How To Buy A House
- 1 How To Buy A House
- 1.1 Step 1. Determine How Much House You Can Afford
- 1.2 Step 2. Setting Up Housing Budget
- 1.3 Step 3. Check Your Credit Scores
- 1.4 Step 4. Select A Lender
- 1.5 Step 5. Get Prequalified And Preapproved Mortgage
- 1.6 Step 6. Select Real Estate Agent
- 1.7 Step 7. Shop For What You Want
- 1.8 Step 8. Make An Offer
- 1.9 Step 9. Get A Home Inspection
- 1.10 Step 10. Closing The Deal
Buying a house isn’t quite as easy as buying a car. But it doesn’t have to be difficult either. Follow this how to buy a house step by step guide to making buying a house an easy process. It will provide insight on things that are often overlooked when it comes to buying a house.
Step 1. Determine How Much House You Can Afford
Before figuring out how to buy a house, first, determine how much house you can afford. This is one of the most important steps when it comes to buying a house. The first step to this process is to figure out Debt-To-Income ratio, also known as Front End Ratio. The debt refers to the monthly amount repaying debt payments, such as mortgages, student loans, auto loans, credit card payments and child support.
Example – John earns $5000 a month and his total debt payments are $2500 a month. John’s debt-to-income ratio is .50.
To calculate debt-to-income, simply take the debt and divide it into the monthly earning. 2500/5000 = .50
Lenders generally want to see the Front End Ratio be under .28 for traditional loans and under .31 for FHA Loans.
Back End Ratio – This includes all debt payments, such as car loans, student loans, credit cards and including house payment. Lenders typically prefer a back end ratio of less than .36.
Step 2. Setting Up Housing Budget
The first step would be to take a look at your net income (take home pay). Now compare this to your expenses, this will be everything that is not housing related. It will include everything from food, entertainment, gas, credit cards etc.
The amount left over is the amount that can be put towards a mortgage payment. It is a good idea to only use a portion of that amount so you can budget for an emergency fund.
Another thing to consider is job security. I was a former oil field worker and the last two years it was a rough time to find work. To keep in consideration of boom and bust jobs and aim to save 6 months mortgage payments in event that a layoff does occur. 6 months is a realistic time frame until you can find another job. It is wonderful if you can get another one right away but having 6 months savings will keep the stress at a minimum.
Once you have figured out how much you can afford to spend on a mortgage per month you can contact your FHA lenders. They can only tell you what you are qualified for, not how much you are comfortable to pay for expenses. Use the budget you have set out when getting a mortgage so you don’t buy a house you cant afford.
Step 3. Check Your Credit Scores
This is a step that is often skipped as home buyers move right to trying to get approved for a loan. Having a higher credit score will be an asset when it comes to getting the best loan terms. From 4.5% interest to 5%, the .5% could mean saving tens of thousands in the long term.
There isn’t a set in stone minimum credit score that lenders are looking for. The general minimum credit score is 620 for a conventional loan and 580 for an FHA Loan.
To check your credit scores go to Annualcreditreport.com You can check it once a year for free. If your credit scores aren’t up to par, find out how the best ways to raise your credit scores.
Step 4. Select A Lender
There will be many options to choose from when it comes to getting a conventional loan or an FHA Loan. Shopping around will ensure the best rates in the market. Remember, .5% can mean saving 10,000s of thousands in the future. Be sure to ask around before deciding on a Lender.
Step 5. Get Prequalified And Preapproved Mortgage
Once the right lender has been chosen, it is now time to get prequalified and preapproved. Be ready to provide your income statement, savings, and investments to your lender. This will determine the amount that you may borrow.
A lender can only determine how much you may borrow, it is up to you to determine how much you can afford to pay for the loan on the house. It is quite common to get a mortgage that is too big to handle. Make sure you feel comfortable with the size of debt your about to take on.
Step 6. Select Real Estate Agent
Choosing the right Real Estate Agent will play a large role in the ease of buying your home. There are many Real Estate Agents out there. Many of them are only part-time. Choosing one that will devote the most time and energy and has the buyer in mind will lead to success. It is also important that the agent has in-depth knowledge of the area. This will provide important insights on the neighborhood without having to experience it first hand.
Step 7. Shop For What You Want
This is the time to work with your agent to determine what your needs are, and what neighborhood would be best suited. Here is are some things to keep in mind when purchasing a home.
Step 8. Make An Offer
Once you have decided on the house you’d like to purchase, it is time to make an offer. Your agent will get the history of the home and do a Comparable Market Analysis(CMA). This provides a guideline on the value of the house. The Agent will be then able to advise you on your offer to purchase.
Once the offer has been made, it can either be Accepted or a Counter Offer could be made. During the counter offer, the old offer is now void and the counter offer would then be the new offer. The offer process continues until it is either Accepted or you walk away from the deal.
When the offer is accepted, the buyer pays a deposit called Escrow or Earnest Money. The money is then deposited into the Broker or Agent in Charge’s Trust account or an Escrow company. Once the deal is closed, the money will be credited back to the buyer.
Step 9. Get A Home Inspection
Once the offer has been accepted, the buy can have an inspection done on the property. This will better determine the value of the home. Any repairs needed are negotiated between the buyer and the seller.
The mortgage/lender will also have an appraisal done on the house to determine the accurate value of the property.
Step 10. Closing The Deal
The last process is transferring ownership of the property and the funds from the sale to the appropriate parties. The process may be unique in different states. Your agent will guide you through the process. Once this is all complete, you will be able to move in on a date agreed to by both parties. This allows the seller time to pack their things and move out before the buyer takes possession of the property.
This completes the 10 step guide on How To Buy A House. If there is anything I might have missed or you would like more info on, please comment below.