Buying a home is a huge deal. It’s quite likely to be the biggest purchase of your life. While it’s true that homeownership is a great long-term financial move, you need to know what you’re getting yourself into. So with that in mind, let’s take a look at several strategies to help find the right home for you.
Start With Why:
Owning your home is a life-changing event, and being intentional about the process is critical to achieving your desired outcome.
The process starts with you, and an important question is - why is this on your radar in the first place? It shouldn’t be because your married friends are becoming homeowners, or because it’s “the financially mature adult thing to do.”
You shouldn’t even be looking to buy a home because market conditions are favorable, interest rates are low and home prices are trending down in your area.
You should become a homeowner because you WANT to be a homeowner. You have to want to take on all the responsibilities of homeownership, and you must be mentally ready to settle down in a single place for at least a few years.
The benefits of homeownership range from having the autonomy to create the space of your dreams, to building a nest egg of value by paying $$ toward your mortgage each month.
Let's Talk About Credit Scores:
While purchasing a cash home is a simple process, most folks do not have hundreds of thousands of dollars set aside to do so. For the vast majority of us, that means we're seeking a mortgage.
Mortgages are often federally insured and regulated, meaning there are strict requirements for potential homebuyers to fit within. The bottom line is that you'll be proving your ability to repay your loan. To do so, you need to have a good credit rating, a stable income stream, and several other requirements.
Out of all of those requirements, your credit score is one of the most important factors that lenders will consider, AND, in our opinion, it's the easiest to improve.
Download CreditKarma on your phone for an instant deep dive into your credit. It's free, it doesn't impact your credit score, and it monitors your credit daily with recommendations on how to improve your score. This is the single best thing to do immediately to begin tweaking your credit score in a positive direction.
In the USA, you’re entitled to get a free copy of your credit each year from the 3 major credit reporting bureaus (Experian, TransUnion, and Equifax). CreditKarma gives you immediate access to full reports for TransUnion and Equifax, but you can also get a free copy of your Experian report at annualcreditreport.com.
Although several websites offer “free” credit reports, annualcreditreport.com is the only website authorized by the Federal Trade Commission to provide free credit reports.
As you go through your credit report, analyze it carefully and see if you can spot any mistakes. If you do, you’ll have the option to dispute those mistakes, which would improve your overall score.
At the same time, if you have a late payment or two, it’s possible to get them removed. Call the company that registered them, and ask them to remove those late payments.
If you only have one or two late payments, there probably won’t be any pushback, and the company will most likely remove them. But if you habitually make late payments, they likely won’t.
All mortgages have a minimum credit score needed to qualify, and the higher your score, the better your terms will be.
For reference, according to TheLendersNetwork.com, the typical credit scores by mortgage type are:
FHA Loan - 580+
VA Loan - 620+
USDA Loan - 640+
FHA 203K Loan - 620+
Conventional Loan - 620+
(Of course, these numbers could change depending on your area. Make sure to consult a trusted mortgage broker or mortgage agent to confirm the credit scores you need to have to qualify.)
Now, Let's Talk About Debt:
Beyond your credit score, mortgage lenders use a metric called the Debt-to-income (DTI) ratio. This metric measures your ability to manage your monthly payments and repay your debts.
As a general rule, lenders prefer a DTI lower than 36%, with no more of that amount going towards housing expenses.
While the maximum DTI varies from lender to lender, the lower it is, the better the chance that you’ll get qualified for a mortgage.
So to improve your chances of getting your mortgage approved, there's a fine line between paying off as much of your current debt as possible while saving enough $$ for your down payment.
Start by paying off your loans with the highest interest rate (typically your credit cards). Then use a debt repayment strategy, such as the snowball method to pay off your debts rapidly.
Next, it's advisable to start building an emergency fund that’s large enough to support you and your family for at least 3-6 months.
Next Up: Down Payments
Mortgage programs can range drastically, with your financial picture determining the best route forward.
