Buying your own home and starting a brand new household is not an easy task. Since everybody think it is easy, they eventually commit a lot of mistakes. People most often buy a home that’s more expensive than what they can afford. People oftentimes look at sweet deals and end up in a pile of debt because the deals are actually based on ridiculous credit interests. People also take mortgage plans that they cannot pay off in the long term just because their income cannot match their expenses.
All these factors greatly contribute to why starting up a household is not only a difficult but also a demanding task. It requires a lot of thinking and planning beforehand. You wouldn’t want to just jump into buying a house in a suburb just because it’s a “great” deal. Now, if you are just starting to plan to buy your house, here are the steps that you should consider following for you to make it through your mortgage alive.
Step 1: Know Thyself
The first step is to evaluate your financial capabilities. Know how much you can and willing to pay. You can always start with understanding your credit score.
A credit score is a number calculated from a formula created by Fair Isaac based on the information in your credit report. You have three different credit scores, one for each of your credit reports. Credit reports are kept by the three major credit agencies, Experian, Equifax, and TransUnion. They show whether you are habitually late with payments and whether you have run into serious credit problems in the past.
Generally, a low credit score may hurt your chances for getting the best interest rate, or getting financing at all. So get a copy of your reports and know your credit scores. There’s an online app MyFICO.com where you can check your credit score.
After clearing your credit score, you can now look at your assets. Know how much all your debit is as of the moment, so you can start setting your budget.
Step 2: Set your Budget
You now need to determine how much you can afford. While the most common way is to add all your income and subtract your expenses, you can now document every detail of your finances easily with online applications such as CNN Money’s Real Estate Calculator. If you want to go for an easy-to-use yet professional app, you can try Quickbooks Online to guide you every step of the way by allowing you to use accounting disciplines in keeping track of your finances.
For a more accurate figure, ask to be pre-approved by a lender who will look at your income, debt and credit to determine the kind of loan that is in your league. The rule of thumb is to aim for a home that costs about two-and-a-half times your gross annual salary. If you have significant credit card debt or other financial obligations like alimony or even an expensive hobby, then you may need to set your sights lower.
Step 3: Show the Money
At this point, you need to come up with cash for your down payment and closing costs. Estate sellers wouldn’t just straight up give you a house out of installment deals. Normally, they would want to get 20% of the home’s price as a down payment. If you can put down more than that, the lender may be willing to approve a larger loan. If you have less, you’ll need to find loans that can accommodate you.
Once you’ve considered the down payment, make sure you’ve got enough to cover fees and closing costs. These may include the appraisal fee, loan fees, attorney’s fees, inspection fees, and the cost of a title search. They can easily add up to more than $10,000b – often running upto 5% of the mortgage amount.
If your available cash doesn’t cover your needs, you have several options. First-time home buyers can withdraw up to $10,000 without penalty from an Individual Retirement Account. You can also receive a cash gift of up to $14,000 a year from each of your parents without triggering a gift tax.
Step 4: Look for an Agent
Most real estate sellers list their homes through an agent. Just a reminder – these agents work for themselves. It follows that they can offer more time to focus on your account, holding you accountable to your financial obligation. Then again, since these agents are usually self-employed, they would want you to pay as quickly as possible to ensure you clear the loan as early as possible, and for them to get their commission in the earliest time, too.
Professionally speaking, you would want to have an “exclusive buyer agent”. Sometimes, buyer agents are paid directly by the buying clients themselves, on an hourly or contracted fee. Other times, they split the commission that the seller’s agent gets upon sale. A buyer’s representative has the same access to homes for sale that a seller’s agent does, but his or her allegiance is (supposed to be) only to you.
Step 5: Look for your desired house
There are tons of criteria for looking for your desired house,but it all boils down to location, location, location.
Location of the house tells you whether living there is economically advantageous so you can easily find a new job or entrepreneurial opportunities. The location can also determine if your house would be perfect for the quality of life you seek for your family.
When the house already checked the more important criteria, you can now look into the added features like that of aesthetics or bonus amenities.
Step 6: Make an Offer
Now that you’ve found the house that you want, have a little help with your exclusive agent so that you can make your bid. If you’re working with a buyer’s broker, then get advice from him or her for an initial offer. If you’re working with a seller’s agent, devise the strategy yourself.
Know that negotiation is an art. Try to line up data on at least three houses that have sold recently in the neighborhood. If you really want the house, don’t lowball because it would irk the seller too much.
Remember that your leverage depends on the pace of the market. In a slow market, you’ve got muscle; in a hot market, you may have none at all.
Step 7: Iron out the Contract
Have your lawyer or exclusive buyer’s agent review the documents to make sure the deal is contingent upon: a.) you obtaining a mortgage, b.) home inspection that shows no significant defects and c.) guarantee that you may conduct a walk-through inspection 24 hours before closing.
It would also be best if you can make a good-faith deposit – usually 1% up to 10% of the purchase price – that should be deposited into an escrow account. The seller receives this money after the deal has been closed. This serves as your safety net in case of a problem: if the deal falls through, you get the money back only if you or the home failed any of the contingency clauses.
Step 8: Close the Deal
A couple of days before the actual closing, the lender sends you the final HUD-1 Settlement Statement that lists all the charges you can expect to pay at closing. The HUD-1 Settlement Statement is a form prepared by closing agents itemizing all charges imposed on a buyer and a seller in real estate transactions. The HUD-1 is used primarily to settle reverse mortgage and mortgage refinance transactions.
Review it carefully and thoroughly. Make sure that everything that you and the seller have settled is intact. This form includes deal elements like the cost of title insurance that protects you and the lender from any claims someone may make regarding ownership of your property. The cost of title insurance varies greatly from state to state, but it usually comes in at less than 1% of the home’s price.
Make sure that you see through all these steps meticulously. Buying your first home is very important, and you wouldn’t want to make mistakes that can injure you for a long time.