Buying a new home is one of the toughest activities that one can engage in. This is true, especially, if it is your first time.
However, if you understand the process well enough, you will be able to make smarter decisions than one who has no idea of the process.
This article serves as a comprehensive guide, so, be sure to read to the end.
Here are some tips that you should consider in the process of purchasing your new home –
Build up your savings account
It is important to build your savings account up in general. Your lender will have to be sure that you are not living from hand to mouth.
Having at least 4 months worth of payments for your mortgage saved up will serve as proof that you’re load worthy. Many lenders and backers (such as the FHA) will show more consideration for you once they know that you have a good amount of money stored up.
The saved up cash can also assist in new home’s maintenance and repair costs, especially, in the event that sporadic repairs come up.
Get a good real estate agent
A real estate agent is an ally that you need when you want to buy a home.
They are knowledgeable about homes and neighborhoods and will give you valuable information with regards to buying, negotiating, and getting familiar with the area that you wish to reside.
Getting an agent is free, and they only get paid a commission from the amount that was paid for the house.
Once you are getting close to purchasing the home, a smart move would be to obtain a pre-approval.
Here, after the lender has satisfactorily analyzed your finances, itgives you a written confirmation of what it agrees to lend you along with the terms and conditions.
A pre-approval will make you appear more serious to the person who wants to sell and will give you an edge over other potential buyers.
Save up early for your down payment
Although many lenders permit as low as a 3% down payment, it is advisable to have about 20% ready. However, if you set aside less than 20%, it could translate into larger costs, and it will also require that you make private mortgage insurance payments.
Examine your credit; Do not initiate new activity
One important factor that determines if your mortgage loan gets approval is your credit.
Your credit will also assist in ascertaining interest rate and the terms of the loan.
So keep your credit in check before initiating the home purchase. Find better ways to level up your credit and try to set all records straight, and then try to clear up outstanding debts.
Also, try not to open new credit accounts until you close the home loan.
Make a budget and stick to it
Never allow lenders to influence what you planned as mortgage loan expenses. Pre-approval amounts are most times ascertained on the basis of your income report and also your credit report.
However, they do not take note of the amount you spend in running your daily and monthly expenses.
Instead of buying a house that is more expensive just because your lender feels you should, be focused on letting the expenses for the house to remain within your means.
You may plan to buy a home that is big with plenty of space, especially, If you have a family.
However, sacrificing space could translate into reduced maintenance cost and more amenities if you opt to buy a townhouse or a condo.
Keep in mind, however, that finding the right home doesn’t mean that the neighborhood is great.
So, ensure that your make research about the neighborhood and analyze every detail with regards to nearby schools, crime rate, hospitals, pharmacies, grocery stores, and more.
Try driving through the area on different days to analyze traffic and the level of activities.
Keep all vital documents in place
As soon as you start contemplating making an offer, get all the necessary documents which will be used to authenticate your finances in place such as bank statements, pay stubs, copies of tax returns, etc.
Have the paperwork coordinated
Buying a house definitely involves large paperwork. A title company will be contacted by your lender to take care of everything that has to do with paperwork and ensure that the person selling the house to you is the legal owner.
Close the Sale
To close the sale, you will be required to sign every paperwork which is needed to make the purchase complete. You will also sign your loan documents.
Once the paperwork gets back to the lender, your loan will require a few days to be funded as usual. As soon as the seller gets their check, the home is all yours, and you can move in.
Your house and your land serve as collateral for your mortgage loan. Lenders hope that you succeed and are able to meet up with your monthly payments.
Therefore, upon making a loan application, your financial standing will be examined by the lender to verify that you are loan worthy. Below are some ways that the lender use to decide to approve your loan –
Basically, lenders request a 20% down payment on a home, but some mortgages do not request that much. However, note that tabling a lesser down payment will make your lender examine you more. Because the lesser the amount you invest, the likelier you are to abandon the loan.
