum payments, loan payments, etc.) total $2,000 per month and your gross monthly income is $6,000, your DTI is $2,000/$6,000, or 33%. Your lender will use the debts shown on your credit report to calculate your DTI.

Depending on the type of loan you’re applying for, your lender may also calculate your housing expense ratio, also sometimes referred to as front-end DTI. This is a ratio that looks at your total monthly house payment (principal, interest, taxes and insurance) compared to your monthly income. For example, if you have a $1,200 house payment and the same $6,000 monthly income, your housing expense ratio is $1,200/$6,000, or 20%.

It’s smart to review your DTI before you apply for a loan. In most cases, you’ll need a back-end DTI of 43% or less to qualify for the most mortgage options, although this number varies based on your lender, loan type and other factors.

Liquid Assets

Even with the help of a mortgage, you’ll still need liquid assets to fund the purchase of a home, specifically your:

Down payment: Buying a home with no money down is possible, but most homeowners need to have some cash for a down payment. A down payment is the first major payment you make on your loan at closing.

The amount of money you’ll need for a down payment depends on your loan type and how much money you borrow. You can buy a home with as little as 3% down (though there are benefits to putting down more).

Closing costs: You’ll also need to pay for closing costs before you move into your new home. Closing costs are fees that go to your lender and other third parties in exchange for creating your loan.

The specific amount you’ll pay in closing costs will depend on where you live and your loan type. It’s a good idea to be prepared for 3 – 6% of your home’s value as an estimate of your closing costs. In some situations, part of closing costs can be rolled into your mortgage or paid by the seller using seller concessions.

Credit Health

Your credit score plays a huge role in what loans and interest rates you qualify for. Your credit score tells lenders how much of a risk you are to grant a loan.

Taking steps to improve your credit score and reduce your debt can pay off big as you prepare to get a mortgage. Better numbers mean better loan options with lower interest rates.

Your credit score is based on the following information:

• • Your payment history
  • The amount of money you owe
  • The length of your credit history
  • Types of credit you’ve used
  • Your pursuit of new credit

What score will you need to qualify for a home loan? Most lenders require a credit score of at least 620 to qualify for the majority of loans. A score above 720 will generally get you the very best loan terms.

At Rocket Mortgage®, you can qualify for an FHA or VA loan with a 580 median FICO® Score. However, to qualify for these with a median score below 620, you’ll need a housing expense ratio of no more than 38% and an overall DTI no higher than 45%.

Willingness To Live In One Place

A mortgage can be a 30-year-long commitment. Though you don’t need to live in your home for the entirety of your mortgage term, it’s still a big decision. When you own a home, it’s more difficult to move. Unless you’re buying a second home or investment property, you might need to sell your current home first, which can take time.

Decide whether you’re ready to live in your current area for at least a few more years. Consider your career goals, family obligations and more. Each of these factors will play a major role in the type of home you buy and where you set up your primary residence.

Timing

Deciding whether it’s a good time to buy a house or not depends on a variety of personal factors (such as financial readiness and lifestyle preferences) and market conditions (such as economic health and current mortgage rates).

Ultimately, the right time to buy a home comes down to your own unique situation. Be sure to consult a financial expert before making any big financial decisions such as buying a house.

Once you decide you’re ready to buy a home, it’s time to set a budget. A good place to begin is by calculating your DTI ratio. Look at your current debts and income and consider how much money you can reasonably afford to spend each month on a mortgage. Homeownership comes with several costs you don’t need to worry about while renting. You’ll need to pay property taxes and maintain some form of homeowners insurance. Factor these expenses into your household budget when you decide how much you can afford on a house.

There are many ways to save for your home purchase, including through investments and savings accounts. If you have relatives who are willing to contribute money, you may be able to use gift money toward your down payment (in which case, be sure to provide your lender with a gift letter). But how much do you need to save before buying a home? Let’s look at some of the major expenses related to the purchase, and how much you might want to save for them.

Down Payment

Your down payment is a large, one-time payment toward the purchase of a home. Many lenders require a down payment, because it mitigates the loss they might suffer in the event that a borrower defaults on their mortgage. Many home buyers believe that they need a 20% down payment to buy a home. This isn’t true. Plus, a down payment of that size isn’t realistic for many first-time home buyers. Fortunately, there are many options for buyers who can’t afford a 20% down payment. For example, you can get a conventional loan for as little as 3% down. Federal Housing Administration (FHA) loans have a minimum down payment of 3.5%. Department of Veterans Affairs (VA) loans and United States Department of Agriculture (USDA) loans even allow eligible and qualified borrowers to put 0% down. There are advantages, however, to making a larger down payment. For one, it typically means you’ll have more mortgage options. It also usually means you’ll have a smaller monthly payment and a lower interest rate. Plus, if you put at least 20% down on a conventional loan, you won’t need to pay for private mortgage insurance (PMI). Closing Costs You’ll also need to save money to cover closing costs – the fees you pay to get the loan. There are many variables that go into determining how much you’ll pay for closing costs, but it’s usually smart to prepare for 3 – 6% of the home value. This means that if you’re buying a home worth $200,000, you might pay $6,000 – $12,000 in closing costs. The specific closing costs will depend on your loan type, your lender and where you live. Almost all homeowners will pay for things like appraisal fees and title insurance. If you take out a government-backed loan, you’ll typically need to pay an insurance premium or funding fee upfront. Before you close on your loan, your lender will give you a document called a Closing Disclosure, which lists each of the closing costs you need to cover and how much you’ll need to pay at closing. Look over your Closing Disclosure carefully before you close to know what to expect and to catch any errors.

