While the homebuying process can seem overwhelming, it does not have to be. Lucky for you, we have broken it down into five easy-to-follow steps, from checking your credit score to getting your finances in order. Follow each one and it may get you closer to your goal of owning a home.
1 Check Your Credit Score
Start by requesting a free copy of your credit report. You can get a free one annually at AnnualCreditReport.com.
Credit scores range from 300 to 850, and can show if you make payments on time, are late or do not pay at all. The higher your score, the better. A higher score shows you are more likely to pay back money on time and improves your chances that a bank will lend you money to buy a house (what is called a mortgage) and give you better pricing.
A lower score, on the other hand, may indicate you have had credit problems in the past or made late payments. And no score means you have likely never opened a credit account such as a loan or credit card.
The minimum credit score required to qualify for a mortgage is established by the lender. However, there are certain loan programs such as Federal Housing Administration (FHA) loans, designed for first-time homebuyers, that will accept credit scores that are lower.
While a low or no credit score could impact your ability to qualify for a home loan or obtain the best terms, there are also several things you can do to improve your credit score, including paying bills on time and keeping credit card balances low. MyFico.com provides some good insight into how scores are calculated and what you can do to increase them.
Did you know?
Credit scores are typically found using a Social Security Number (SSN) as identification. However, if you do not have a SSN and have a Taxpayer Identification Number (ITIN) instead, you can still request a free credit report in writing, using your ITIN to identify you.
If you don't have a credit score, your lender might be able to supply suggestions on how to change that or improve it over time.
2 Determine How Much You Can Afford
While a mortgage lender can tell you how much you can qualify for, you will still need to figure out how much you can reasonably afford in a monthly mortgage payment. Experts recommend that you spend about 30 percent of your gross monthly income (what you make before taxes) on housing.
So, if you make $3,000 a month before taxes, this means you should target about one-third of that - roughly $1,000 a month - towards a mortgage payment, including:
- principal (the amount you are planning to borrow from the bank)
- interest (the fee the lender charges to borrow the money)
- insurance (to help protect your home against damages)
- property taxes (what you are required to pay in taxes based on the value and location of your home)
There are free online monthly mortgage payment calculators available that can help you understand how much house you can afford based on today's pricing.
3 Get Your Down Payment and Closing Costs Together
When buying a house, you will need to factor in a down payment and closing costs.
- Closing costs are the fees associated with processing the loan. They average out to be about 2-3% of a home's purchase price. On a $200,000 home, that could equal out to between $4,000-$6,000 in closing costs.
- The down payment, on the other hand, is money that goes towards the purchase of a house and is usually paid at closing (the final step in buying the home/signing the papers). Some lenders require as little as 3% to 5% down for a standard loan, while FHA loans for first-time buyers require 3.5% down. In other words, depending on your lender, the type of loan you get, etc. you might be looking at $6,000 to $10,000 towards a down payment on a $200,000 house.
Keep in mind: the larger your down payment, the less money you will have to borrow from a lender, and the lower your monthly mortgage payment will be. There are also several down payment assistance programs available to first-time buyers to help cover closing and down payment costs. Ask your bank or real estate agent since they may have down payment assistance options or partners. You can also search for down payment assistance programs in your area or check with local Finance Authorities.
4 Find a Lender and Get Pre-qualified
Probably one of the most important steps before your search can begin is to begin working with a lender to get pre-qualified. This is where a lender looks at your finances and credit score. You will likely need to fill out paperwork and provide documentation. However, when you are pre-qualified, the lender will tell you how much money you can borrow and will also supply you a letter which shows sellers you are not only serious about buying their home, but you can also afford it.
If you are a Non-U.S. Citizen, you can still qualify for a mortgage, even if you do not have a Social Security Number. Some lenders will do ITIN (Individual Taxpayer Identification Number) loans, which are available to those who have an Individual Taxpayer Identification Number instead of a Social Security Number.
It is always recommended to talk to multiple lenders so you can find one that fits your needs and can offer the best pricing. A good place to start might be the bank you currently use or asking other homeowners or real estate agents who they might recommend.
5 Start Your Home Search
Once you have been pre-qualified and have found a knowledgeable real estate agent, you can now start searching for a home. You will want to figure out your must-haves (number of beds, baths) and the area you would like to buy in. You might even need to remain flexible or open-minded, whether that is sacrificing space for a good location or giving up a quick commute for a bigger home.
After you have found something that ticks the boxes, you will want to work with your real estate agent to put together an offer with a fair price and terms that work for you and the seller.
If your offer gets accepted, a lot of things will need to be done, including an inspection (inspecting the condition of a house), appraisal (assessing the home's value), and final walk-throughs (ensuring there is no new damage and all the systems and appliances are in working condition) before closing day, or when you officially sign to buy the house and the county records you as the new homeowner. It is a long process and might take months or even years but hang in there. You will find homeownership can often be worth the wait.