Like any big investment, purchasing a house can be pretty complicated. How do you figure out what type of home you can afford? What’s the difference between getting pre-qualified or pre-approved for a mortgage? Do you need a real estate agent? And what does escrow even mean? Basically, what is the process of buying a home?
The journey can seem especially mystifying if you’re a first-time buyer, since everything is likely to be new to you. Comparing 2018 to 2017, there was a 17% increase in the number of first-time homebuyers, according to Genworth’s First-Time Homebuyer Market Report .
And according to the 2018 report by the National Association of Realtors, over one-third of all house purchases were made by millennials. Younger generations seem to be especially confused when it comes to getting into the real estate market. While more than half of millennials say they’re ready to own a home, nearly half also say they don’t know where to start, according to a recent survey .
Being able to buy a home does require laying some groundwork, but it’s not rocket science. By educating yourself and planning in advance, you can put yourself in a good position to become a property owner. Here are the steps you can expect throughout the home-buying process:
Doing Your Homework
Before you get started in your home search, you may want to get a sense of the lay of the land. Consider the type of home you’d like to buy and what neighborhoods you’d want to live in. Then do some research to see what similar homes have sold for in the recent past. That should give you an idea of whether your resources align with your dream house, or whether you need to reevaluate.
It might also be smart to familiarize yourself with the home-buying process, how much of a down payment you’ll need to save, and what it will take to qualify for a home loan.
Lenders may have different factors they review when approving borrowers for a mortgage, but typically your credit score and debt-to-income (DTI) ratio will both come into play.
You can figure out your DTI ratio by dividing your monthly debt payments by your monthly gross income, and multiplying the result by 100 to get a percentage. Most lenders will also be looking to verify your income and at least two years’ worth of steady employment or consistent and ongoing income, such as trust or retirement income. Keep in mind that not all income sources are eligible to use for qualifying.
Most conventional mortgages also require a down payment of between 3% to 20% , or less if you are going with a government insured VA loan . With a conventional mortgage, you’re likely to pay private mortgage insurance if you put less than 20% down. Knowing this kind of information well in advance of actually looking for a home can help you get your finances in order and improve your chances of qualifying for a mortgage.
Getting Pre-Qualified for a Home Loan
Next on the home buying process timeline, you’ll need to figure out what kind of home you can afford. One way you can do this is by getting pre-qualified with a mortgage lender. This involves the lender reviewing the basics of your financial situation and providing an estimate of how much you may be able to borrow and at which rates.
The lender is likely to ask about your income, assets, and debt, and they may do a credit check—although typically not verified at this stage. Getting pre-qualified with several lenders can help you get a sense of what kind of home you can afford and allow you to compare monthly payments and interest rates.
Finding an Agent
It’s not required, but the vast majority of home buyers hire an agent to help them find a house and seal the deal. You can hire either a REALTOR® or a real estate agent to assist you in your search. Both are professionals licensed to help people buy real estate.
The main difference is that REALTOR® must belong to the National Association of Realtors , which requires them to stick to a code of ethics that includes honesty and putting a client’s interests before their own. Agents only get paid when you close on a home: Depending on local customs, the seller typically covers the commission for both the listing agent and the buyer’s agent.
If you are bidding on a home that is For Sale By Owner, check with the seller about covering this cost. A realtor or real estate agent will help you find property listings that fit your preferences, visit them to make sure they’re up to snuff. Once you choose an agent, they can help you write offers and counteroffers, attend inspections, help you negotiate, and work with you to deal with any obstacles that emerge.
When looking for an agent , you can ask people you know for recommendations, note the names on signs in your area, and read reviews online. It could be a good idea to reach out quite early in the process and to speak to multiple agents until you find one that feels right and may be considered an expert in the area you are wanting to buy.
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Getting Pre-Approved for a Mortgage
Once you’re ready to start seriously looking for a home, most people need to lock down funding. You can do this by getting pre-approved with a mortgage lender. Compared to pre-qualification, this is a more involved process. You’ll fill out a detailed application and allow the lender to do a hard credit check and verify your finances.
When you’re pre-approved for a mortgage, you will know exactly how much you can borrow and at what terms. That’s because the entire credit portion of the loan, which includes the borrower’s credit, income, and assets are verified at this stage.
Remember that you don’t have to take out the highest amount you qualify for if you find a more affordable home. In that scenario, you’d just ask your lender to adjust the pre-approval letter based on the actual bid you’re making on a home. Showing a seller the lender’s pre-approval letter (typically valid for 90 days) can help you rise above the pack if multiple offers are in play.
Shopping for a Home
Next, it’s time to start shopping for the house of your dreams. If you have an agent, you’ll probably sit down with him or her and outline the parameters of what you’re looking for.
Then, the agent will start bringing you properties that might fit the bill, and you’ll attend viewings and open houses.
But these days, there’s also a lot more you can do to jumpstart your home search on your own. Websites like Trulia, Redfin, and others can help you find out about properties as soon as they’re on the market.
If you’re moving forward without a realtor, you can consider exploring one of several platforms that have cropped up to help buyers who don’t have agents. These include Open Listings , Door , and Houzeo .
Making an Offer
Once you find the perfect home, you’re ready to make a formal purchase offer. This involves not only letting the seller know how much you’re willing to pay, but also providing evidence that you’ll be able to afford those costs and when you expect to close on the house. The offer also details what you expect the seller to do before closing.
At this stage, many buyers also provide “earnest money ,” a deposit that can be up to 10% of the negotiated price. The offer might also include contingencies, which are conditions that need to be met in order for you to proceed with the transaction. Some contingencies like home or roof inspection, are in most cases at the buyers discretion. Others, like a home valuation, can be tied to the loan approval.
Another contingency example is the condition that you’d need to sell your current home, if you already own one, in order to complete the purchase of the new one. Various kinds of home inspections are also among common contingencies .
Closing on the Home and Move In
Once you and the seller are on the same page about a price, the house goes into escrow . That involves a third party, namely an escrow officer, making sure that both of you meet the conditions you’ve agreed to.
Your real estate agent will help make sure any home inspection you ordered takes place. If there are unwelcome surprises, the agent might need to help you re-negotiate the selling price. Depending on the severity of the surprise—if a significant home repair is needed, for example—the lender might require a complete fix before escrow closes. Once that’s all set, and all income, assets and property conditions are signed off by the underwriter, you will be issued final loan approval.
Next, you’ll sign the needed paperwork to take out the mortgage and finalize the home purchase. It can take up to a few days for the purchase money wire to reach the seller, and for the county records to reflect the transfer of the sale. And then—the house is all yours! Move in and enjoy.
Applying for a Mortgage with SoFi
Regardless of where you are in the home buying process, applying for a mortgage with SoFi can potentially help get you to the next step of your journey. If you’re in the early stages, you can find out in just two minutes online whether you pre-qualify, and then view the terms and rates available. Getting pre-qualified is complimentary, and no commitment is required.
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