Lenders, therefore, request for private mortgage insurance in order to protect themselves. Note also that not all loans require PMI.
In underwriting a loan, lenders will also checkout the LTV which is determined by dividing the loan amount with the appraised value of the home. For instance, let’s say your loan amounts to $80,000 and the appraised value of the home is $110,000, then the LTV is simply 80%.
The 30% down payments translates into a low LTV. However, a higher LTV will not stop you from getting a loan, but it may incur an interest rate that is higher.
Firstly, you need to consider your front-end ratio. This simply refers to the total house payments to be made monthly.
If that amount is divided by your total income every month, you have your housing ratio. For the debt ratio, divide all your monthly expenditures by your total income too.
Your front-end ratio should not exceed 28% of your total income every month, and your debt ratio should not exceed 30%. For someone who has a high income, they may have ratios up to 40% and 50%.
Your lender will use your credit history records to arrive at a score. Three models that are used for scoring will be examined, and then their median score will be obtained and used in determining whether or not you are qualified.
The chance that the loan will be paid off by the borrower is higher if the score is high. According to Fair Isaac Corporation, scores are between 350 and 850. 723 is the median score.
In order to get “A” credit loans, your score must be upwards of 680. Generally speaking, the higher your score is, the better the rate of interest.
Lenders use an Automated Underwriting System to determine if you are loan worthy. An AUS is a program used to analyze indicators such as your debt ratios.
An AUS can be used to give a borrower a pre-approval. As the process progresses, more evidence will have to be presented by you to validate the AUS results.
Today, buying a house mostly requires that you use a mortgage which comes with interest and you can only access one if you are found to be qualified.
The truth, however, is that you can buy your own house without a mortgage. All you have to do is to consider other possibilities as follows –
If you have more than one source of income, you can simply decide to live on only one source while you save the rest for some years.
By doing so, it could help you to save a lot of money for the house that you wish to buy. This will require that you simplify your life as much as possible.
So if you earn $25,000 each from three different sources annually, you can decide to live off one source while saving the income from the other two sources. In 5 years, you would have saved up $250,000 to buy your home.
It may not always be easy to simplify your lifestyle to meet your target. As a way of aiding the process, you could rent out a part of your house, or you can simply rent a part of the house of your family or your friends. You can also cut down on some other activities in order to cut costs such as making sacrifices on vacations, luxury, and more.
If your current home has a lot of equity and you are considering downsizing, you could sell your home and use the profit that you get to relocate to another area where the cost of living is relatively low.
This is a very good idea, especially, if you reside in an area that has a relatively high cost of living and are contemplating making a move to an area where you can buy a relatively cheaper house.
If you sell your house for a huge amount and make a very nice profit, you could have all the money that you need to buy a new home in another part.
Seller financing is another way to get a house of your own if you find it difficult to get a mortgage.
This approach can be used, especially, if you have a very low credit score which disqualifies you from qualifying for a mortgage or if you have not built a long employment history which also disqualifies you from qualifying for a mortgage from the bank.
It is required by most banks that you must have at least 2 years of work employment before you can qualify to get a mortgage even if there is enough money in your savings account.
Seller financing is offered by sellers that are very flexible, and all that is required is that you append your signature to a promissory note which states that the loan will be repaid. Once this is done, the seller will then sign the deed over.
The house will officially become your property, but since the bank sold the house to you, you will be required to make monthly payments to them.
However, since you legally own the house, you can have it sold or refinanced. Seller financing is basically known to have a 3-5 year tenure, and then the remaining payment will be made in bulk once the term comes to an end.
One huge advantage, therefore, is that you have lots of time to grow your credit or improve your overall financial situation which can then help you to refinance. Refinancing will then convert the contract into a normal mortgage, and the seller will be paid their money.
Although this can work as an alternative to getting a mortgage, it is usually very difficult to find a seller that is willing to deal because they usually find it difficult to agree.