Home Buying Process

Buying a house is a significant commitment. 

So before you begin shopping for properties or comparing mortgage options, you need to make sure you're ready to be a homeowner.

Step 1: Decide Whether You're Ready To Buy A Home

Wondering if you should buy a house? First, let's look at factors that lenders and homeowners should consider.

Income And Employment Status

Your lender won't just want to see how much money you make. They'll also want to see a work history (usually about 2 years) to ensure your income source is stable and reliable.

Preparing your income report involves bringing the proper documentation together to show steady employment. For example, if you're on the payroll, you'll likely need to provide recent pay stubs and W-2s. On the other hand, if you’re self-employed, you'll need to submit your tax returns and any other documents the lender requests.


Debt-To-Income Ratio

Debt-to-income ratio (D.T.I.) is another financial instrument mortgage lenders use to evaluate your loan application. Your D.T.I. helps your lender see how much of your monthly income goes to debt so they can determine the mortgage debt amount you can take on.

D.T.I. is calculated by dividing your monthly debt by your gross monthly income. For example, if your monthly debts (credit card minimum payments, loan payments, etc.) total $2,000 per month and your gross monthly income is $6,000, your D.T.I. is $2,000/$6,000, or 33%. Your lender will use the debts shown on your credit report to calculate your D.T.I.

Depending on the type of loan you're applying for, your lender may also calculate your housing expense ratio, sometimes referred to as front-end D.T.I. This ratio looks at your total monthly house payment (principal, interest, taxes, and insurance) compared to your monthly income. For example, if you have a $1,200 house payment and the same $6,000 monthly income, your housing expense ratio is $1,200/$6,000, or 20%.


It's wise to review your D.T.I. before you apply for a loan. In most cases, you'll need a back-end D.T.I. of 43% or less to qualify for most mortgage options, although this number varies based on your lender, loan type, and other factors.

Liquid Assets

Even with the help of a mortgage, you'll still need liquid assets to fund your home’s purchase, specifically your down payment and closing costs.


Down payment

Buying a home with no money down is possible, but most homeowners still need some cash for a down payment. A down payment is the first significant payment you make on closing your loan.


The amount of money you'll need for a down payment depends on your loan type and how much money you borrow. You can buy a home with as little as 3% down (though there are benefits to putting down more).


Closing costs

You'll also need to pay closing costs before moving into your new home. These are fees that go to your lender and other third parties in exchange for creating your loan.


The specific amount you'll pay in closing costs will depend on where you live and your loan type. It's a good idea to be prepared for 3 – 6% of your home's value as an estimate of your closing costs. In some situations, part of closing costs can be rolled into your mortgage or even paid by the seller using seller concessions.


Credit Health

Your credit score plays a huge role in what loans and interest rates you qualify for. In addition, it tells lenders how much risk you are willing to undertake for a loan.


Taking steps to improve your credit score and reduce your debt can pay off big as you prepare to get a mortgage. Better numbers mean better loan options with lower interest rates.


Your credit score is based on the following information:

  • Your payment history
  • The amount of money you owe
  • The length of your credit history
  • Types of credit you've used
  • Your pursuit of new credit

What score will you need to qualify for a home loan? Most lenders require a credit score of at least 620 to be eligible for most loans. A score above 720 will generally get you the very best loan terms.


Willingness To Live In One Place

A mortgage can be a 30-year-long commitment. Though you don't need to live in your home for the entirety of your mortgage term, it's still a big decision. When you own a home, it's more challenging to move. Unless you're buying a second home or investment property, you might need to sell your current home first, which can take time.


Decide whether you're ready to live in your current area for at least a few more years. Consider your career goals, family obligations, and more. Each of these factors will play a significant role in the type of home you buy and where you set up your primary residence.


Timing

Deciding whether it's the perfect time to buy a house or not depends on a variety of personal factors (such as financial readiness and lifestyle preferences) and market conditions (such as economic health and current mortgage rates).


Ultimately, the right time to buy a home comes down to your unique situation. Consult a financial expert before making big financial decisions like buying a house.

Step 2: Calculate Your House-Buying Budget

You have decided you're ready to buy a home, so it's time to set a budget. 

Start by calculating your D.T.I. ratio. Then look at your current debts and income, and consider how much money you can reasonably spend on a mortgage each month.


Homeownership comes with several costs you don't need to worry about while you’re renting. For example, as an owner, you must pay property taxes and maintain some form of homeowner’s insurance. Factor these expenses in when deciding how much you can afford a house.


Find out what you can afford

Have trouble coming up with a number? Use Rocket Mortgage's Home Affordability Calculator to figure out what mortgage you can afford.

Rocket Mortgage® shows you your maximum home price and you get an online approval decision.

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Step 3: Save For A Down Payment And Closing Costs

There are many ways to save for your home purchase, including investments and savings accounts. If you have relatives who are willing to contribute money, you can use gift money toward your down payment (just make sure to show a gift letter to your lender).


So how much should you save before buying a home? First, let's look at some of the significant expenses of a purchase.

Down Payment

Your down payment is a large, one-time payment toward the purchase of a home. Many lenders require a down payment to mitigate the loss they’ll suffer if a borrower defaults on their mortgage.


