If you’re thinking of buying a home the Path to Home Ownership can be intimidating. You’re not alone. There are a lot of questions and everyone seems to have a different answer. Remember that every situation is different. What your friend’s experience was will not be the same for you.
Here’s a map with 10 simple steps to follow in the homebuying process. Lets take each one and see if we can untangle some of the uncertainty and fear in the quest of purchasing your home.
Save For Your Down Payment
This is probably the most daunting part of the process. I hear it all the time… “I don’t have 20% to put down on a house!” Well, guess what! You don’t need 20%!!! Create a budget and do your research. There are a variety of loan products out there that require much less from you at the purchase.
Christian Johnson of Caliber Home Loans agrees,
“I still think the #1 misnomer in my business is the amount required for a down payment. Many still believe that the minimum down payment is 20%, when this is simply not the case! On all loan amounts, we offer a minimum of 3% down (Unless a VA loan, which is 0% Down) for our qualified buyers. Time spent with a great loan advisor is certainly well spent. Get some advice from a seasoned professional who works for a company that only does mortgages – you’ll be glad you did.”
Government loans such as FHA, VA, and USDA offer the lowest down payment options and are viable options for those that qualify. Mortgage Officer, Dave Smith, explains how some of these government loans work and how they can be beneficial.
Of course, the more you can save the less your loan will cost you over time. When a buyer puts more down toward the loan this can get them a lower interest rate or other fees associated with their mortgage.
Where can you find that 3% – 10% down payment? Let’s look…
- Plan a savings budget – How much do you actually need to save? There is the down payment + closing costs + other associated fees such as inspections and appraisals.
- Increase your income – Easier said than done sometimes however if you think hard and get creative there are ways to increase your savings. Side hustles, working overtime, selling unused items, taking on a part-time job, or negotiating a raise at your current position are all ways to build that home account.
- Cut unnecessary spending – Sometimes we don’t realize just how much we are spending day to day. Consider eating out less, skip the beach vacation this year, get a roommate, or make your coffee at home rather than hitting that drive-thru 5 days a week. Although small cuts in your spending may not seem dramatic, a series of small cuts can lead to big savings
- Pay off your debt – High interest loans and credit cards will eat into your ability to buy your new home and can wreak havoc on your finances. The smart move here is to pay off those high interest debts first.
- Research First-Time Home Buyer Programs – The availability of these changes over the course of the year depending on current market conditions. These programs are designed to help you achieve your goal of buying a home by helping out with a down payment or offering a low down payment option. Some popular ones are TSAHC (Texas State Affordable Housing Corporation) and SETH (Southeast Texas Housing Finance Corporation). Your lender will have access to these.
Know Your Credit Score
Learn your score and clean up outstanding debts like student loans and credit cards. Your credit score and your debt to income (DTI) ratios will have the greatest impact on getting qualified for a loan. This will determine your “risk factor” and will affect your interest rate.
Low credit scores are the biggest hurdle first-time buyers encounter along their path to home ownership. Our past can catch up to us and we don’t know how to correct it even when we are not in a good job making excellent income. If you are struggling in getting your credit score up here are a few things you can do:
- Pay credit card balances strategically
- Pay bills on time
- Dispute credit report errors
- Deal with collections accounts
If you need assistance in getting everything taken care of there are credit repair companies that can help. Do your research and make sure you are working with a legitimate and reputable company.
Find a Real Estate Agent
It seems everyone knows a real estate agent however remember they are not all the same. During this process you are in each other’s back pocket. You will be sharing personal information with your Realtor such as finances, how you like to live, and what you like to do for fun and work. Contrary to popular belief Realtors are humans and you want to make sure your personalities mesh. Realtors are a fiduciary and must conduct themselves as such.
Your Realtor is going to be a large part of your transaction. Here are some steps to finding the right agent for you:
- Get a referral from someone you trust
- Ask the right questions
- Clarify your motivation to purchase
- Explain your communication preferences
- Clarify your timeframe for purchasing
When you decide on an agent make sure you sign a contract with them. In the state of Texas, and probably most others, unless a Buyer Representation Agreement is signed by all parties the agent works for the seller not the buyer. This agreement is very important between you and your agent.
Getting pre-approved by a reputable and respected mortgage lender will differentiate you as a serious buyer and you will have a better idea of what you can afford. This is one of those times you want to listen to your agent’s recommendations. Your agent will have several loan officers they have history with. They know how they operate and that they will get the job done for you. When you “go rogue” and choose someone your agent is unfamiliar with a piece of control is lost.
