Buying a home is a big step, and a huge goal for many people. It requires time, money, and research, and can feel overwhelming at first. Planning properly ahead of time, and having the right knowledge can make the process much easier and less stressful.
Here are the steps to get you heading in the right direction:
Step 1: Know your budget
You need to have good knowledge of where your finances are at, and know what you can afford to spend per month on your new home. To figure this out, you should know how much income you take in per month, your monthly expenses, and from there evaluate your savings. Experts say that you should put no more than 30% to 32% of your gross annual income towards “mortgage expenses”- principal, interest, property taxes, and heating costs. There will also be additional costs towards mortgage insurance and homeowner’s insurance.
Step 2: Save for the down payment
Again this may seem daunting, but is absolutely doable with the right planning. In general, you will need a down payment of 5% if the purchase price of your home is $500,000 or below, then 10% for the portion of the purchase price that is above $500,000, and a full 20% down payment on properties worth $1 million or more. Get in touch with a knowledgeable mortgage lender who can tell you the types of loans you may be eligible for and the down payment that is required for each. You should also shop around for your mortgage, to find the best interest rate.
Step 3: Put together the mortgage paperwork
Lenders will require a large amount of paperwork to show that you can afford your monthly payments, so you should put together a folder with:
- 2 years worth of tax returns
- Your most recent pay stubs for the last 30-60 days
- Your recent bank account statements
- Any other asset or investment statements
It’s a good idea to get all this information together ahead of time, so you can close the loan faster when the time comes.
Step 4: Get pre-approval for the mortgage
Once you have decided on a lender, you will fill out an application with them, and submit the necessary documents, as well as agreeing to a credit check. Then they will send you a letter outlining the amount and interest rate of the loan that you would qualify for. You should include this preapproval letter in any home offers to show that you are serious, and ready to go.
Step 5: Start searching for your first home!
The best part! Now you know your budget, and what you are pre-approved for. Start shopping and visiting homes, and enlist a knowledgeable real estate agent who can help make the process as seamless as possible. Realtors have vast knowledge of the market, different types of homes, and the current market prices. They will help negotiate your offers and terms, and help guide you on the right price that you should present.
Once a seller accepts your offer, your lender will start processing the loan. You can opt for a home inspection and a home appraisal before your purchase moves toward closing. You should include this contingency in your offer.
Finally, on the closing date of your purchase, you will be given the keys and gain possession of your new home!