How to Buy a House for Beginners
Unless you have a couple hundred thousand dollars or more to spend, you can’t just plunk down cash and buy a home. Instead, you need to go through a process that takes you from getting loan approval to sitting down at the closing table. This can be overwhelming, but if you break the procedure down into steps and take your time, you can be a homeowner one day, living the American dream.
Buying a house is not only an emotional experience, but a financial commitment as well. Understanding the process and costs involved will make the experience easier for first time buyers.
Determine Whether You Are Ready to Buy
In your market, a mortgage payment might be about the same or maybe even less than your rent payment. Tack onto the mortgage additional funds for taxes, insurance and in certain instances, homeowner's association dues. A quick calculation is that the total cost should be about 1 percent of the purchase price.
Save for a Down Payment
You’ll need to have some money saved for a down payment. Note that some lenders require 20 percent of the purchase price of the home as a down payment. But if you put down the 20 percent, you can save money by not having to pay for private mortgage insurance, an expense required by lenders if you put down less than 20 percent of the home’s price. But in a high-priced market like San Francisco, you might only be able to put down 10 percent, for example, so you’ll need to work with a lender who will research alternative loans that require a lesser down payment.
Stay at Least 5 Years
You should plan to live in or keep the house for at least five years in order to gain financial appreciation or equity. If you sell before that, you are likely to either break even or lose money when you figure closing costs and interest payments. Note that homes don’t always appreciate, but they often do – especially in San Francisco, where homes appreciate faster than the national average.
Prepare for Repairs and Maintenance
You’ll need to either learn how to be a handyman or have money saved for house maintenance and repairs. You probably didn't need to concern yourself with this as a renter. Plan to spend around 1 percent of your home’s purchase price for yearly maintenance. Also consider the monthly expenses of a home such as lawn maintenance, higher utility bills, and if you have a pool, the additional cost of keeping it pristine.
Have Good Credit and Little Debt
You’ll need a credit score of at least 580 and debt that is not more than 43 percent of your income. Both your credit score and debt-to-income ratio demonstrate to lenders that you are responsible enough to make mortgage payments without defaulting on the loan. Lenders don’t want to foreclose, but they will if they have to.
Get Preapproved for a Mortgage Loan
To get sellers to take you seriously, you should be preapproved for a mortgage. You need to prove to the sellers that you have the funds to pay for the home and a lender is willing to supply a mortgage. Getting preapproved means showing lenders proof of income, employment, assets and debt.
Use a Real Estate Agent
Although you can buy a house without a real estate agent, if you’re a beginner, an agent can help walk you through the home buying process. Plus, as a buyer, you have nothing to lose by using an agent, as buyers don’t pay for an agent. The seller does.
Look Online and Visit Homes
Set some parameters for your home search, such as price range, size of home and desired neighborhood. Then visit your favorite homes. Looking only online won’t give you a true picture of the house and neighborhood. You should physically walk through the home before you buy.
Make an Offer
Once you’ve found a home you want, make an offer and include an earnest money deposit. A higher deposit makes your offer more attractive. Consider the temperature of the market and if it's moving quickly, don't wait around before making that offer. If you wait, especially in a hot market like San Francisco, you could lose the home to someone else. Your real estate agent can guide you on how much to offer.
After you make an offer, the seller can turn it down, counteroffer or accept your offer. If the seller turns you down, move to the next house. If the seller counters, consider accepting or countering back. If the seller accepts your offer, you can think about celebrating.
Massaging the Deal
Once your offer is accepted by all parties, more work is involved. Contingencies are the steps taken before you can close and include getting final approval on your loan, agreeing to accept or further negotiate the results of a home inspection and the ability to get a clear title to the home, which is why you have title insurance.
Get the Keys to Your New Home
Your agent will walk you through the final processes before closing. You will need to pay closing costs, which include attorney fees, title fees, prorated property taxes and your down payment. This is typically between 2 and 5 percent of the home’s price. and those costs are given to you before sitting at the closing table. Now you can celebrate.
By Laura Agadoni