Other Costs Based On Loan Type

Your loan type might require a specialized inspection as well. For example, you often have to get a pest inspection before you take out a VA loan. Most lenders will schedule this inspection on your behalf and pass the cost along to you at closing. These expenses might seem minor when held up against the other costs associated with buying a home, but they can add up, so be sure to budget wisely.

Before you can apply for a mortgage, you’ll need to decide what the best type of loan is for you and which one you’ll qualify for.

Conventional Loans

Conventional loans are mortgages made by a private lender and not backed by the government. The most common type of conventional loan are loans that are backed by Fannie Mae or Freddie Mac, sometimes called conforming loans. The majority of mortgages in the U.S. are conventional loans. Conventional loans are always a popular option for home buyers, and you can get one with as little as 3% down.

FHA Loans

Backed by the Federal Housing Administration, FHA loans are less of a risk for lenders because the government insures them if you stop making payments. As a result, FHA loans have credit score requirements that aren’t as strict. You can get an FHA loan with a down payment as small as 3.5%.

VA Loans

VA loans are mortgage loans for veterans, active-duty members of the Armed Forces, eligible reservists or National Guard members and qualifying surviving spouses. The most popular benefit of VA loans for home buyers is no down payment required. VA loans are insured by the Department of Veterans Affairs.

USDA Loans

Another type of government-backed loan, a USDA loan, helps people in rural and suburban areas buy homes. You can get a USDA loan with 0% down, but your home must be in an acceptable rural area and you must meet income eligibility rules.Rocket Mortgage doesn’t offer USDA loans at this time.

When you’re ready to start house hunting, it’s time to get preapproved for a mortgage. When you apply, your lender will give you a preapproval letter that states how much you’re approved for based on your credit, assets and income. You can show your pre approval letter to your real estate agent so they can help you find homes within your budget. To get pre-approved, you need to apply with your lender. The preapproval process typically involves answering some questions about your income, your assets and the home you want to buy. It will also involve a credit check.

There are multiple parties involved when getting a mortgage and buying a house. Your real estate agent is your representative in the home purchase transaction. Your agent will look out for your best interests by finding homes that meet your criteria, get you showings, help you write offers and negotiate. As a buyer, you can usually work with a real estate agent for free. In most cases, the seller will pay the buyer’s real estate agent’s commission. The buyer’s agent commission is usually 3% of the purchase price. A real estate agent represents you and helps you understand how to buy a house. Your agent will show you properties, write an offer letter on your behalf and assist in negotiations. Real estate agents are local market experts and can also advise you on how much to offer for each property. It’s possible to buy a house without a real estate agent or REALTOR®. This isn’t recommended, especially for first-time buyers. The homebuying process can be complicated and emotional. Having an agent by your side can help you navigate the real estate market, submit a legally sound offer and avoid overpaying for your property. How can you find the right real estate agent? Begin by asking family members and friends for recommendations. Direct referrals are often the best way to get unbiased information on agents in your area.

Your real estate agent will help you hunt for houses within your budget. It’s a good idea to make a list of your top priorities, some of which might depend on whether you’re looking for a starter home or forever home and what type of house you are looking for.

• • Here are some things you might want to consider when shopping for a house:
  • Price
  • Square footage
  • Home condition and possible need for repairs
  • Access to public transportation
  • Number of bedrooms
  • Backyard/swimming pool
  • Local entertainment options
  • Local school district ranking
  • Property value trends
  • Property/real estate taxes

Rank your priorities from most to least important and show this list to your agent. Your agent will then show you homes that fit your criteria. You may need to spend some time searching for the perfect home, so don’t get discouraged if your hunt takes longer than you expected. Only you can decide which property is right for you. Make sure you see plenty of homes before you decide which one you want to make an offer on. Like much of the home buying process, you can do a great deal of your house hunting online. Once you find a property you like that fits your needs and budget, it’s time to make an offer.

