How to buy a home : step by step guide

How to buy a home? You have come to the right place. You can be a first time home buyer or a repeat home buyer. When you plan to buy a house, you should consider multiple factors. According to research, global real estate property values increased on average 1.3% every year from 1900 to 2017. Over the last 10 years, real estate property values have appreciated by over 40% across the United States. In 2020, the homeownership rate in the United States was about 68%. The US government gives a number of tax benefits to American homeowners and as a homeowner you can take advantage of these benefits.

Homeownership trends are different generation by generation. According to Statista research, the homeownership of Americans aged above 65 is decreasing. In contrast, the homeownership rate of millennials is increasing and projected to lead the homeownership rate over the next two decades.  

How much to spend on a house 

Determining your budget is the first step to buying a house.You should do a calculation in order to determine what is the maximum amount of house that you can afford. Furthermore, you should figure out your monthly expenses and see how it compares with your monthly income. The total monthly expenses should include all expenses which you have to pay such as credit cards, auto loan, student loans and so on, plus the mortgage monthly payment and any Homeowners’s association (HOA) fees. Then, the monthly total expenses should be subtracted from your total monthly income. After doing the calculation, you will have a general idea about how much you can spend on your mortgage. 

How much is the down payment on a house?

First time home owners can be eligible for 3% down payment. You need to have a good credit and meet certain criteria. If your down payment is less than 20%, you are required to pay mortgage insurance (PMI)  each month until your home equity reaches 20%. 

The down payment for a property may vary depending on your credit score, location and property value. 

For example: 

Situation 1:  You plan to purchase a $500,000 house in Provo, Utah. You will not qualify for Federal Housing Administration (FHA) because the 2021 loan limit for a single unit in Provo – Utah county is $439,300. You would need to pay 5% or $25,000 down payment. 

Situation 2:  You want to live in San Francisco, California. You plan to purchase a $2.5 million house. In this case, you will not qualify for a FHA loan and a conforming loan due to the high property value. 2021 FHA loan limit and conforming loan limit for San Francisco county single unit is $822,375. So, you would need to pay $500,000 or 20% down payment. 

What are requirements for first time home owners?

1. You must be a first-time homebuyer. Means that you have not owned any residential property in the past 3 years. If you are buying the home with another person, at least one of you should not have owned a home in the past 3 years. 

2. The home being financed must be a one-unit property including townhouses, condos, real estate cooperatives, and planned unit development. 

3. You plan to occupy the house as your primary residence

4. The mortgage must be a fixed rate.  Adjustable rate mortgages (ARMs) are not eligible for the 3% down payment mortgage.  

Other available mortgage programs may offer low or no down payments. For instance, FHA loans, VA (Department of Veteran Affairs) loans, USDA (US Department of Agriculture) loans. These loans typically have lower down payment, lower interest rate which can be 1% or less. However, you are required to meet certain criteria. 

In addition, It is important that you should ideally have savings to cover expenses for 6 months, in cases of financial difficulties as well as emergency cases. For instance, homeowners may lose their job, get sick, divorced and so on. 

What is included in the mortgage monthly payment? 

The mortgage monthly payment includes the principal, interest, property tax, home insurance and private mortgage insurance (PMI). Principal is the amount you borrow to finance the house purchase. Interest is the amount the lenders charge you when you borrow to purchase the home. Property tax is paid to the local city or county where the house is located. Some lenders may let homeowners pay their tax and insurance directly. Home insurance is required to insure your home against damages from natural disasters such as flood, fire, earthquake. Also, PMI is another insurance which is required on most loans when your down payment is less than 20%. PMI protects your lender in case of mortgage defaults. You are required to pay the PMI monthly until your home appreciates in value so that you have 20% in equity. 

Your monthly mortgage payment will depend on multiple factors such as purchase price, your credit score, mortgage interest rate, down payment and so on. However, you should simply do a mortgage calculation to have a general idea about the mortgage payment which you have to pay monthly. 

Where to buy real estate

When it comes to real estate, location is one of the most important factors. It is important when you purchase a real estate property as a residential as well as rental property. You may plan to buy a home which is close to your work, close to good schools where your children may attend. Or the home may be at a good location where many tourists come to visit and so on. 

You should buy a home which you can enjoy. Moreover, you should consider a situation when you need to move out of the area for some reason. Then, you may need to sell or rent your home. When the property is in an area where the economy is thriving, plus there is good job growth. It is easier to find renters. The location sometimes would be great in terms of economic growth. In case you plan to rent your home, It is important that you should figure out if there are any HOA and City regulations. These regulations may give you a restriction on renting your house. 