A pre-approval means a lender has looked at your financial background and determined how much home you can afford. This saves valuable time so you can target your home search to your comfort level. Getting pre-approved helps because you know the amount of your mortgage ahead of time, you are able to get all of your documents in order, and you have time to address possible credit errors and issues.
Find Your Home
This is what is the most fun of the process. You will work with your agent to find a home in your budget that meets your needs and your budget. All the criteria discussed when you were hiring your agent will come into play here. This is what he or she will be searching for on your behalf.
It is important that you are honest and clear with your Realtor as to what your needs and wants are as well as your “deal-breakers”. Does the house have to have a 3-car garage? Will you buy a house with a pool? All of these things are vital in the search for your new home. Your agent should have a great respect for your time and showing you properties that do not match with what you want is not a good use of anyone’s time.
Make An Offer
This is what all the looking comes to; finding the house that you can see yourself living in, that meets your budget, and makes you smile. An offer is simply extending your hand to the seller and an invitation to talk about purchasing the property.
There are many things to consider when preparing your offer. This is where having your own agent, not the one listing the property, is so very important. Your agent will look at the current market, learn as much as possible about the seller, and guide you through these things. Here are some additional things to consider
- Leave some “wiggle room” in our offer amount. The seller may counter or you made need to make some price adjustments later on in the transaction. Don’t throw all your money in the pot to start. Also, if interest rates go up and you are at your max loan amount you may no longer qualify for the loan.
- Learn what you can about the seller. This is where your agent can speak with the listing agent to see what is important to the seller. It isn’t always about price! Maybe they need to close quickly…or have a longer closing period. These things can make you a better fit for the seller than other offers.
- Make a respectful offer. Lowballing in a seller’s market will get you no where. Think about how much you are willing to pay for THAT particular house. Listen to your agent and their opinion on where the asking price is and if there are other offers being made.
- Keep your emotions in check. This is difficult sometimes because you have spent days…or even weeks or months…looking for THIS house. And yet you want to keep your head about you when it comes to negotiation. Again, seek counsel from your agent.
Have a Home Inspection
This is so very important! A general inspection performed by a licensed inspector will give you a “State of the House” report before you purchase it. A good inspector will run the house through its paces making so you know what you are buying.
Most houses are “used” meaning they aren’t new. They have been lived in by one or more families over the years. Your inspector will check everything big (HVAC, roof, foundation, plumbing) to everything small (temperature of the oven, if the doorbell dings & dongs) and provide a report to you and your agent.
Ken Duggan of Pillar to Post is a licensed Texas inspector is knowledgeable and shares what is inspected and what you, as a buyer, should know including on new construction homes!
In some market conditions you may be tempted to forego the inspection process. Before you commit to this consider all potential outcomes as it can lead to some hefty expenses later on.
Get An Appraisal
An appraisal is an unbiased and independent opinion of a home’s value and is used whenever a mortgage is involved in buying, refinancing, or selling that property. A qualified appraiser creates a report based on an in-person inspection, using recent sales of similar properties, current market trends, and aspects of the home (for example, amenities, floor plan, square footage) to determine the property’s appraisal value.
An appraisal will be ordered by the lender. The fee is usually several hundred dollars and is paid by the borrower prior to closing. The buyer will pay their lender directly for the appraisal. This is required and the only way to purchase a home without an appraisal is to pay cash.
The appraisal is an important part of the transaction and the results, if lower than the contracted price, can delay the transaction or cause it to terminate completely. This is where your agent is vital to your transaction. They can advise how you can handle any appraisal discrepancies at the time you are writing your offer with the use of appraisal waivers and other contract addenda.
Close the Sale
Closing! Can you believe all of the above steps happened in about 30 days? Closing is the term used when the transaction to transfer the property from one entity to another is completed. In Texas, real property transactions are facilitated by tile companies. The title company in Texas is usually responsible for two different roles – providing the title insurance, and acting as the escrow officer. Sometimes, different title companies can handle these two roles, but it’s almost always the same title company.
In Texas the parties are not required at the same time. The buyer and seller will sign their own documents at their own appointment. Once all interested parties have signed and the money has changed hands (facilitated by the title company) then the transactions is closed and funded.
After everything has funded you get your keys! The home is yours and you can move your family in! You are now a HOMEOWNER!