Buying a home is pretty much the most expensive purchase you'll ever make. Unless of course, you plan to keep that Cartier diamond in the glovebox of you Porsche. Buying a home is an arduous, treacherous, painfully detailed process that takes months and never seems to end. So here are 10 tips to help make the journey slightly less painful than child birth.
Step 1: Start Your Research Early
As soon as you can, start reading Web sites, newspapers, and magazines that have real estate listings to find your market. Make a note of particular homes you are interested in and see how long they stay on the market. Also, note any changes in asking prices. This will give you a sense of the housing trends in specific areas. Zillow, Redfin, even MLS.com all have features that let you save homes, make notes and otherwise create your haven of houses that tickle your fancy.
Step 2: Determine How Much House You Can Afford
Lenders generally recommend that people look for homes that cost no more than three to five times their annual household income if the home buyers plan to make a 20% down payment and have a moderate amount of other debt. Basic lending guidelines for a pre-approval are that the monthly P&I, Principal and Interest are 33% of your monthly gross income. The reality is that to approve the loan, they request that the PIITE, Principal, Interest, Insurance, Taxes and Expenses, are 33% of your monthly gross income.
Expenses are considered as any basic household utility expenses, plus credit card minimum payments, plus any outstanding loans. As you can see, what starts out as a simple process, can get very detailed, and very tricky to navigate.
The major trick is credit card debt. The lender will actually use the minimum payment due. So if you have $10,000 debt, and you're trying to pay $800, the lender will actually only consider the minimum payment of $160 towards your PIITE.
This is good, as now you get the loan. But now you have a mortgage, plus your credit cards, plus the increase when you buy new furniture, new appliances, a little decorating. You need to consider this will planning your monthly expenses.
You should make this determination based on your own financial situation. Use a payment estimator Affordability Calculator to see how much house you can, or more importantly, should afford.
To help you save for your down payment, try Discover Bank’s AutoSavers Plan, which makes it easy to put aside money each month.
Every home buyer has their own priorities when choosing a mortgage. Some are interested in keeping their initial monthly payments as low as possible. Others are interested in making sure that their monthly payments never fluctuate.
Step 3: Get Prequalified and Preapproved for credit for Your Mortgage
Before you start looking for a home, you will need to know how much you can actually spend. The best way to do that is to get prequalified for a mortgage. To get prequalified, you just need to provide some financial information to your mortgage banker, such as your income and the amount of savings and investments you have. Your lender will review this information and tell you how much we can lend you. This will tell you the price range of the homes you should be looking at. Later, you can get preapproved for credit, which involves providing your financial documents:
- W-2 statements (last 2 years)
- Last 2 months of paycheck stubs
- Last 3 months bank account statements
- Last 3 months of mortgage statements or copy of lease/rental agreements
Step 4: Find the Right Real Estate Agent
Real estate agents are important partners when you’re buying or selling a home. Real estate agents can provide you with helpful information on homes and neighborhoods that isn’t easily accessible to the public. Their knowledge of the home buying process, negotiating skills, and familiarity with the area you want to live in can be extremely valuable. And best of all, it doesn’t cost you anything to use an agent – they’re compensated from the commission paid by the seller of the house.
Step 5: Shop for Your Home and Make an Offer
Start touring homes in your price range. It might be helpful to take notes (using this helpful checklist) on all the homes you visit. You will see a lot of houses! It can be hard to remember everything about them, so you might want to take pictures or video to help you remember each home.
Make sure to check out the little details of each house. For example:
- Test the plumbing by running the shower to see how strong the water pressure is and how long it takes to get hot water
- Try the electrical system by turning switches on and off
- Open and close the windows and doors to see if they work properly
- It’s also important to evaluate the neighborhood and make a note of things such as:
- Are the other homes on the block well maintained?
- How much traffic does the street get?
- Is there enough street parking for your family and visitors?
- Is it conveniently located near places of interest to you: schools, shopping centers, restaurants, parks, and public transportation?
Step 6: Get a Home Inspection
Typically, purchase offers are contingent on a home inspection of the property to check for signs of structural damage or things that may need fixing. Your real estate agent usually will help you arrange to have this inspection conducted within a few days of your offer being accepted by the seller. This contingency protects you by giving you a chance to renegotiate your offer or withdraw it without penalty if the inspection reveals significant material damage.
Both you and the seller will receive a report on the home inspector’s findings. You can then decide if you want to ask the seller to fix anything on the property before closing the sale. Before the sale closes, you will have a walk-through of the house, which gives you the chance to confirm that any agreed-upon repairs have been made.
Step 7: Work with a Mortgage Banker to Select Your Loan
Lenders have a wide range of competitively priced loan programs and a reputation for exceptional customer service. You will have many questions when you are purchasing a home, and having one of our experienced, responsive mortgage bankers assist you can make the process much easier.
Every home buyer has their own priorities when choosing a mortgage. Some are interested in keeping their monthly payments as low as possible. Others are interested in making sure that their monthly payments never increase. And still others pick a loan based on the knowledge they will be moving again in just a few years.
Step 8: Have the Home Appraised
Lenders will arrange for an appraiser to provide an independent estimate of the value of the house you are buying. The appraiser is a member of a third party company and is not directly associated with the lender. The appraisal will let all the parties involved know that you are paying a fair price for the home.
Step 9: Coordinate the Paperwork
As you can imagine, there is a lot of paperwork involved in buying a house. Your lender will arrange for a title company to handle all of the paperwork and make sure that the seller is the rightful owner of the house you are buying.
Step 10: Close the Sale
At closing, you will sign all of the paperwork required to complete the purchase, including your loan documents. It typically takes a couple of days for your loan to be funded after the paperwork is returned to the lender. Once the check is delivered to the seller, you are ready to move into your new home!