Get a pre-qualification for a mortgage loan

A pre-qualification will let you know the price range which you can afford. You will provide lenders some basic information on your income, your debt, your assets, etc. Lenders will look over your financial situation, then they will let you know which loan you may qualify for and how much you qualify for. 

Lenders usually will not charge you for pre-qualifications. Also, they may not check your credit scores. They will only provide you with the loan amount for which you qualify. However, there is no guarantee that you actually qualify for a loan mortgage until you get pre-approved. 

Get Pre-approved to make an offer on a property

You need to get pre-approved to make an offer on a property.  When you find a house that you like and would like to make an offer, you need to get a pre-approval letter from a lender. You need only one pre-approval to give an offer. However, you should talk to multiple lenders in order to choose the best one amongst those lenders.

The pre-approval process may take longer than pre-qualification because lenders need to review your overall financial situation and your credit. When you qualify, a lender will issue a pre-approval letter. It is a bigger commitment from the lender, however, It is not a guarantee that a final loan approval has been granted. The other conditions must be satisfied prior to approval to close.  

Why do you need to get a pre-approval?  

A loan pre-approval will let you know the price range which you can afford. Also, it lets sellers know that you are a qualified and serious buyer. Usually, there are multiple competitors for a house. So, if you have a pre-approval it shows the sellers that you can afford to purchase the house. It may be good to have a pre-approval with a loan more than the amount you need to use to finance a home since unexpected situations may happen, and you may have to make some changes. 

It may take time for you to search for a home. Also, you may have to make offers multiple times if sellers do not accept your offer.  The pre-approval may be valid for a certain period of time, usually 60-90 days depending on lenders. So, you will need to look for another pre-approval if the pre-approval becomes invalid. 

What is a good debt to income ratio?

Your debt to income ratio should be low. Lenders will need to review your information such as pay stubs, W2s, bank statements, other debt and assets in order to understand your financial situation. Typically, lenders will look for a low debt to income ratio. You are likely to get a loan approval if your debt to income ratio is low. 

What is a good credit score?

Lenders will also need to pull and review your credit scores. Credit score should be at least 620. However, buyers with higher credit scores have a higher chance of getting approved and will pay lower interest rates. You can save a good amount by getting a lower interest rate. Therefore, if your credit scores are below 620, you are recommended to work on your credit before you look for a mortgage loan. 

Note that you may need to work with multiple lenders to look for an ideal loan. In particular, you need a good loan with the best deal to close the house. In this case, multiple lenders will need to pull and review your overall financial situation. As a result, your credit scores may be affected. So, you should not allow a lender to pull your credit score if you do not want to work with that lender. It is not clear how your credit scores will be affected by multiple mortgage enquiries. However, a mortgage loan usually is better than other types of loan such as credit card debt. So, your credit score may be not affected as much when you have to work with several mortgage lenders in a short period of time. 

How to shop for your home

You can start searching for a home after you get a pre-qualification. However, you will need a pre-approval letter to make an offer for a house. You should buy a home which you will enjoy. In addition, you should consider a home location where it would be great in terms of economic growth. 

Which criteria to search for a house?

Since unexpected situations may happen, the house price which you look for should ideally be a little bit under your affordable price range. The price you pay depends on the demand and your negotiation skills. You can always make an offer on a house for a lower price. However, if there are multiple competitors who are interested in the house, sellers will likely accept a higher offer. 

Furthermore, you should do research for HOA and City regulation as well as property appreciation. HOA and City regulations may apply some restrictions when you rent your home. HOA regulations may also apply restrictions on remodeling your home if your home is managed by a HOA. 

Property appreciation may vary depending on the economic situation, type of property, location and property condition. The property appreciation in one location may be higher comparable to other places. From an economic standpoint, it may be a better option to purchase a higher priced home in a better location with a better economic growth. You will get a higher gain when you sell the house. 

Note that you may need to spend a lot of money on fixing or finishing some parts of the house when you purchase a house. It will cost you a lot of time and money. Otherwise, if you choose to buy a house in better condition, then you can save your time and money for other investments and generate good returns on those other investments. Hence, it may be worth purchasing a house in better condition and better location. However, it depends on your specific situation – you will need to do your own calculation in order to make a better decision. 

How to find a house to buy? 

You can search for houses on Redfin, Zillow, or work with a mortgage broker. You can find the price history and comparable properties from Redfin and Zillow listings. This information will help you to have a better idea about home prices when you make an offer for a house.