Many home buyers believe they need a 20% down payment to buy a home. This isn't the case. Plus, it isn't a realistic option for many first-time home buyers.


Fortunately, there are many choices for buyers who can't afford a 20% down payment. For example, you can get a conventional loan for as little as 3% down. Federal Housing Administration (F.H.A.) loans have a minimum down payment of 3.5%. Department of Veterans Affairs (V.A.) loans and United States Department of Agriculture (U.S.D.A.) loans allow eligible and qualified borrowers to put 0% down.


There are advantages, however, to making a larger down payment. For one, it typically means you'll have more mortgage options, and you'll have a smaller monthly payment and a lower interest rate besides. Plus, if you put at least 20% down on a conventional loan, you won't need to pay for private mortgage insurance (PMI).


Closing Costs

You'll also need to save money to cover closing costs – the fees you pay to access the loan. Many variables go into determining how much you'll pay for these, but it's usually wise to prepare for 3 – 6% of the home value. This means that if you're buying a home worth $200,000, you might pay $6,000 – $12,000 in closing costs.


The specific closing costs will depend on your loan type, lender, and location. Almost all homeowners will pay for things like appraisal fees and title insurance. If you take out a government-backed loan, you'll typically need to pay an insurance premium or funding fee upfront.


Before you close on your loan, your lender will give you a document called a Closing Disclosure, which lists each of the closing costs you need to cover and how much you'll need to pay at closing. Look over your Closing Disclosure carefully before you commit so you fully know what to expect and can catch any errors.

Other Costs Based On Loan Type

Your loan type might require a specialized inspection as well. For example, you must generally get a pest inspection before taking out a V.A. loan. Most lenders will schedule this inspection on your behalf and pass the cost along to you at closing.


These expenses might seem minor when held up against the other costs associated with buying a home. But remember, they do add up! So be sure to budget wisely.

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Step 4: Decide What Type Of Mortgage Is Right For You

Before you can apply for a mortgage, you'll need to decide on the best type of loan for you and understand which one you'll qualify for.

Conventional Loans

Conventional loans are mortgages made by a private lender and not the government. The most common type of traditional loans is loans backed by Fannie Mae or Freddie Mac, sometimes called “conforming loans”. Most mortgages in the U.S. are conventional loans. These are always a popular option for homebuyers and you can get one with as little as 3% down.

F.H.A. Loans

Backed by the Federal Housing Administration, F.H.A. loans are less risky for lenders because the government continues to ensure them even if you stop making payments. As a result, F.H.A. loans have credit score requirements that aren't as strict. As a result, you can get an F.H.A. loan with a down payment as small as 3%. 

V.A. Loans

VA loans are mortgage loans for veterans, active-duty members of the Armed Forces, eligible reservists or National Guard members, and qualifying surviving spouses. The most popular benefit of V.A. loans is that no down payment is required. In addition, V.A. loans are insured by the Department of Veterans Affairs.

U.S.D.A. Loans

Another type of government-backed loan, the U.S.D.A. loan, helps people in rural and suburban areas to buy homes. You can get a U.S.D.A. loan with 0% down, but your home must be in an excellent rural area and you must meet income eligibility rules.


Step 5: Get Preapproved For A Mortgage

When you're ready to start house hunting, it's time to get preapproved for a mortgage. When you apply, your lender will give you a preapproval letter that states how much you're approved for based on your credit, assets, and income. You can show your preapproval letter to your real estate agent so they can help you find homes within your budget.


To get preapproved, you need to apply with your lender. The preapproval process typically involves answering questions about your income, assets, and the home you want to buy. It will also include a credit check.


Step 6: Find The Right Real Estate Agent For You

There are multiple parties involved when getting a mortgage and buying a house. 


Your Cr8tive Realty agent will look out for your best interests by 

  • finding homes that meet your criteria, 
  • securing you good showings, 
  • helping you write offers, and 
  • negotiating.

You can usually work with a real estate agent for free as a buyer. However, the seller will pay the buyer's real estate agent's commission in most cases. The buyer's agent commission is usually 3% of the purchase price.


A Cr8tive Realty agent represents you and helps you understand how best to buy a house. Your agent will show you properties, write an offer letter on your behalf, and assist in negotiations. Real estate agents are local market experts and can advise you on how much to offer for each property.


It's possible to buy a house without a real estate agent or REALTOR®. However, this isn't recommended, especially for first-time buyers. The home buying process can be complicated and emotional. Having an agent by your side will help you navigate the real estate market, submit a legally valid offer, and avoid overpaying for your property.


Step 7: Begin House Hunting

Your Cr8tive Realty agent will help you hunt for houses within your budget. It's a good idea to make a list of your top priorities, some of which might depend on whether you're looking for a starter home or forever home, and what type of house you are looking for.

Here are some things you might want to consider when shopping for a house:

  • Price
  • Square footage
  • Home condition and the possible need for repairs
  • Access to public transportation
  • Number of bedrooms
  • Backyard/swimming pool
  • Local entertainment options
  • Local school district ranking
  • Property value trends
  • Property/real estate taxes

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