Before you start the process of buying your first home, take the time to learn the ropes of home shopping and ownership to make the process go as smoothly as possible. You’ll hear lots of new terms and learn plenty of real estate concepts along the way, and it helps to have an understanding of what these are before you jump in to ensure that you get the best deal possible. Here’s a basic checklist of what you’ll need to do in your quest for that dream home.
Can I afford a home?
Even if you have crystal-clear credit and a good job, there’s no guarantee that lenders will give you a mortgage if the other numbers don’t line up. Lenders look at your income, your housing expense and your other fixed expenses. If your ratios are too high, banks may consider it a high-risk loan and they may turn you down. Even if they give you a loan, you certainly don’t want to find yourself strapped for cash or house poor.
Start by cleaning up your credit if it needs it, and then determine how much you have for a down payment. Depending on the situation, lenders may require as little as five percent or as much as 20 percent. Look for an online mortgage calculator to get a rough estimate of what you can afford, and then add the two numbers together so you know how much you might be able to spend on a home.
Get a handle on your debt-to-income ratio. Take your projected monthly housing expense, divide it by your monthly income and then multiply the result by 100. Most lenders will look for this number to be 28 percent or less. Add together your housing expense along with all of your other fixed expenses, such as credit card payments, child support, insurance and car payments. Divide that by your monthly income and multiply by 100. This number typically should be 36 percent or less. If your ratios don’t line up, you may want to wait before buying your first home.
How do I shop for a mortgage?
Before you start looking at homes, make sure you get pre-approved for a mortgage. This entails putting together a lot of paperwork, which often takes some time. You’ll likely be asked for pay stubs, W-2 forms, bank statements and documentation on any credit lines or loans you have open. Lenders will also want the contact information for landlords over the past two years, as well as income tax returns for the past two years.
You may be asked for additional information if you’re an independent consultant or freelancer or if you own your own business. If you’re not using your own money for a down payment, be prepared to explain where it came from. Lenders don’t want buyers taking out loans to cover their down payments, and gifts from a relative may take some additional paperwork.
Find out if your situation will require that you pay private mortgage insurance, or PMI, until you have more equity in the home, and get a rough estimate of all closing costs. If traditional banks turn you down, contact the Federal Housing Authority (FHA) to see if you qualify for one of their programs. If you’re ex-military, the U.S. Department of Veterans Affairs might be able to help.
What if I’m tied to a lease?
Unless you’re living with your parents, you’ve got a lease that your landlord will likely hold you to. Talk to your landlord about the potential move, and ask him if you can go onto a month-to-month lease when your lease is up to give you a bit more flexibility. This is especially helpful if your lease is up during the winter months when for-sale homes are scarce or if you’re planning on buying a fixer upper that you want to renovate before you move into it. Whatever the situation, make sure you’ve got a solid transition plan so you don’t find yourself living out of a hotel room.
What’s involved in making an offer?
Keep your emotions in check when buying your first home, and remember that this is a business transaction. If a seller sees that you’re too eager, he may hold off for asking price. Conversely, if you make a lowball offer, the seller might be offended and make things more difficult. Start by understanding the seller’s motivation. If he has put the house on the market to see what he can get, rest assured that he won’t take anything less than asking price. But if you’re fortunate enough to come across a seller who is moving for a new job, he may need to sell quickly and you can make a lower bid.
This part of buying your first home is truly a negotiation, as you can ask for concessions if there are any property faults. If the central air conditioning is broken, for example, you may ask that the seller either fix it before the closing or knock money off of your offer so that you can pay for the repairs. At this point, you haven’t had a home inspection yet, but if the seller takes your offer, you should schedule one as soon as possible. If the inspection comes up with other major faults, you can usually renegotiate or walk away, depending on what the issues are.
How do we finalize the deal?
Once you’ve gone through all of these steps, there are just a few more details to clean up. You should hire an attorney to representing you at the closing, secure your mortgage funding and shop for homeowner’s insurance. Just before the closing, you and the seller or his agent should do a final walk-through of the home to ensure that all agreed-upon repairs were made and that light fixtures and other attached objects have not been removed from the home.
Buying your first home may seem daunting, but there’s a pot of gold at the end of the rainbow. Do everything you need to do, and you’ll be safely ensconced in your dream home in no time.