You can always request the advice of your real estate agent.  The real estate agent will assist you in searching, making offers and negotiations as well as in closing the deal. Working with a good agent can help you to save your time, money and deal with legal issues. It is even better if you can find agents who only charge for a small flat rate. You don’t have to pay an agent when the agent helps you to buy a house. However, that agent will charge the seller a fee which may be 3% of the house price when the purchase completes. However, if your agent can charge less, then the seller will pay less. Then, you may negotiate for a better price on the house which you  purchase.

For instance, when you purchase a property in Utah with Homie as the seller and buyers agent, Homie will give you $2,500 – $5,000 credit toward your closing costs. Redfin and Flat Rate Realty may charge 1.5% and 1% respectively for listing property. These brokers may save you a good amount of money when you work with them to buy a house. 

How to shop for a home loan

It is very important to find a good lender to finance your home. Before settling on a lender, you should shop around to have a better choice. It is to your advantage if multiple lenders compete for your business. Some lenders offer better deals than others. Therefore, you should talk to multiple lenders. You should obtain as much information as you need so that you can make an informed choice amongst those lenders. 

For instance, some lenders such as Homie, and Redfin forgo the usually 6% broker commission. These lenders take a flat fee and pass on the savings to the buyers and sellers. 

How to choose a good lender? 

You do not have to work on the final loan with the lender that you get pre-approval from, to make an offer for a house. You can choose to work with a different lender if you can find a better deal. 

Note that some lenders may offer a lower interest rate. It sounds good to have a loan with a lower interest rate. However, you should pay attention to other fees such as points, lender fees and other closing costs. These fees will cause your closing cost and monthly mortgage payments to be higher.

What is the loan estimate?

 The loan estimate issued by lenders will list the loan amount, down payment, annual percentage interest (APR) , monthly payment and other fees.

You should not make a commitment to any lender until you see the detailed loan estimate. You should do your own calculations, make a comparison and use your good judgement in order to choose a better deal. For reference, you can use the comparison worksheet by Freddiemac as a guild.

Furthermore, you should also make sure to clarify any questions before committing to the loan. For instance,  when can you refinance your home? Will you have to pay any prepayment penalty if you pay earlier than the loan term?

What are the common types of mortgage loans ?

There are 5 types of common mortgage loans : the Conventional loan including conforming loans and non-conforming loans or jumbo loans; Government – insured mortgages including FHA loans, USDA loans and VA loans; fixed rate mortgages and adjustable rate mortgages 

What is a conforming loan?

Conforming loans are not insured by the federal government. A homebuyer with a conforming loan must meet the borrowing limit set by the Federal Housing Financing Agency (FHFA). In most counties of the United States, the 2021 maximum conforming loan limit for one-unit properties is $548,250 ( $510,400 in 2020). However, in high cost areas, that maximum loan limit is $822,375. You can find conforming loan limit information for specific counties from the FHFA list of 2021 maximum loan limit as well as its map. 

What is a jumbo loan or non-comforming loan?

Loans above the conforming loan limit are jumbo loans or non-conforming loans. A 10% – 20% down payment is required. 

What is a FHA loan?

FHA loans are government backed mortgage loans which typically have lower income and credit score requirements than conventional loans. However, homebuyers are required to pay upfront mortgage insurance premium (1.75% of the base loan amount) and an annual mortgage insurance premium if the down payment is less than 20%. You can find 2021 FHA loan limit information for specific counties from the 2021 FHA loan limit list. 

What is an USDA loan?

USDA loans are government backed mortgage loans for homebuyers in largely rural areas who have lower to moderate income and lower credit scores. A down payment is not required for USDA loans, however, homebuyers need to meet USDA loan eligibility requirements such as income limit, property eligibility and so on. 

What is a VA loan? 

VA loans are low interest mortgage loans for the members of the United States military and their families. A down payment and mortgage insurance are not required for VA loans, however, homebuyers have to pay funding fees. Funding fees are charged on VA loans to help reduce the cost to taxpayers in the cases of loan default. Funding fees and closing costs can be paid upfront at closing or rolled into VA loans. 

What is a fixed-rate mortgage?

Fixed-rate mortgage loans keep the same interest rate over the loan life. The loan terms usually are 15 years, 20 years and 30 years. A fixed-rate mortgage loan is your choice if you plan to live in the property for more than 10 years. 

What is an adjustable-rate mortgage (ARM)?

Unlike fixed-rate mortgage loans, an ARM loan’s  interest rates can fluctuate up or down depending on the market conditions. An ARM loan may be a 3, 5 or 7 years term. An ARM rate changes usually in response to the market or Treasury Bill rates. ARM loans usually start off with a lower interest rate comparable to fixed rate mortgages. An ARM loan can be your choice if you plan to live in the property for a short period. 

