If you were a tenant for a while, you’re probably sick and tired of all the moving around. As if that wasn't enough, paying massive rent each month feels like such a burden. So, it isn't surprising that people are so elated when they finally make the big step of purchasing a property.
However, despite all the enthusiasm, buying a house is everything but fun, especially facing a recession. The buying procedure is extremely arduous, involving several vetting processes. There's also a chance you'll get an unfavorable loan or that you'll buy a property during the peak market.
Luckily, we're here to help you out. In this article, we'll go through 10 main steps when buying a property, thoroughly explaining what each entails.
• Good credit score
However, despite all the enthusiasm, buying a house is everything but fun, especially facing a recession. The buying procedure is extremely arduous, involving several vetting processes. There's also a chance you'll get an unfavorable loan or that you'll buy a property during the peak market.
What are the basic prerequisites?
Even if you're feeling anxious about buying a house, that doesn't necessarily mean you're ready for such a step. Buying a large family property requires a big financial commitment but also getting accustomed to all the cleaning and maintenance that comes with it. Among others, it requires:• Good credit score
• Loan preapproval
• Money on the side for a down payment
• Reliable real estate professional
• Understanding the process
Of course, resolving the finances is the most important thing. However, you shouldn’t downplay the need for a good real estate agent.
If you think your credit score is too low, perhaps it's better to wait for a while so you get better terms. For conventional loans, you'll need at least a 620 score. Lenient loans, such as FHA loans, will require 580. There are also banks that are willing to approve you at a 500 score, but in such cases, you'll need a bigger down payment.
Aside from credit scores, lenders check a few other things. Having a reliable source of income is a major consideration. To ensure you have healthy financial practices, a lender will also assess your credit history, emphasizing loans you didn't manage to pay off. Lastly, they want to make sure your debt-to-income doesn’t exceed 50%.
We suggest that your housing obligations should never exceed 30% to 35% of your monthly income. This includes all related costs, including interest, principal, insurance, and taxes.
Nowadays, it’s somewhat common for new owners to make a minimal down payment of 3% for common loans. Keep in mind that back in the day, minimal down payment was 20%, so the new norm is extremely liberal.
While the new minimal down payment sounds incredible, allowing everyone to buy a house, it can also be a two-edged sword. In other words, the less you put down initially, the more you’ll have to suffer massive interests down the line.
Take your time searching for lenders while focusing on closing costs and interest rates. Keep in mind that getting preapproval doesn't necessarily mean you'll get a loan. The vetting process is much more rigorous for the actual loan, so it's better to provide a complete insight into your finances from the get-go.
Whatever the case, we suggest you don't look for a house without pre-approval. Having this document will put sellers at ease, making the entire procedure much faster.
Ideally, you should find professionals that have been in the business for a while and have numerous clients. As mentioned, they should have a keen understanding of your needs and the market while also being able to provide references.
We always recommend that you start by checking popular real estate websites. Checking the listings will give you a better understanding of the available properties and prices. Furthermore, using online search will ensure that you don't miss anything.
Once you create a shortlist, you still shouldn't start making visits. Instead, contacting the agent and asking questions about each property is much better to reduce the leg work. The vital information includes the house's age and condition, the neighborhood, the school and store availability, and the distance from the city center.
When making an offer, you should place emphasis on contingencies. These are contract stipulations that allow you to break the contract without fees if a property doesn’t meet one of your requirements. If a homeowner doesn’t agree to your contingencies, this usually indicates that a property lacks these features.
The home inspection contingency might be the most important among all the contingencies. According to it, a buyer can break the deal if a property doesn't pass a home inspection. Mortgage and home sale contingencies are also important, ensuring you can exit the contract if you can't secure financing.
You must hire an unbiased third-party professional for the inspection and appraisal to be legitimate. Keep in mind that money can't switch hands before the appraisal and that lenders can only borrow money according to the house's appraised value.
In other words, if the purchasing price is much higher than the appraisal value, you'll need to find another way to cover the differences. This is why you need home sale contingency to cover this type of spread.
Furthermore, although insurance isn’t a legal requirement, many financial companies require that you buy a policy before approving a loan. If you wish to save money, you can go with the basic one, and the lender will accept it.
Warranties serve a similar purpose, although they focus on home appliances. Unlike insurance, you don't need a warranty for a lender, but it's still a nice thing to have to reduce future repair and replacement costs.
Once you sign the contract, the proprietorship will change hands from the previous owner to you. In most cases, the signing will take place in the escrow office, seller's home, or real estate company. During this step, the agent must ensure all documents are present and signed.
After that, the funds are released and keys provided, after which the new owner can move in.
Of course, resolving the finances is the most important thing. However, you shouldn’t downplay the need for a good real estate agent.
10 Home purchasing steps
Here’s everything you need to consider during the process:1. Improve your credit score
Before preapproving you, a financial institution will take a look at your financial history and credit score. As you probably know, having a dismal credit score will completely disqualify you from getting a loan. On the other hand, having a bad or average credit score can secure a loan but at a very high-interest rate.If you think your credit score is too low, perhaps it's better to wait for a while so you get better terms. For conventional loans, you'll need at least a 620 score. Lenient loans, such as FHA loans, will require 580. There are also banks that are willing to approve you at a 500 score, but in such cases, you'll need a bigger down payment.
