Buying your first home can be an overwhelming process, but it really doesn’t have to be. Four years ago when I got my real estate license I started to notice that my client based were primarily home buyers. Most were completely naive to the home buying process and had not done any research. While I appreciated them hiring me to guide them, I also felt a heavy responsibility of educating them, and not just selling to them. Their innocence and hopefulness of my first time homebuyers clients really is what drives me and my passion in this business. Almost always when I sat down or got a call from a potential homebuyer the first thing they wanted to know was how to buy a house? What is my first step? Well, today I want to share this with you the steps that you need to take to buy your first home. I want to share this invaluable information with the public because whether I am your real estate agent or not, I believe everyone should know how to purchase a home, and what needs to be done before they start the process.
How to Buy A House
Step 1: Know Your Credit Score
First you need to know your credit score. This is important. Crucial even. Don’t even reach out to a Realtor without knowing this information. This makes you look ill prepared and like you don’t take the process seriously. There are several sites that give this information for free. Creditkarma.com shows your Transunion and Equifax scores. (Please keep in mind that your score varies by credit bureau. There are several models for credit scores so any score that you see on a free site should be used as a benchmark only) Also, lenders will use your middle score to determine credit worthiness. The magic number that you are looking for is 640. While some lenders will approve a loan with a 580 credit score, my professional opinion is that I don’t recommend pursuing a home purchase with that type of score, unless, and this is a strong unless, your score is 580 you have with minimal debt, and you’re ok with a higher interest rate. Get your score to 640 before you proceed. This will help you to get the best possible interest rate and ultimately lower your monthly mortgage payments.
Step 2: Gather all necessary documents.
Two years worth of W2’s and 1040s will be needed to prove your income. If for any reason you had to make any changes to your previous tax returns, a Schedule C will need to be provided as well. You’ll also need at least 60 days worth of bank statements to prove that you have funds available for down payments, closing costs and such. Depending on the lender you may need to provide a copy of your driver’s license and/ or government issued and a social security card to prove your identity. Banks don’t play any games when it comes to loaning out money. No stone will be left unturned when it comes to loans, money and identity. So if you owe taxes, don’t try to hide that, it will show up. If you’ve had a foreclosure before, loan officers will see that to. Be honest with all of your paperwork. If these documents are gathered beforehand and readily available once you start the home buying process then you will be ahead of the game.
Step 3: Save Your Money
While there are a plethora of programs available for first time home buyers, ultimately, your best bet is to save your own funds. Thankfully, gone are the days of a 20% down payment. If you choose an FHA loan then all you’ll be required to pay is 3.5% for a down payment and 3% for closing costs. So in total that’s 6%. Then there will be fees associated with appraisals and home inspections. Here in Texas a home inspection can cost you about $500. An appraisal is about the same. So add another $1000 to the 6% that you’ve saved. Now, if you’re one of the lucky ones who have a bit of a higher credit score. (i.e over 720) and a low debt to income ratio. I highly recommend that you go for a conventional loan. The difference in a conventional and an FHA loan is that you will put down a higher down payment. (Starting at 5%) however, your mortgage payment on the same home will be less because the PMI (Private Mortgage Insurance) that is required on all FHA loans will be reduced or completely eradicated, based on your down payment. ( PMI is only eradicated if your down payment is 20% or more) So what this means in simple terms is that you’ll pay less in a monthly mortgage payment if you go with a conventional loan.
Step 3.5 But I don’t have any money.
Get some. I wish there was a simpler answer, but truth be told nothing in this world is free. If you want to buy a home you need money. Even if you qualify for programs that pay for down payments and closing costs you still need some reserves available for other costs associated with the process. So here are a few options to help you to save money: Borrow from your 401k, get gift funds from a family member, sell your unwanted items, use your tax return, get a second job. If you’re fortunate enough to qualify for a program that pays closing costs and down payments, I would still recommend that you still have at least $5000-$7000 available to cover other expenses. You won’t use all of it but I’m all about preparing for the unknown so you need to make sure that you’re good to go should any issues arise.
Step 4: Determine how much home you can afford?
Be honest with yourself. How much is your rent? If you live in Texas and your rent is $1500 or over and you can pay that comfortably then you’re in a really good spot. Think about whether you have any wiggle room. What is your absolute top number as far as monthly payments are concerned? Know your range. Also, if you are a married couple with two incomes consider this, will both of your incomes be considered when determining the mortgage? If so, what happens if someone becomes unemployed, and or decides to be a stay at home parent. Seasons change in our lives and we must be prepared for the inevitable. Some of my most financially savvy buyer clients have chosen to only have one spouse on the loan and both on the deed for this purpose. Also, it’s wise to work it this way because it protects the credit of one spouse in the event of a financial issue. Keep in mind that a lender ultimately has the final say so in how much they’ll lend you. So if it’s way more than what you’re willing to pay you certainly have the right to not spend as much. If it’s way less, then you may have to wait to buy a house.
Step 5: Where do I want to live?
If you’re looking to buy in or near the city that you live in then narrow your search down to no more than 3 cities. Determine what commute times you’re willing to do and what you need to be near. For instance, if you want to make sure that you are near your job, then choose cities closest to your job. Perhaps you want to be near your church. Consider that as well. Of course you may change your mind but simply having an idea of where you are willing to stay helps you to stay focused. Also, whenever I speak with a client who’s more than 6 months out from purchasing I suggest that they start going to local open houses. This way they can start considering which neighborhoods, subdivisions and cities fit their needs. If you’re relocating, then there is still hope.. I have had potential clients reach out to me who lived in a different state who wanted to purchase a home in Dallas. They did so because of social media. By simply searching hashtags like #movingto….. or #relocatingto…. (ex. #Movingtodallas) you can find an agent that can help you to locate homes in your desired area. Ask them to set you up on their MLS system so that you can see available inventory. I can also refer you to an agent in your desired area by contacting me.
Step 6: Choose an Agent:
The right agent is so important to the process. You don’t want one that’s going to rush you or be forceful. How many homes they have sold should not be a primary concern for the client either. What you really want to get a feel for is their attitude and if the are client focused or numbers driven. A quick look at their social media page should tell that story. If you see an agent that you may be interested in working with reach out to them to interview. Ask them questions about the home buying process Like “How many homes does your average client view before submitting an offer?” What is the median price range for said subdivision.? You want to get a gauge for their knowledge of the market as well as their attitude regarding closing on a home. Remember this is their livelihood, they are in it for an income, but the primary concern should be to make guide, not force, their client, down the right path. Should you need help finding an agent, I am happy to refer you to some. Just contact me and I’ll give you a few recommendations.