What to expect during inspecting and appraising the house?

When the buyer and seller agree on the final offer, the lender will have a professional to do an appraisal on the value of the house. If the appraisal value is lower than the offer, the lender will not lend the loan. For instance, the final offer for the house is $500,000. However, the appraisal is $410,000 less than the offer. Then, the lender will not approve to lend $500,000 on the house that is worth only $410,000. Or you do not want to pay $500,000 on the house that is worth less.

Home inspection should be conducted by a professional on your behalf in order to avoid potential costs on the house. Home inspector will exam to find any issues with the home such as the roof, appliances, heating and air conditioning systems, ventilation and so on. After an inspection, the home inspector will issue a detailed report on the condition of the house. You should address any major issues and negotiate to repair them , reduce the sale price or back out of the deal. After the offer is accepted, within 30-45 days to close the loan, you can back out of the sale without losing your deposit.

Close on your home

You find your dream home.  You and the home seller agree on the selling price and other conditions. Your mortgage loan is approved by a lender. A home inspection is also done. You should request for a home walkthrough 24 hours before closing and make sure that all conditions are upon agreement. A clear title, mortgage insurance and so on are all set. Then, you can close on the house.  

The lender will arrange a date and a place for the final contract to happen. A closing agent will bring all the required documents for you to sign. You need to get ready to pay for the total amount to close.   Before you sign, you should carefully read all the documents. You should have questions to make sure that all conditions on the contract are clear. After you sign the final contract and transfer the full amount for the property closing, the house ownership is transferred to you. 

How much are the closing costs for a buyer

The closing cost for a house is about 2% – 5% on the total loan amount. For instance, you plan to buy a $400,000 house. Then, the closing cost can vary anywhere from $8,000 – $20,000.

You will find the total amount which you have to pay to close as well as monthly principal and interest payment, plus tax and insurance on the Closing Disclosure (form 1003 Uniform Residential Mortgage Application). All charges to close are listed on the Closing Cost Details such as origination fee, points, title fees, recording fees, mortgage insurance, property insurance, HOA fee if any and so on. 

Cash to close =  the down payment + total closing costs – your deposit – lender credits if any

How long does it take to close on a house?

Typically, you expect to close on a house between 30-45 days. The lender will need to finalize all necessary paperwork . Sometimes, a closing process can be delayed. For instance, after a home inspection, there maybe some issues that you would like the home sellers to fix or reduce the house price. Or, after a house appraisal, the loan amount needs to be adjusted and so on. 

The process of how to buy a house seems hard. However, one you know what it takes, it becomes easy. You can also save a lot of money when you follow the right directions and you do it in the right way. 

Questions and Answers – How to buy a house

1. How much is the down payment on a house?

The down payment typically is 5% for residential house and 20% for rental real estate. First time home owners can be eligible for 3% down payment, however, you need to have a good credit and meet certain criteria.

If your down payment is less than 20%, you are required to pay mortgage insurance (PMI)  each month until your home equity reaches 20%. 

The down payment may vary depending on your credit score, property value and location. 

2. What is a good debt go income ratio?

Typically, lenders will look for a good loan with a low debt to income ratio. The debt to income ratio can be as high as 50%. However, you are likely to get a loan approval if your debt to income ratio is low. 

3. What is a good credit score?

Credit scores should be at least 620. However, higher credit scores will likely have a better chance of getting  approved and will pay lower interest rates. You can save a good amount from getting a lower interest rate. Therefore, if your credit scores are below 620, you are recommended to work on your credit before you look for a mortgage loan. 

4. Why do you need to get a pre-approval?  

A loan pre-approval will let you know the price range which you can afford. Also, it lets sellers know that you are a qualified and serious buyer when you make an offer for a house. Usually, there are multiple competitors for a house. So, if you have a pre-approval it shows that you can afford to purchase that house. 

5. Why should you switch to another lender?

You should switch to another lender if you can find a better deal, particularly for a final loan contract. You will not be obligated or committed to any lender until you sign a loan contract. Importantly, you should ask lenders for a detailed loan estimate. Then, you do some calculation and use good judgement in order to make the best decision. 

6. Should you have extra money besides a down payment and closing costs?

Ideally, you should have savings for 6 months of mortgage payments. Your lenders will love to see that extra savings in case financial difficulties may cause mortgage default. For instance, you may lose your job or get sick. If you lose your income, then the extra savings will help to continue paying for your mortgage. However, the extra savings may vary if you have other assets.