Introduction
Do you want to buy a home? But you need a step-by-step guide on how to do it? This article, I hope, will provide insight, clarity, and the answers you are looking for.
Two Phases
When buying a home there are two phases. The Preparation phase, and the Buying phase. In the preparation phase you prepare your finances for buying a home, and in the buying phase you go through the steps of buying your home. In the next section, we will look at the preparation phase.
Preparation
Improve and maintain your credit score
It is not necessary to have an excellent credit score to get pre-approved for a mortgage. However, the better your credit score the better rates you get. Which, the lower the rate, the more you save in interest over the life of the loan.
If you have a credit score of between 500-700 you should be okay, but 620 would be what to shoot for if in the 500s. According to Experian, the lowest credit score to apply for a mortgage is 500. But there is a caveat, this low of a credit score is for first time home buyers putting down 10%. A first-time buyer is also able to put down 3.5% as a down payment but they would need a minimum of a score of 580.
If your credit score is good, maintain it. If it is in the 500s or even lower, here are some ways to improve it.
1. Pay your balance in full every month.
2. Do not let your balance exceed 10% of your utilization ratio. Do not max out your credit card.
3. Ask for a credit line increase.
4. Do not close an old credit card, it counts towards your length of time. If it is subject to closure due to inactivity, buy something on it every month and pay it off.
5. Do not apply to credit cards just for the sake of it or to get a higher credit score, since the hard inquiry will drop your credit score by a few points.
6. A credit card is not an emergency fund. Have at least $1000 in a savings account.
7. Educate yourself on credit cards and how they work.
Following these, will help you in improve your credit score, or at least maintain it.
Save up for a down payment
There is a misconception that a person must have 20% as a down payment for a home. Don’t get me wrong, the higher the down payment, the better it is for the buyer. And ideally, 20% should be put down or more, because the higher the down payment, the more you’ll save when it comes to interest.
But a buyer can put 5% as a down payment, and for first time buyers it can be even lower. According to Rocket Homes, if a first time buyer, can put as low as 3% for a conventional loan and 3.5% for a FHA loan.
So, when saving, shoot for 5% of the purchase price. If you are a first-time buyer, shoot for 3.5%. After you reach that, move on to the buying phase, and keep saving.
Some tips on saving are:
1. Automatically have your bank withdraw a certain amount from your account when you get paid.
2. Start budgeting and tracking your expenses and limit your unnecessary spending.
3. Have your savings account out of reach.
Now that you have improved your credit score, or if it was already good, maintained it. And you have saved around 5% for a down payment, let’s move on to the buying phase.
Buying
Find a good agent
To find a real estate agent, ask your friends and family to refer you to one that they worked with before, or look up “real estate agents near me” on google and you will find one. Either way, the agent you choose must be one you are comfortable working with.
Initial appointment
When you first reach out to the agent. An initial appointment or call will be set up in order to discuss how the agent works, your situation, and the things you should expect. Every agent does things differently but these are the things you should expect. Also, you must expect questions of what I call “The Buyer 7s”:
1. how long have you been looking?
2. Are you working with an agent?
3. Are you renting or do you already have a home?
4. Are you working with a lender, if yes, how much are you prequalified for?
5. Where would you like to move and by when?
6. What type and style of home are you looking for? multi-family, single family, a condominium, or a townhouse?
7. What is your price range and how many bedrooms, bathrooms, do you need and what other features or rooms do you want in your future home?
Determining the purchasing factors
From these questions, the buyer 7s, the purchasing constraints will be determined. However, your agent may give you a form to get more in detail about what you are looking for in your next home. Determining these criteria, how many bedrooms, bathrooms, and price for instance, will help the agent find you the home you are looking for and it will help you clarify what you need in your next home and what you want, and not paramount.
Get Pre-approved
Getting pre-approved is important, and it should be done right at the beginning of the buying phase. You may even get pre-approved before finding an agent. In that case, you would move to seeing homes right after the initial meeting.
Getting pre-approved, give you a clear picture of what you can afford, so that you do not waste your time looking at homes that are out of your budget. Also, when writing the offer, you will need a pre-approval letter to show the seller you are able to buy the home. Any delay with an offer may cause the loss of the home.
Seeing homes
Seeing homes is the next step after getting pre-approved. It is important to go see homes because a picture or a video is not enough to experience the home fully. You’ll be using your senses, sight, smell, hearing, and touch, to get a feel for the home and to figure out if you can see yourself living there, and the things you like and dislike.
After, discuss with your agent about the home and if it would be a good fit to put an offer on. If it is not, now you know what you do not like, which will help in the next homes to come. If it is a good fit, then, let’s move on to the next steps.
The offer
Now that you have found a home you like, let’s make an offer, the offer will consist of, an offer to purchase form, contingencies, a pre-approval letter, an earnest money deposit.
In the offer to purchase form, what will be included are:
1. the name of the seller
2. the address of the home
3. the names of the buyers
4. the price you are offering.
5. the down payment amount.
6. the earnest money deposit amount
7. your preferred closing and move in dates.
8. a deadline to respond to the offer.
9. any requests from the seller for instance leave the dryer, washer.
10. complete lists of fees and closing costs
Contingencies are clauses which protect you in this offer if something were to go wrong. With them, you are allowed to back out of the deal without losing your earnest money deposit. There are five types. Home inspections, appraisal, financing, home sale, and title.
The pre-approval letter is also sent to the seller to showcase that we have financing available and we can actually buy the home.
We will talk about the earnest money deposit in the next section.
The earnest money deposit
The earnest money deposit is to show the seller that you are serious about buying their home. The seller is taking their home off the market to go with this offer, so they need proof that you are serious and if you were to back out for reasons not stated in the offer, they are able to keep the earnest money deposit.
The earnest money deposit is typically 1% to 3% of the purchasing price. Depositing more shows the seller that you are serious and may give a competitive edge over other buyers.
It is kept in an escrow account and if you were to back out due to contingencies, you would get your deposit back and if you went all the way to closing, the deposit would become part of your down payment.
Home inspections
You will hire a home inspector, who will inspect the house thoroughly. It is wise to do a home inspection because you will know what conditions the home really is in even if it looks new and spotless. After, you may decide to back out of the deal if you are not comfortable with the home due to the things that may have come up from the inspection or you can negotiate with the seller to come up with a new price or arrangement.
Final Walk through
After the home inspection, the lender will continue with the approval and finalize the loan. After that, you will have final walk though of the house to make sure the seller is handing over the house to you in good and promised condition.
Execute the closing documents
Right after the final walk-through, you will sign mountains of closing documents and the ownership of the home will be transferred to you.
Home delivery
Congratulations for your new home! The agent will hand over to you the keys and any documents that may come with the house.
Conclusion
What stage are you in? If you are in the buying stage and are looking to buy a home in the Eastern Massachusetts area or greater Boston area, I would like to be your agent. It would be my pleasure to help you find your home!
Please fill out the form below and I will reach back to you shortly!
