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For many Americans, buying their first home is essential to the American dream. It’s a way to create roots, join a community, raise a family and build equity. For many, it’s the biggest investment they’ll ever make.
Buying a home is exciting, but the process can also be a bit terrifying. Like the stock market, the real estate market can ebb and flow based on current conditions.
A buyer’s market means the supply of homes on the market is high, which causes prices to stay low. Buyers can take their time and focus on getting the property that suits them best.
A seller’s market means every home has multiple buyers bidding for purchase, which causes prices to skyrocket. You’ll have to act fast and anticipate a bidding war if you have a specific home in your sights.
Buying a home will be one of the biggest purchases in your life. Luckily, professionals are here to guide the way and ensure you have a successful journey. With these essential financial tips in mind, you’ll become more educated about the buying process and get closer to seeing your dreams come true as you move into your new home.
Become Mortgage-Worthy
According to the Zillow Home Values Index, the current median price of a house is over $350,000, though prices may vary depending on where you live. Finalizing a purchase will require a careful balance of savings and lending. Any bank or mortgage company you choose to work with will look at your financial history, income, debt, assets and liabilities to determine your creditworthiness.
Before starting the process, you can do the work on your own to ensure you look good to a lender. Use an online affordability calculator to estimate your current situation and find a house price that fits your budget. While not a guarantee, it can give you a good idea of where you stand.
You should also pay attention to your credit score. Lenders use credit scores to determine your ability to repay the loan. For conventional loans, they look for credit scores of 620 or higher. The higher your credit score, the more you’ll benefit from lower interest rates. However, lenders have a variety of programs available for many situations. Working with a lender early in the process will give you a better outlook on your current situation.
Get Pre-Approved
The home buying process isn’t fast or easy. It can take weeks or even months to search for the right home, find a lender to do business with, get all the paperwork ready to close the loan and finish the process.
Real estate agents and lenders look for ways to shorten that process whenever possible, with pre-approval being an important timesaver. Pre-approval allows a lender to thoroughly review your finances and assess how much they’re willing to lend you. While it’s not a final confirmation, it is a good indicator of what a mortgage lender feels you’re qualified for.
Once you move through this part of the process, the lender will issue you a pre-approval letter you can submit with any offer you make on a home. This gives the seller more confidence that the transaction will be successful and you’ll be able to close on the home. This also gives you a better understanding of what you’ll qualify for, which helps you have more confidence as you shop for your new home.
Understand Monthly Payments
Every month, your mortgage payment will include principal and interest. The principal is the portion of your monthly payment applied to your loan balance. This is the lump sum balance of what you borrowed.
Interest is based on the interest rate you lock in for your loan. Interest is highest at the beginning of the term and will drop as the principal balance is paid down.
While principal and interest make up the two biggest portions of a monthly mortgage payment, they aren’t everything. The bill also includes taxes and insurance.
Property taxes are assessed annually, but most lenders include them in your monthly payment to collect the total amount over the year. By law, the lender will collect them and put them into an escrow account, paying them to the government when they come due. Property taxes change over time depending on a variety of factors.
Insurance includes both homeowners and mortgage insurance. Your lender requires homeowners insurance to protect the physical investment in the event of damage. This will also be collected monthly and put into escrow to be paid annually.
If your down payment is less than 20 percent of the home value, the lender will most likely require private mortgage insurance (PMI) for protection from losses in case your home moves into foreclosure. Once you reach a 20 percent value, you can drop PMI and lower your monthly payment.
Budget For Closing Costs
Closing costs are fees paid at the time you close the loan. Many first-time homeowners forget these fees, which can add up to 5 percent of the loan amount. These fees include things like home appraisals, title searches, inspections and completing the mortgage paperwork.
Sharpen Your Negotiation Muscles
It’s easy to feel overwhelmed during the home buying process. That’s why it’s important to have a qualified expert working on your behalf. Real estate agents help you navigate the entire transaction from beginning to end. You have a right to ask questions and negotiate the terms. If something doesn’t feel right, you can take a step back. Spend time looking for a real estate agent you feel comfortable with who will work hard to help you understand the process and achieve your home buying goals.
Plan For The Future
Getting caught up in the moment is easy, especially in a seller’s market where properties have multiple bidders. It’s essential to keep a clear head and pay attention to your needs for the long term. Is this a house you can grow into in the future? Will it suit your needs for the next few years? If you’re newly married and planning on starting a family, a two-bedroom condo may not be the best situation.
Remember, this is a process with repercussions you’ll be living with for years. Have fun with it. Plan for it. And get ready to dream.