When you decide to make an offer on a home, you must submit an offer letter in writing. Your offer letter includes details about yourself (like your name and current address), the price you’re willing to pay for the home and more. It will also include a deadline for the seller to respond to your offer. Most offers also include an earnest money deposit. An earnest money deposit is a small amount of money, typically 1 – 2% of the purchase price. Your real estate agent will be able to tell you what’s common in your market. Your earnest money deposit goes toward your down payment and closing costs if you buy the home. If you agree to the home sale and later cancel, you typically lose your deposit. Your agent will almost always write the offer letter on your behalf, but you can write it yourself if you choose. Your agent will then get in contact with the seller or the seller’s agent to submit the offer. From here, the seller can respond in one of three ways:

• • Accept the offer: If the seller accepts the offer, you can move onto the next step.
  • Reject the offer: If the seller rejects your offer, the ball is back in your court. You can choose to submit another offer or move on to another home.
  • Give you a counteroffer: The seller can also come back with a counteroffer of their own. They may change the purchase price or the terms of the sale. You can accept the counteroffer, reject it, or make another counteroffer.

Negotiations may go on for some time after you submit your offer. Let your real estate agent help you manage negotiations – don’t be afraid to walk away if you can’t reach an agreement. Once you and the seller agree to an offer, it’s time to move on to the appraisal and inspection.

Lenders usually don’t require a home inspection to get a loan, but you should still get an inspection before you buy a property. During a home inspection, an inspector will go through the home and specifically look for problems. They will test electrical systems, make sure the roofing is safe, make sure appliances are working and much more. After the inspection closes, the inspector will give you a list of problems they found in the home. When you receive your inspection results, go over each item line by line and look for major issues. If a home has a serious health hazard (like lead paint or mold), ask the seller to correct the problem before you close. If you can’t reach an agreement, you may want to move on and consider other options. Read over your inspection results with your agent and ask whether they noticed any major red flags. Bear in mind that you’ll be liable for any major repairs after your sale closes. A clogged toilet or a sink that won’t drain aren’t major issues. However, if your home inspection reveals an expensive problem (like cracks in the foundation or poorly installed windows), you may want to reconsider the purchase. It’s common for homebuyers to include a home inspection contingency in their purchase offer. A contingency gives buyers the option to back out of a purchase (or negotiate repairs) without losing their earnest money deposit if the home inspection reveals major issues with the home.

home appraisal is a review that gives the current value of the property you want to buy. You must get an appraisal before you buy a home with a mortgage loan. Lenders require appraisals because they can’t lend out more money than a home is worth. If the appraised value comes back lower than your offer, you might have trouble getting financing. Be thoughtful about your offer and consider contesting the results of the appraisal if you believe the appraised value is too low. However, you can’t count on a reviewer agreeing with you. Home buyers should also include an appraisal contingency in their offer. Appraisal contingencies are often drawn up to allow buyers to back out of a purchase (or negotiate a lower price) without losing their earnest money deposit if the home appraises for less than the offer amount. As with inspection contingencies, appraisal contingencies may vary, so make sure you understand the nature of your agreement.

After you view your inspection results, you might want to ask your seller to correct some of the problems you found. You can do this in one of three ways:

• • Ask for a discounted purchase price considering the results.
  • Request that the seller give you credits to cover some of your closing costs.
  • Ask that the seller have the problems fixed before you close.

Your real estate agent will submit your requests to the seller’s agent. If you’re buying a house that’s for sale by owner (FSBO), your agent will negotiate with the seller directly. The seller might accept your request, or they might reject it. If your seller rejects your request, it’s up to you to decide how to proceed. If you have an inspection contingency in your offer letter, you can walk away from the sale and keep your earnest money deposit.

You should do a final walkthrough in your new home before you close, even if you’re 100% committed to the property. This time allows you to check and make sure that the seller has everything in order. Walk through the home and make sure the seller hasn’t left any belongings. Check your repair areas if you requested them and keep an eye out for pests. You may also want to double-check your home’s systems one final time to make sure everything is in working order. If everything looks good, it’s time for you to confidently move toward closing.

Your lender is required to give you your Closing Disclosure, which tells you what you need to pay at closing and summarizes your loan details, 3 business days before closing. Read through your Closing Disclosure and make sure the numbers don’t vary too much from your Loan Estimate, which you would have received no more than 3 business days after your initial application. Once you’ve reviewed your Closing Disclosure, it’s time to attend your closing meeting. Bring your ID, a copy of your Closing Disclosure and proof of funds for your closing costs. You’ll sign a settlement statement, which lists all costs related to the home sale. This is when you pay your down payment and closing costs. You’ll also sign the mortgage note, which states that you promise to repay the loan. Finally, you’ll sign the mortgage or deed of trust to secure the mortgage note. After closing finishes, you’re officially a homeowner.

This article was originally published by Rocket Mortgage and accessed on 2/2/22