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By Stephen Sellner | Citizens Bank Staff
Are you tired of paying rent every month with nothing to show for it? Then it could be time to buy your first home!
Owning a home has a lot of perks. The most obvious is financial — a home is not just a place to live, but also an investment. Your home’s value can go up or down over time, so you could sell your home years later for a profit. You’ll also have the freedom to customize your home to your liking with no lease restrictions to hold you back.
Still, buying a home can be pretty intimidating for first-timers. What do you do first? How do you know the timing is right?
Here’s a general guide to help you navigate the home-buying process.
Are you comfortable with the cost of your rent each month? In other words, after you pay rent, do you have enough money to pay your regular bills and still have a little left over? If so, you should aim to maintain that comfort level with your mortgage payment. Don’t get so caught up in the financial investment of a home that you extend beyond your comfort zone with your future mortgage payments.
With that in mind, a good rule of thumb is to keep your monthly mortgage payment — with taxes and insurance included — and other monthly debt obligations below 43% of your gross monthly income (the money you make each month before taxes).
For example, if you and your spouse make a combined $10,000 per month before taxes, it’s best to keep monthly payments for your mortgage, auto loan, credit card, and other debt expenses below $4,300.
But don’t use that metric as an excuse to buy a home that pushes your lending limit. You might be better off having a lower monthly mortgage payment with money available for other bills and expenses. Sure, you want to buy a nice home, but you also need to afford life's other expenses.
Find a mortgage payment that fits comfortably into your budget so you can enjoy this new chapter of your life.
Yes, there are benefits to putting down 20% of a home’s purchase price up front. But 20% is a lofty expectation for lots of people.
If you can’t comfortably afford to put down 20%, then only put down the minimum amount required. That’s because you’ll probably have other expenses after buying your home, like new furniture and making repairs or improvements. You’ll want some savings available after you close.
Let’s say you’re interested in a $200,000 home and have $15,000 in savings. Your lender requires a down payment of at least 3%, or $6,000. In this situation, you’re better off putting down the minimum $6,000 and holding onto your remaining $9,000 for furnishings, savings, and upkeep.
Generally speaking, your credit score is one of the first factors lenders review when determining your mortgage eligibility. Make sure yours is in good shape before applying.
Credit requirements vary by lender and loan program, so research those details when shopping for a mortgage. If your credit score is on the lower end, you may want to apply for a Federal Housing Administration (FHA) loan. Regardless, you should always work to improve your credit score before applying for a mortgage to get better terms.
Before applying for a mortgage, get prequalified for one. Prequalification is a simple credit inquiry so your lender can get a rough idea of the mortgage you could qualify for. You’ll tell the lender your household income, debt payments, how much you have saved, employment information, and your preferred mortgage type.
Some lenders may offer a pre-approval. That’ll involve a hard inquiry into your credit, plus you’ll provide documentation to verify your income, assets, and employment.
Most people get prequalified for a mortgage over the phone.
At the end, you’ll receive a letter from the lender stating that you have prequalified or been pre-approved for a mortgage up to a certain amount. Some real estate agents may require that letter before you can make an offer on a home.
The letter can be good for up to 90 days, which means you have to look for homes and make offers. If you need more than 90 days, you'll need to get prequalified again to get another letter.
Now the fun part — finding your dream home! Your real estate agent will bring you around to look and walk through homes that fall into your price range and other criteria.
When you find the home you want, make an offer! Depending on the situation, you can match the asking price, bid lower, or even offer more (if there are many bids on the home). The owners and their real estate agent will either accept, decline, or counter your bid.
A home is a major financial commitment. Therefore, it only makes sense to have someone inspect it before you buy to make sure no expensive repairs are needed. Hire a qualified, professional home inspector to evaluate the home for major structural or mechanical issues.
Most bids are contingent upon the findings of your home inspection.
Once the seller accepts your offer and the home passes your inspection, you’ll need to formally apply for your mortgage. Prequalification or pre-approval was the first step toward applying; this is the real deal.
The lender will process your completed application and send you initial disclosures to review and acknowledge. Then, they'll order an appraisal of the home to ensure that the purchase price doesn’t exceed the fair market value of the property. Finally, an underwriter will review your application before issuing their decision on your mortgage.
Congratulations! You’ve made it to the final step. Before closing, you’ll receive copies of any appraisals or home valuations, as well as your Closing Disclosure. The Closing Disclosure is a form that provides all final costs associated with your mortgage.
Then, you’ll bring any necessary money and documentation to the closing, which will take place at a date, time, and location convenient for all parties. Be sure to review all documents closely. Once you sign, you’ll officially own the home and property!
Buying a home is expensive, competitive, time consuming, and sometimes a bit crazy. But the financial and sentimental rewards make it all worth it. And remember that your loan officer and real estate agent can help you navigate the process to make sure you follow all the appropriate steps.
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