If you're a veteran, you may have a VA loan benefit that allows you to purchase a home with 0% down, while also avoiding a fee called "Private Mortgage Insurance" (PMI).
By putting at least 20% down, you’ll avoid paying for private mortgage insurance, and your monthly payment will be lower than putting a smaller amount down.
Of course, it could very much be the case that a 20% downpayment is out of your reach. In that case, your real estate agent could help you find a first-time homebuyer program. Many of these offer single-digit down payments, like FHA loans.
What's Next? Loan Pre-approvals:
The next thing to do is to get a mortgage pre-approval.
Not only does pre-approval give you peace of mind as you tour properties, but when you make offers, it shows that you’re a serious buyer, and gives you a leg-up when making offers.
To get pre-approved, the financial institution will need to verify your financial information (proof of income, taxes, etc.) and submit your loan for preliminary underwriting to ensure everything checks out.
How to Find the Right Real Estate Agent:
The right real estate professional will be dedicated to you and your home-buying journey from start to finish. You generally do not pay real estate professionals for their services, as the seller and seller's brokers will negotiate compensation when listing their homes for sale, and the seller's broker will offer "cooperating compensation" to a broker representing a buyer.
This agent will also help you avoid common pitfalls that new home buyers may stumble upon, providing advice and strategies every step of the way. To find a good fit, consider asking your Real Estate Agentr the following questions:
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How many years of experience do you have, and in those years, how many clients have you successfully represented?
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What is your plan if you're on vacation or out of town? Do you have a team, or are you working solo?
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Do you work as an Agent with fiduciary responsibilities to represent me and my best interests? Or do you work as a Transaction Broker, limiting those responsibilities to represent my best interests? (Most brokers in New Mexico operate as Transaction Brokers with no obligation to a buyer's best interests). The Lovely Home Company operates with the Agency unless requested otherwise by our clients.
Time to Search for a Home!
This part of the process is the most fun and can be incredibly highly intense.
Strategizing with your real estate professional to determine areas of interest, ideal price points, home features, and what you want your life to look like will hone the areas and homes of interest, and you can be set up on a home search that reflects exactly what you're after.
Once your agent has a good idea of your price range and choice of neighborhoods, they will then use all the property search tools at their disposal (MLS, list of contacts, pocket listings, etc.) to find several homes that meet your requirements.
Making an Offer on Your Home:
Once you find the right home, you need to work alongside your agent to make the most competitive offer possible.
A personalized letter can help you stand out from the competition. For every offer we write, we submit a cover letter talking up the strengths of our offer, some personality notes to positively frame our clients in the best light possible, and notes about how we operate as a brokerage.
Your agent can also help you put together a competitive offer based on comparable properties in the area.
Of course, you also have to make sure you stick to your price range. Don’t make an impulsive offer higher just to beat the competition. Your goal is to find a great home that creates the life you want.
The offer outlines the timeline, terms, and protections in the contract to ensure you can do inspections, validate the value of the home with an appraisal, and ensure you buy the home free and clear of any title issues, boundary issues, etc.
The Path to Closing:
Once your offer is accepted by the home seller, you’ll start to go through the closing process. To help the entire process go smoothly, you need to know what to expect when closing on a house.
The closing process can take anywhere from 30 to 45 days.
Your offer should include the contingencies we discussed above, including the inspection process, an appraisal, a title report, a homeowner's insurance quote, a property survey, and HOA document review periods.
If you make a big purchase, take out a line of credit or loan, or even close accounts, you could end up delaying or killing your loan altogether, so no impulsive car buying, don't quit your job - just live your normal life with no surprises.
So as the date of the closing draws near, stay put financially.
You Made It!
Homeownership is always an exciting prospect, especially as you get closer and closer to making it happen.
But for your first home purchase to be successful, you have to make sure you understand what it entails, what to be wary of, and what you can afford.
This guide is an overview, but not a holistic representation of every step of the way. We're here to help and we're in your corner.
