For many first-time buyers, the process of buying a house can seem overwhelming. After all, how do you even know where to start, much less how to get from taking the first step to submitting a winning offer on a home? If you’ve found yourself asking similar questions recently, we’ve got your back. Below is our comprehensive list of what you need to be prepared for the process of buying a house:
1. Get your financials in order
Making sure you’re financially ready is the first & most important step in buying a home. As for what counts as “financially ready,” there are four things you need to have in order to be approved for a mortgage. They are:
- A stable employment history: Mortgage companies generally want to see two years of stable employment. If you work for someone else, you can supply this by showing two years of W-2’s from the same company. If you work for yourself, tax returns will do. In either scenario, you’ll want your records to show the highest possible net income.
- A good credit score: Since your credit score shows your track record of paying back loans, it’s incredibly important to have a good score. These days, if you’re open to an FHA loan, you’ll need at least a score of 540. For conventional loans, you’ll need a 620. If you need to raise your score a little, concentrate on making your payments on time each month and paying above the minimum amount to work on reducing your debt.
- An acceptable debt-to-income ratio: Beyond credit cards, mortgage companies also look at other debt that you’ve taken on, such as car loans and medical bills. In particular, they look at how much of your income is spent paying off debt each month. This is called your debt-to-income ratio. You can calculate this yourself by adding up all your monthly debts and dividing it by your gross monthly income. To be considered financeable, most banks prefer that the resulting ratio is less than or equal to 36%.
- A healthy savings account: The last piece to this is saving your hard-earned dough. You’ll need to save for a down payment, which, these days, is anywhere from 3.5% - 20% of the purchase price. You’ll also need to save to cover your closing costs, which can amount to an additional 1% - 2% of the sales price.
If your finances aren’t up to par just yet, that’s okay! Take the time to work on getting them where they should be. Start by working towards building your employment history and paying down debts, especially credit cards. Then, when you have those areas set, move towards building up your savings.
2. Apply for a pre-approval
Once your finances are ready, the next step is to get pre-approved for a mortgage loan. This document comes in the form of a letter from a mortgage company, stating that they’re willing to give you a loan up to a certain amount. It’s used when you’re ready to submit an offer to show the sellers that you’re qualified to buy the home.
That said, obtaining a pre-approval does require a certain amount of paperwork. Before giving you the letter, mortgage companies will vet your finances to make sure they're in good shape. In order to prove that to them, you’ll need to be able to show them the following:
- Two years of W-2s or high-net tax returns
- A recent pay stub with your year-to-date income listed
- Recent account statements for your debts and assets
Keep in mind that how much you’re pre-approved for can vary, according to the lender. Since pre-approval inquiries are soft inquiries, meaning that they won’t hurt your credit score, you can feel free to shop around by applying with multiple companies in order to find the one that works best for you. Just be sure to do all your inquiries within the same 30-day window.
3. Figure out how much house you can afford
Many buyers, especially first-timers, make the mistake of setting their pre-approval amount as their budget. However, they fail to keep in mind that the number on the pre-approval represents the maximum amount they can get in a loan. That number may not be feasible to pay when combined with all your other financial responsibilities.
In order to find out your true range of home affordability, you should turn to a mortgage calculator. This tool will help you see what your monthly payment will be at various sale prices. Once you land on a payment amount that feels feasible, try working it into your current monthly budget to get a sense of what your expenses will be like. After you find a monthly payment that works, use the corresponding sale price as your maximum budget.
4. Set up a housing search
Once your budget is firmly in place, it’s time to get to the fun part -- looking at listings to find a house you love. The first step in doing this is setting up a personalized feed in a home search site or app like Open Listings. Here, you’ll create a set of criteria that your new home should have. Then, you’ll be alerted whenever a new home matching that criteria comes up on the market.
As what parameters to set, sticking to your predetermined budget is key. Along with that, you’ll want to come up with a list of must-have features. This can refer to things like an acceptable number of bedrooms and bathrooms, your target areas, and lot size or square footage.
A note of caution: It can be tempting to be super specific when it comes to making your wishlist. However, at the end of the day, that may do you a disservice. These searches will only show you homes that meet all of your prescribed criteria, and, if you get too specific, you may end up missing out on a home that’s perfect for you. Keep things relatively broad, especially in the beginning of your search.
5. Visit open houses
Once you have your criteria in place, you’ll start getting listings via email. Eventually, you’ll see some that spark your interest. At that point, it’s time to go see the open house to get a sense of whether or not the property is a good fit for you.
To get the most out of your tour, do your best to look beyond aesthetics. Really evaluate whether the the home itself suits your needs. Feel free to take photos or notes about the various things that you liked or didn’t like about the property. Ask the listing agent any questions that you may have about the house.
Beyond that specific property, you’ll also want to take a tour of the surrounding area. Think about its impact on things like your commute to work, any available amenities, and the quality of the schools. Remember, a home’s location is the one thing about it that you can’t easily change, so you really want to make sure that you like the area before submitting an offer.