Buying a new home can seem to be a formidable endeavor. While it may signify a new exciting start, this daunting process is not without its pitfalls.
For starters, buying a house is a huge investment. Over and above that, you’ll need to make several intelligent decisions along the way so that you get a property that rises in value over time rather than becoming a money pit which strains your finances.
Generally, buying a home can be broken down into 3 stages to keep things simple. In stage 1, you’ll be deciding how much you can afford. In stage 2, you’ll decide how to finance the home. In stage 3, you’ll be choosing the home and going through the paper work to make it yours.
So, we’ll approach this process by looking at the points in each stage so that it’s all simplified and organized.
In this stage, you and your partner will sit down and decide just how much you can afford to pay for your home. Too often, couples make the mistake of choosing the home they love first, before even doing the math.
The end result is that their finances are stretched, and meeting the monthly payments becomes a nightmare.
Use an online mortgage calculator to figure out how much you can pay: https://www.mortgagecalculator.org/
When applying for a government loan (FHA loan), you’ll need to put down a 3.5% down payment. You’ll also need a minimum credit score of 580. For example, if you choose to buy a $300,000 house, your 3.5% down payment will be $10,500. You’d need this much saved up in cash for the down payment.
If you choose a conventional loan, you may only need to pay a 3% down payment, but your loan will not be federally insured. You’ll also need a minimum credit score of 640 and conventional loans are much more difficult to get. Your debt to income ratio will need to be 43% or lower.
What you need to be aware of for stage #1
You must know how much you can afford every month. Do note that there will be homeowner’s insurance, property taxes, etc. that are over and above your monthly mortgage. So, you’re not just paying for a home loan here. There are other costs too.
Closing costs will mean paying the real estate agent’s commission, attorney’s fees, property taxes, mortgage recording fees and so on. You must be aware of all the different fees you’ll be incurring BEFORE you buy the house.
You should also know your credit score because it will directly impact the types of loans you can get and so on. If you have a score of 700+, you’ll be able to get much lower interest rates on your loan.
You may also wish to calculate how many monthly payments you can make if you have no income coming in. You must have contingency plans in place. If property taxes increase, will you have enough?
If you can’t afford to make your monthly payments, are you willing to take a loss and sell your house? If your car suddenly breaks down and you need to buy another one, will the sudden expense affect your monthly mortgage payments?
Ideally, you must have about 6 months’ worth of mortgage payments saved up to tide you through any unforeseen circumstances.
In this stage, you’ll be looking for a lender. You should shop around and look for a loan provider with low fixed rates (NOT adjustable rates). If your credit score is good, you’ll qualify for attractive rates. Don’t settle for less.
An important point to note here: while most loans require a 3% to 5% down payment, if you can make a 10% or even 20% down payment, you’ll be able to get a smaller loan at far better interest rates.
There are many people who buy their homes with cash. This is the BEST way to go about it, but for many people, it’s just not feasible. Saving up so much for a house will take time. However, if you can afford it, go ahead and buy one without a loan.
Unless of course, you can invest that money and make higher returns than what you’re paying for the home loan. In this case, you might choose to take a loan even if you have the cash to pay for it.
There will be closing costs involved when you’re about to close the sale with the seller. This may be about 3% to 5% of your loan amount. So negotiate these rates before choosing the loan. Some lenders will cover the closing costs for you.
You should also try and get pre-approved for the loan. This may take you a week or so. If you’re ‘testing out’ a few lenders, try and get all the inquiries done within 30 days so that it doesn’t affect your credit score.
Getting pre-approved will show that you’re a serious buyer with the means to buy the home. This will encourage the seller to negotiate with you more eagerly and you’ll be able to get the house at a lower price than what was stated.
In this stage, you’ll be buying the house. The first step will be to find a trustworthy real estate agent. Discuss your budget and loan preapproval with them so that they can find the best properties which suit your needs.
Then it’s just a matter of visiting the different properties and choosing one you like. Always remember to buy a house in a promising neighborhood. It should be clean, low in crime, have access to schools and malls and other amenities, etc.
Location is everything when it comes to real estate. Even if you don’t plan on selling your house, you’ll want it to appreciate in value over time. When you’re in your senior years, you may wish to downsize.
Selling the house at a higher price than what you paid for it will mean you not only make a tidy profit, but also have more money to last throughout your retirement.
When choosing a house, you must ensure that the property has electricity, working plumbing, etc. The roofing needs to be good and so on.
The best thing you can do here will be to hire a home inspector to check on the home BEFORE you buy it. Yes, it’s a cost you must bear, but they’ll be able to spot issues on the property that an untrained eye will not know to look for. Well worth the cost.
You’ll also want an appraiser to valuate the house so that you’re not paying way above market value. Generally, most lenders will send a home appraiser to do this, unless you’re paying fully with cash and will need to hire your own.
Do note: the lender will only give you a loan that’s equal to the appraisal. For example, if the home is valued at $250,000, that’s the loan you will qualify for.
However, if the buyer wants $280,000, you’ll need to pay the extra 30K out of your own pocket, or they’ll need to lower their asking price. Always negotiate here.
The seller must deliver a clean title. You’ll have to discuss beforehand which items will remain in the house once it’s sold. You don’t want to end up with a new home that has the windows and door missing because the previous owner took it all with them.
Plumbing, electricity, heating and other appliances should be in working order, if they’re being transferred to you. Once all that’s settled, then it’s just a matter of doing the paper work to transfer the property to your name after payment is made.