Aside from credit scores, lenders check a few other things. Having a reliable source of income is a major consideration. To ensure you have healthy financial practices, a lender will also assess your credit history, emphasizing loans you didn't manage to pay off. Lastly, they want to make sure your debt-to-income doesn’t exceed 50%.
2. Create a budget
One of the biggest mistakes future homeowners make is going above the budget. If you have a good credit score and loan history, most institutions are willing to give you a bit more runway. Some people take advantage of this by taking a loan they can’t cover.We suggest that your housing obligations should never exceed 30% to 35% of your monthly income. This includes all related costs, including interest, principal, insurance, and taxes.
Nowadays, it’s somewhat common for new owners to make a minimal down payment of 3% for common loans. Keep in mind that back in the day, minimal down payment was 20%, so the new norm is extremely liberal.
While the new minimal down payment sounds incredible, allowing everyone to buy a house, it can also be a two-edged sword. In other words, the less you put down initially, the more you’ll have to suffer massive interests down the line.
3. Find a suitable lender
When choosing a lender, your best bet is going with governmental loans. Previously mentioned FHA loans and a few others are the optimal choices as they give you much better terms. Most importantly, they're much more lenient when it comes to preapprovals. You should also consider a reverse mortgage, which is especially great for older owners.Take your time searching for lenders while focusing on closing costs and interest rates. Keep in mind that getting preapproval doesn't necessarily mean you'll get a loan. The vetting process is much more rigorous for the actual loan, so it's better to provide a complete insight into your finances from the get-go.
Whatever the case, we suggest you don't look for a house without pre-approval. Having this document will put sellers at ease, making the entire procedure much faster.
4. Choose the right agent
Choosing an agent is the most overlooked part of the buying process. The right person should know the market, neighborhood, and loan providers extensively. Most importantly, they can provide relevant and timely information that can save you a lot of money.Ideally, you should find professionals that have been in the business for a while and have numerous clients. As mentioned, they should have a keen understanding of your needs and the market while also being able to provide references.
5. Begin the search
The most important thing about home buying is not to have unrealistic expectations. Almost every house and apartment has flaws, and you need to find something closest to your ideal property.We always recommend that you start by checking popular real estate websites. Checking the listings will give you a better understanding of the available properties and prices. Furthermore, using online search will ensure that you don't miss anything.
Once you create a shortlist, you still shouldn't start making visits. Instead, contacting the agent and asking questions about each property is much better to reduce the leg work. The vital information includes the house's age and condition, the neighborhood, the school and store availability, and the distance from the city center.
6. Make an offer
It’s common for homeowners to bump up their asking price, so you need to determine the real property value. Aside from asking the agent, you can also check the price of similar properties in the neighborhood for reference.When making an offer, you should place emphasis on contingencies. These are contract stipulations that allow you to break the contract without fees if a property doesn’t meet one of your requirements. If a homeowner doesn’t agree to your contingencies, this usually indicates that a property lacks these features.
The home inspection contingency might be the most important among all the contingencies. According to it, a buyer can break the deal if a property doesn't pass a home inspection. Mortgage and home sale contingencies are also important, ensuring you can exit the contract if you can't secure financing.
7. Perform inspection and appraisal
A home inspection can help you determine if a property is in its advertised shape. If there are too many issues with the house, a buyer can ask the seller to make the necessary repairs. If you previously signed a contingency, refusing to make fixes can be used as a reason to withdraw the offer without penalties. Alternatively, you can ask the seller to reduce the asking price.You must hire an unbiased third-party professional for the inspection and appraisal to be legitimate. Keep in mind that money can't switch hands before the appraisal and that lenders can only borrow money according to the house's appraised value.
In other words, if the purchasing price is much higher than the appraisal value, you'll need to find another way to cover the differences. This is why you need home sale contingency to cover this type of spread.
8. Buy insurance and warranty
Unlike other entries on our list, getting insurance and a warranty aren't necessities. Still, they can be fantastic methods for safeguarding your investment and even reducing future maintenance costs.Furthermore, although insurance isn’t a legal requirement, many financial companies require that you buy a policy before approving a loan. If you wish to save money, you can go with the basic one, and the lender will accept it.
Warranties serve a similar purpose, although they focus on home appliances. Unlike insurance, you don't need a warranty for a lender, but it's still a nice thing to have to reduce future repair and replacement costs.
9. Make a last checkup
Doing the last walk-through is critical if the house requires extensive repairs. The common practice is for a buyer to make one last checkup a day or two before closing the deal. During this time, you should check the previously repaired sections of the house to see if the seller honored the agreement. Furthermore, you can also see if someone did additional damage to the property during the last few days.10. Close the deal
Despite what you might think, closing the deal isn't always easy. You need to go through the closing disclosure once again to check the price, associated fees, and other terms. The lender is legally obligated to send the document to the buyer three days before the deal is finalized.Once you sign the contract, the proprietorship will change hands from the previous owner to you. In most cases, the signing will take place in the escrow office, seller's home, or real estate company. During this step, the agent must ensure all documents are present and signed.
After that, the funds are released and keys provided, after which the new owner can move in.