House Market April 6, 2022

Steps To Buying A House

Check Your Credit Score

Before you begin the process of buying a house, you want to make sure that you’re actually in a position to take on this significant milestone. That’s why the first step is to check your credit score and review your finances.

What Lenders Look For

Obtaining a loan is not always an easy feat. All mortgage lenders will look at your credit score and financial history before agreeing to provide you with a loan, so it can be helpful to be one step ahead of them.

Credit Score To Buy A House

It’s also important to understand what credit score is required to buy a house.

To obtain a conventional loan, you’ll need a median FICO® Score of 620 or higher. However, if you qualify for an FHA loan, requires a minimum middle credit score of 580. The VA doesn’t require a specific qualifying credit score, but lenders can set their own policies. We require a median credit score of at least 620.

Your credit and financial history will dictate whether you’re able to obtain a mortgage and at what interest rate. Buyers with higher credit scores tend to secure better interest rates, so you must get a sense of where you stand before you get deeper into the process.

Save For A Down Payment And Closing Costs

Although a mortgage spreads out the cost of buying a house over many years, you’ll still need to provide some money upfront to pay for your down payment and closing costs.

The Down Payment

Unless you’re getting a VA loan or a USDA loan,  neither of which require a down payment – you’ll need to make sure you have funds saved for a down payment. The minimum on a conventional loan, like a 30-year fixed loan, is 3%. An FHA loan is available with a down payment of 3.5%.

Keep in mind that the larger the down payment, the more equity you’ll have, and the lower your monthly mortgage payments will be. By paying more upfront, you’ll save on interest and be less likely to have to pay private mortgage insurance. Experts often recommend putting down 20% if you’re considering a larger down payment, as that’s the minimum you can put down while avoiding mortgage insurance.

Closing Costs

Along with your down payment, you’ll have to save money for closing costs. (fees associated with processing and securing your loan). Although the amount you’ll need will vary depending on your loan amount and the tax requirements in your area, you can generally expect closing costs to be 3% – 6% of the purchase price.

Determine How Much Home You Can Afford

Before you speak with a mortgage lender, it’s useful to calculate how much house you can afford on your own. A lender will tell you how much money you qualify for, but you want to make sure you won’t be overextending yourself by determining your budget, and what you realistically can afford to spend on mortgage payments each month.

When determining how much house you can afford, you should use the 28/36 rule of thumb, which stipulates that you should not spend more than 28% of your gross monthly income (your salary before taxes) on housing expenses and 36% on your total monthly debt payments.

Your housing expenses are your monthly mortgage payment, which includes:

Principal: The money that you borrowed to purchase your home.

Interest: The fee that the lender charges you to borrow the funds.

Taxes: The property taxes that you’re required to pay the government based on the value of your home.

Insurance: The homeowners insurance that protects your home against any damages.

Association dues: The fee you must pay if your home is part of a homeowners association. Note that if your home is not part of a homeowners association, you will not be required to pay this fee.

Choose A Lender

Many buyers don’t realize that they can and should shop around for lenders before choosing one. There can be variations in the interest rates, terms and closing costs that each lender offers, which is why it’s essential to do your homework.

The Loan Estimate

When comparing different lenders, you should ask each one to provide you with a Loan Estimate, which – as discussed above – will spell out the loan terms, projected payments and closing costs for your potential mortgage. This form is provided in a universal format, meaning that it will allow you to clearly see the differences between what each lender is willing to offer you.

f the way, make you feel comfortable asking questions and respond with a sense of urgency.

It’s also important to be aware that, in addition to the credit score requirements mentioned above, most lenders have their own guidelines you’ll likely need to fulfill to be approved for a mortgage with them. Keep in mind, these are general guidelines and may vary depending on your lender and what type of loan you get:

Good credit history

Proof of reliable source of income

Debt-to-income ratio below 50%

If you meet only the minimum requirements, you may want to work on improving your credit score and reducing your debt before applying for a mortgage, as this can get you access to better rates and/or increase your budget flexibility.

Get Preapproved For A Loan

Contrary to popular belief, getting prequalified for a loan is not a guarantee that you’ll actually be able to obtain a loan. When you get prequalified, lenders will only estimate your finances based on the information you provide.

On the other hand, getting preapproved for a loan requires a thorough investigation of your finances that includes the verification of your income, assets and credit rating. When you get preapproved for a loan, you are guaranteed that you’ll be able to obtain the loan, assuming your finances don’t change.

A preapproval will tell you exactly how much the bank is willing to lend you and specify the costs of obtaining the loan. Furthermore, getting preapproved will demonstrate to sellers that you’re a serious buyer who is ready and able to buy their home.

What we’ve specified above is the traditional distinction between a prequalification and preapproval. However, it’s important to note that lenders sometimes use the terms interchangeably, usually inadvertently. However, this can lead to some confusion for borrowers. At Rocket Mortgage®, there are two different levels of approval offered:

A Prequalified Approval, which provides an estimate of what you can afford based on your credit report, as well as the information you provide us about your income and assets.

A Verified Approval,1 which goes a step further to verify your income and assets. By allowing us to verify your information, you are provided with the assurance that you’ll be able to obtain a loan.

Start House Hunting

You won’t have access to your local Multiple Listing Services, which provides your agent with a full list of all homes currently on the market. One of the many reasons why isa good idea to hire a real estate agent. They will also guide you thought the different home sale and inspection contingencies.

After you’ve settled on your priorities and have clearly communicated them to your real estate agent, it’s time to start house hunting. As you browse the listings your real estate agent sends you, keep your priorities at the back of your mind. Remember, it is highly unlikely that any listing will perfectly match your dream home, so try not to be too picky until you see the listings in person.

You’ll find that the more houses you see, the more they all start to blend together. So, try to be organized and make sure that you talk through the things you like and dislike about each property with your agent.

Earnest Money Deposit

Along with your offer, you’ll also be required to provide an earnest money deposit, also known as an escrow deposit. This deposit is money that you provide upfront to show the seller that you’re serious about the offer, so the seller feels comfortable taking the home off the market.

The amount of money included in the deposit can be negotiable; however, an earnest money deposit is typically 3% of the purchase price. The money is held in an escrow account and applied to your down payment and closing costs at closing.

If you change your mind and decide that you won’t buy the home for any reason that is not specified in a contingency, the seller gets to keep your earnest money deposit. That’s why it’s vital that you consider the conditions in which you may need to pull out of the contract before you make an offer. Including a contingency in your offer can be the difference between keeping and losing your earnest money.

Make Sure The Home Is Appraised

If you’re getting a mortgage to purchase your home, your lender will require the home to be appraised before they agree to release your funds. A home appraisal provides an estimate of how much a home is actually worth based on comparable sales in the area, market trends, public records and a comprehensive inspection of the property. So, when you get the home appraised, keep in mind that the lender will only provide funds to cover the appraised value of the house. If the appraisal comes in below the purchasing price, you’ll have to either renegotiate the price or come up with the difference

During closing, you have two major responsibilities:

Signing legal documents: This includes the Closing Disclosure, promissory note, deed of trust and certificate of occupancy.

Paying closing costs: This may include fees for your mortgage application, appraisal, survey, title search and funds to establish an escrow account. An escrow account is used to pay for property taxes and insurance premiums.