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Buying a home can be a huge undertaking. Here, we'll walk you through your home buyer checklist and help you navigate the home-buying process from start to finish.
Here are some of the important steps to take before you start to house hunt and apply for a mortgage.
The home-buying process begins with figuring out if you're ready to own a home. Before getting started, you'll want to have:
"How much house can I afford?" is a common question to ask as a home buyer. Your best bet is to use a mortgage calculator to see what your monthly payment will be based on your loan amount, term length, and interest rate.
Play around with different loan amounts to get a range of what you can afford to spend. Keep in mind that ideally, your monthly mortgage payment, property taxes, and homeowners insurance should not exceed 30% of your take-home pay. If larger homes are expensive in your area, look at starter homes. These are generally smaller and less expensive than larger "forever homes."
Some mortgage types have low or zero down payment options. For example, FHA loans allow you to put down as little as 3.5%. But for most loan types, if you put down less than 20% of the home purchase price, you'll need to pay mortgage insurance. This can make your monthly mortgage payment higher.
Figure out what's realistic for you and your budget. If you're able to save up for a 20% down payment, go for it. If not, aim to put down as much as possible. Here's why: You can sometimes get rid of mortgage insurance once you have 20% equity in the home (when you owe 80% or less of the home's value). The higher your down payment, the less time you'll spend paying mortgage insurance every month.
Figure out where your down payment will come from. Maybe it'll be a combination of savings and an incoming bonus from your job. It's a good idea to set money aside in a separate savings account so you don't accidentally spend it.
There are certain documents required for a home loan application, and gathering these in advance will make the process go more smoothly.
Mortgage lenders generally require:
If you're self-employed, there may be additional documentation required. Check out our guide to getting a mortgage while self-employed for more information.
Once you've taken the steps above, you're ready to gear up to buy a place of your own. Here's what you'll need to do.
You don't need to use a real estate professional to buy a home, but it's a good idea. A real estate professional can help you find the best homes, negotiate a fair purchase price, and navigate complex contracts. As a buyer, you don't pay a fee to use a real estate agent. So why not benefit from someone else's expertise?
Your ideal real estate agent should know the area well but not be pushy. The last thing you need is pressure to buy a home that's not right for you or a purchase price that's too high for your budget. You can ask friends or neighbors for agent recommendations -- that's generally the best place to start.
Getting a mortgage can be tricky, so if you're new to the process, you can check out this beginner's guide to home loans. It'll show you how to get a mortgage and what requirements lenders might have.
From there, you'll need to decide what type of mortgage to get and what loan term you want.
Some loan terms to look at are:
Once you land on a loan term, you'll need to choose the right type of mortgage for you:
Choosing a mortgage lender can be tricky. You can research lenders yourself or work with a mortgage broker.
Don't just look at rates. Also pay attention to closing costs, which are the fees you'll pay to finalize your loan. Also notice which lenders require you to pay mortgage points (a type of discount you can buy to lower your mortgage rate).
Getting mortgage pre-approval allows you to see what loan amount you qualify for. To get pre-approved, you'll need to provide information about your income and existing assets (for example, how much money you have for a down payment).
A lender will also run a credit check to make sure you're a trustworthy borrower. Generally, 620 is the minimum credit score for a mortgage, but some loan types are designed for borrowers with lower scores.
Mortgage shopping is the process of gathering offers from multiple lenders. You can do it yourself or use a broker. It's a good idea to compare a few offers rather than accept the first offer you're given.
Once you're approved for a mortgage, it's time to put it to good use. Here's how.
First, you'll need to make an offer on a house. You can offer to pay what the home is listed for, or suggest a lower purchase price. In some cases, you might choose to offer a higher price than what the seller asks for (for example, if you expect competition from another buyer).
If your offer is accepted, you'll put down earnest money, which is a small deposit that's placed in an escrow account until your closing.
Once you have a real estate contract in place, you'll need to go through a home inspection. That's when a professional comes in and checks for major issues with the property. If issues are uncovered, you can generally go back to your seller and ask to have those problems fixed before you close.
Your mortgage lender will also arrange for a home appraisal to ensure your home is worth enough to cover your loan.
Once everything checks out, you'll close on your mortgage loan. You'll meet with your lender, sign some documents, and pay your closing costs (or agree to roll them into your mortgage and pay them off over time). Here's what to expect when you close on your home.
All that's left then is to get the keys to your new home.
Once you close on your mortgage, you get to start the fun part -- homeownership. There are several expenses of homeownership you'll need to prepare for.
You'll pay property taxes either monthly or quarterly. They're calculated by applying your municipality's tax rate to your home's assessed value. If your home is worth $300,000 and your local tax rate is 1.5%, your annual property taxes will cost $4,500.
Homeowners insurance protects you from certain expenses when damage occurs to your home. It also protects you if someone gets injured on your property. You'll either pay for homeowners insurance once a year or monthly, depending on how your mortgage is set up. It's best to determine how much home insurance you need before shopping around.
Owning a home means doing upkeep and fixing things that go wrong. That could be anything from a leaky roof to a leaky basement. Be sure to budget for maintenance and repairs so you're not caught off guard when issues creep up.
If you don't put down 20% of your home's purchase price at closing, you'll generally have to pay private mortgage insurance (PMI). PMI generally equals 0.5% to 1% of your loan amount and is paid monthly. This protects your lender in case you can't pay your mortgage or it has to foreclose on your home.
You'll pay PMI until you have 20% equity in your home. If you have 20% equity, that means you still owe 80% of the home's value on your mortgage -- equity is the difference between what you owe on your mortgage and your home's value.
If you buy a home that's part of a homeowners association (HOA), you'll need to pay monthly dues, or HOA fees. Those fees cover maintenance of common areas, like a community gym or swimming pool, as well as services like trash removal.
Buying a home isn't an overnight process, but knowing what to expect will make it easier. Now that you understand how to set a budget, apply for a mortgage, navigate the purchase process, and anticipate ongoing expenses, you can focus on searching for the perfect home to call your own.
If you want to uncover more about the best mortgage lenders for low rates and fees, our experts have created a shortlist of the top mortgage companies. Some of our experts have even used these lenders themselves to cut their costs.
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