Probably the most significant purchase of your life is buying a home. And it is not something you should neglect and do without preparation. Make sure you are done with your research work before you start on the road to homeownership. Here’s what you need to take care of when buying a house.
Figure out what you can afford.
You’ve got a lot of ways through which you can determine what you can realistically afford and also how many lenders are willing to give you. Compare in-depth at what you earn to the amount you spend. See if you can find out ways to budget and save more. The bigger your savings, the lower will be your monthly payments.
Improve your credit store.
To bag the best mortgage deals, higher credit score will help you out. Lenders will see you as an unreliable investment if you have a poor or average credit score. Make sure everything is accurate and you are not penalized for old, paid or settled debts.
Build a healthy savings account.
To present yourself as a much better loan candidate in front of the lenders, it’s better to have three to five months of mortgage payments set aside in savings. Additionally, you’ll be prepare for any big-ticket fixes.
Get a mortgage agreement in principle.
Once you’re done with sorting out your finances, calculate how much is affordable and choose the kind of property you’d like. You need a mortgage agreement in principle (AIP) for it. Though it’s not official, it’s a worthy agreement between you and a mortgage lender. The agreement says the lender is willing to lend you a certain amount towards a property. It’s better to go for an agreement, as most agents won’t even an offer without one.
Buy the home you want.
Since short-term decisions can be very costly, you need to think as much as you can in this context. It would not be a wise decision to buy a tiny one-bed flat if you think you will outgrow in a year or two, keeping in mind the current state of the market. Recent statistics show that the hardest hit of the slowing housing market is the second-steppers. Around 60% of the second-steppers say that moving up the ladder is harder than getting into it in the first place.
Requirements To Buy a House.
For most people, buying a house means getting a mortgage. According to the National Association of Realtors, 93% of first-time buyers finance their home purchase. While 83% of repeat buyers do so.
1 The mortgage process typically is different for every buyer. But typically, there are six boxes to check off when getting a home loan;
- Down payment
- A lender
- Credit scores
- Debt-to-income ratio
- Closing costs
- Documentation
A good real estate agent can also be helpful when finding the right home to buy. Eighty-seven percent of people who bought a home in 2021 did so with the help of a trusted real estate agent.
Requirement #1: Down payment.
The first requirement to buy a home is a down payment. This is the money you pay upfront to offset the amount you need to borrow.
“Lenders have tightened the requirements since the economic crisis in 2008,” says Karen R. Jenkins, president and CEO of KRJ Consulting. “As a result, prospective borrowers seeking to purchase a home must have some ‘skin in the game’ to qualify for a home.
The amount you need for a down payment can depend on the type of loan you're hoping to get. For example, FHA mortgages require a minimum down payment of 3.5% of the purchase price.
2 If you're looking at a conventional loan, on the other hand, you'll need at least 20% down to avoid private mortgage insurance (PMI).
3 Note USDA and VA loans have no down payment requirements.
If you're having trouble saving the money for a down payment, there are some options you might consider. Down payment assistance programs, for example, can offer financial help with down payments and closing costs for eligible borrowers. You could also ask for a down payment gift from a family member. Keep in mind that there may be limits on down payment gifts and you'll need a properly documented down payment gift letter.
Requirement #2: A lender.
Your choice of lender matters, as it can influence the interest rate you pay for a mortgage loan. The lower your rate, the less you'll pay to buy a home over the life of the loan. This is why it's important to shop around and compare mortgage lenders.
You can start off by checking with your own financial institution (FI). You may be able to get a competitive rate because you already do business with them. And don't rule out credit unions, small community banks, and even online lenders. The more lenders you check, the more likely it is that you'll get a really good rate.
A great tool for researching and comparing interest rates is a mortgage calculator. This tool gives you an idea of your potential costs before you even meet with a mortgage broker.
Getting pre-approved for a home loan could give you an edge when making an offer on a property, as it shows the seller that you're serious about buying.
Requirement #3: Credit score.
Mortgage lenders consider your entire financial situation when applying for a loan but your FICO score can take center stage. Your credit scores indicate to lenders how likely you are to repay what you borrow. If you have a bad credit score or, even worse, no credit history at all, it will be very difficult to qualify for a mortgage.
So what credit score do you need for a mortgage? Again, the answer depends on what type of mortgage loan you're seeking.
Amy Tierce, a senior loan officer with Radius Financial Group, notes that although the Federal Housing Administration (FHA) offers financing options to borrowers with a credit score as low as 500, most lenders have their own requirements.
4 So it may be a challenge to find a lender who'll work with a borrower with a credit score below 620 or 640.
Checking your credit scores before applying for a home loan can give you a better idea of whether you meet the lender's requirements to buy a house. This can also give you a feel for what kind of interest rates you're likely to pay for a mortgage.
Requirement #4: Debt-to-income ratio.
Debt-to-income ratio or DTI represents the percentage of your income that goes toward debt repayment each month. You can figure this out by adding up all your monthly debt payments and dividing that figure by your gross income each month. The lower this number is, the better for meeting the requirements to buy a house.
Banks use your DTI to determine whether you can afford to purchase a home. The Consumer Financial Protection Bureau has rules stating that the debt-to-income ratio cannot exceed 43%.
5 If your DTI exceeds this amount, you may have a harder time getting a mortgage.
So how can you reduce your DTI to meet the requirements for a mortgage? Paying down some of your debt is an obvious choice. You could also improve your debt-to-income ratio by finding ways to boost your earnings. But consider whether that higher income is sustainable; otherwise, you may not be able to afford mortgage payments for the long term.
Requirement #5: Closing costs.
Closing costs are fees and charges you pay at closing. If you don't pay these fees, the loan documentation can't be signed and the mortgage process isn't complete. Typical closing costs can include:
- Credit report fees
- Application fees
- Recording fees
- Title insurance fees
- Underwriting or processing fees
- Closing fees
- Escrow fees
- Origination fees
- Prepaid interest
- Survey fees.
Your lender should provide you with a detailed estimate of what you'll have to pay at closing. On average closing costs run from 2% to 5% of the home's purchase price.
6 So if you're buying a $300,000 home then you might pay anywhere from $6,000 to $15,000 at closing.
Again, you could look into down payment and closing cost assistance programs that can cover some or all of these expenses. But if you don't qualify, you'll need to include a line item for closing costs in your home buying budget.
Requirement #6: Documentation.
Making sure you have all your ducks in a row before you apply for your mortgage will help the process go much smoother. Insufficient documentation can delay or even stop the loan approval process altogether, so you need to find out what you have to bring to the table.
“Your lender should have a full and complete checklist of required documentation to support your loan application depending on your employment and income situation,” Tierce says. “If you are starting with a pre-approval, be sure that the lender asks for all documentation for the process since a pre-approval without thorough documentation review is useless. Something can be missed that could result in your loan being declined later if the pre-approval process is not extremely well documented.
What is pre-approval? According to Jenkins, it's "preliminary approval based on what the borrower stated on the application—income, debt, assets, employment, etc. The actual approval process validates the income, assets, and debt using various methods such as pay stubs, tax returns, bank statements, W2s, and employment verifications.
Tierce adds that “in competitive markets, sellers and realtors won’t even consider an offer without knowing that the buyer is pre-approved.” Additional documents could be requested at a later date or throughout the process. “The underwriting process is exhaustive, and some documents may bring up questions or concerns that require additional documentation. Just take a deep breath and give the lender everything they ask for, as quickly as possible, to get your approval completed.
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