Are You New To The Home Buying Process?
Are you in the market to start the home buying process, but you really don’t know where to begin? Trust us when we say that you’re not alone in that boat, there are plenty of other consumers just like you that are trying to figure out the home buying process. We’ve said it before and we’ll say it again, when it comes to milestones like this, the worst thing you could do is rush into it; in situations like this, it’s best to take your time and do your research. Buying a home is a 15-to-30-year commitment and if you rush the process you could end up hurting your finances, credit, and end goal.
By no means are we trying to make the home buying process seem scarier than what it is, in fact it’s a very happy milestone that everyone should aspire to reach one day, but we are trying to prepare you for the reality of it all. The last thing we’d want you to have to deal with is the stress that comes along with being scammed or stuck with a property that wasn’t what it seemed. This isn’t a process that can be done overnight, on the contrary you’re going to need to do your research, arm yourself with a great deal of patience, and brace for the unexpected. With how explosive the Texas housing market is at the moment, it’s best to be prepared for plans to change and to possibly have multiple options lined up, so don’t get discouraged if things don’t work out right away.
So, you might be wondering, “what are some things I should be aware of while I’m in the market to buy a home?” For one, you have to sit yourself down and assess your finances, credit, and how much house you can actually afford; it might be tempting to just dive straight into shopping around for a home, but you’ll be setting yourself up for heartbreak if you do so. You’ll also want to figure out how much debt you’re currently carrying, as well if there are any resources available to help you out. In addition, if you want to seller’s and agents to view you as a serious buyer, you’ll want to narrow down your financing options, as well as having those pre-approval letters; trust us when we say that being prepared will make a world of a difference and may even help you land that dream house.
- Familiarize Yourself With Your Credit
Your credit will help determine what kind of interest rates and loan terms you’ll be dealing with throughout the course of your loan, so it’s better to at least know where you currently stand. If you have a poor credit score, you’re more than likely going to be stuck with higher interest rates, which could cost you tens-to-hundreds of thousands over the course of your mortgage loan; you also run the risk of getting denied for a home loan. According to NerdWallet, the second reason why individuals get rejected for a home loan is because their credit score is too low, so roughly 26% of applications get denied for having poor credit.
The better your credit score, the less of a risk you pose to lenders, the better your interest rates and loan terms will be, and overall that means more savings and peace of mind for you. If your credit score just isn’t where it should be, then take the time to look over your credit report, see what needs improvement, and even consider hiring professional help. The worst thing you could do is start the home buying process, while being completely unaware of your credit.
- Figure Out Your Debt to Income Ratio
The number one reason that individuals get rejected when applying for mortgage rates is because their debt-to-income ratio (DTI) is too high, but what is a DTI? Your debt-to-income ratio is your monthly debt amount divided by your gross monthly income; it lets lenders see if you have too much debt and not enough income. Approximately 32% of mortgage applications were denied because of high DTIs.
What’s considered a high-debt-to-income ratio and what can I do to bring mine down? Lenders consider an ideal DTI to be around 36% or lower, that means that out of your total gross monthly income only 36% or less is going toward paying off your debts. If your DTI is higher, then you’ll want to focus on making much more than just the minimum payments to bring that amount down; in the process you’ll not only improve your debt-to-income ratio, but you’ll potentially improve your credit score as well.
- Research First Time Home Buyer Assistance Programs
Believe it or not if you’re a first-time-home buyer there are plenty of government backed loans, down payment assistance grants, and closing cost resources that could help you save money when it comes time to closing on a house. Typically, grants don’t have to be paid back and there are even low-interest loans that can be used to cover costs. Another option includes FHA loans because they allow you to put a down payment as low as 3.5%, while USDA and VA loans allow you to use gifted funds for your down payment; in some cases you can even ask your seller to cover your closing costs.
- Research Neighborhoods and Areas
There is no one-size-fits-all home, it’s important that you take the time to research the area that you’ll be living in, as much as the property you’ll be purchasing. Every individual’s priorities are different when it comes time to look for a home, so ask yourself what’s important to you. Research factors like school proximity and ratings, commute times, crime rates, HOA fees, community life, etc. into consideration; even if you think it’s a small detail, keep in mind that this is the area you’ll be dealing with and calling home.
- Explore Mortgage/Financing Options
We can’t emphasize this enough, don’t rush the financing process, definitely take your time to find the lender that’s right for you. At the end of the day, you’re the one who’s going to be giving their hard-earned money to this lender, mortgage company, financial institute, etc. so make it count. Evaluate your priorities and ask yourself, do you want to commit to a 15-or-30-year loan; does my credit score meet the requirements my lender is looking for; what kind of loan is right for me; what financial incentives are being offered, if I decide to finance with this company?All of these are valid questions to ask potential lenders, so don’t just stay quiet, make sure you’re getting the most out of your mortgage company.
- Pre-Approval vs Pre-Qualification Letters
While some individuals use pre-approval and pre-qualification synonymously, the two differ in terms of seriousness. A prequalification letter only gives you an estimate of how much you’d be able to borrow and only a soft-inquiry is added onto your report; a pre-approval letter is the borrowing power you have at your disposal, that you can then make offers with. With a pre-approval, you’ll complete a mortgage application and lenders will fully verify the information you provided, as well as the entirety of your credit report. Just think about it this way, a pre-qualification letter is just an estimate and typically is acquired at the beginning of the home buying process, while a pre-approval letter is your finalized borrowing power that you can make offers with.
- Do I Need a Real Estate Agent?
We’ve said it before and we’ll say it again, the home buying process is not an easy or quick one, so we definitely recommend asking for professional help when you need it. It’s a realtor’s job to find the home that meets your needs, while also staying within your budget; also take into consideration that they make it a priority to know about different areas, so all the research doesn’t just fall on your shoulders. For most consumers, contracts and legal paperwork can get overwhelming, but a realtor can help you navigate and clarify everything that you’re having doubts about.
At the end of the day, it’s really your call whether you decide to work with a realtor or not, but if you’re a first-time-home buyer we strongly recommend teaming up with one. You don’t have to navigate through home inspections, seller’s disclosures, or even the negotiation process by yourself; remember it’s better to ask for professional help, then to end up in a confusing stressful situation later on.
- Make Sure to go to Those Open Houses
Are you familiar with the phrase, “things aren’t always what they seem?” Well, the same thing could be said about viewing a home online; sure the photos make it look like a dream, but what’s hiding underneath the surface? It’s important to make sure that the real estate photos actually match the property once you go check it out. Imagine not viewing a property, putting a good amount of money down, closing on it, and then finally getting to see it in person only to end up feeling like you got scammed.
Not only should you go to those open houses to make sure that you’re paying for something you’re going to be happy living in, but you can also take this as an opportunity to view the neighborhood, ask questions about the property, etc. It’s better to take some time out of your day to make sure that you’re making the right call; sure you might be losing some time and gas, but it’s better than being stuck with something you’re unhappy with.
- Pay For a Home Inspection
Going back to seeing below just the surface level, while you might tour a home and think everything is just perfect, it’s important to get an expert to review your home. Home inspectors make sure that electrical, plumbing, and ventilation systems meet the current safety codes. The last thing you’d want to invest into is a property that’s deemed unsafe to live in, right? Also, you can ask your home inspector to tag along on the day of the actual inspection, so that they can not only point out home features, improvements/suggestions, to major problems, and repairs that are going to be needed.
Imagine bypassing the inspection, to save some money, only to find out that your home’s foundation is sinking, or your roof needs to be replaced completely; you’ve gone from saving a couple hundred, to now having to spend thousands to repair something you could have caught early on. In other words, don’t bypass a home inspection, don’t take a realtor/seller’s word for it, hire an inspector; it’s better to be safe than sorry.
- Stick To Your Budget
Don’t bite off more than you can chew, as tempting as it might be. Remember, just because you’ve been approved for a certain amount doesn’t mean that you should buy a home that’ll use up the entire budget, or push past it even a bit because you could be stuck with a home you can’t afford. The last thing you ever want to deal with is missing payments and having to foreclose on a home you spent so much time even getting into in the first place. Take a long hard look at your debts, personal expenses, utilities, groceries, etc. and then see how much income you have left over to work with. Don’t dig yourself into a hole you won’t be able to get out of; be smart about this decision and buy a home that you can afford.