Whether you’re dreaming of a white picket fence with 2.5 kids and a golden retriever or opting for vertical living in a high-rise condo, home ownership is one of the big milestones of adulthood. With a little prep work, owning a home can be a reality.
What do you need to buy a house today? First, you might want to do some research on your finances to ensure you are able to cover the costs of owning a home. If you’ve determined you’re ready to buy a home, here are some ideas to get you started.
Using a Real Estate Agent
According to the National Association of Realtors , nearly 87% of homebuyers in 2018 used a
REALTOR® or a real estate agent to purchase their home. A REALTOR® is a real estate agent and both have access to the multiple listing service (MLS) , which is a comprehensive list of homes for sale by a real estate agent or broker in your desired location. Real estate agents could help you build your wishlist and assist in hunting down the best homes to fit your needs.
Using a real estate agent might help relieve some of the stress that comes with buying a home. Agents often employ a questionnaire or checklist of what you’re looking for, and they could send you links to your potential dream home so you don’t have to scour the internet yourself.
According to 2,000 people polled by Homes.com, throughout the home buying process, 44% of first-time homebuyers felt stressed. It’s a big decision, so do your research and be honest about setting realistic expectations.
A Sizable Down Payment
A down payment generally consists of the earnest money deposit you put toward the purchase of your house at contract and any additional funds required to complete the total down payment amount required for the loan program you have chosen.
This is cash saved prior to purchasing a house and is generally applied as a credit to lower the amount you have to borrow. Down payment + loan amount = purchase price. Down payments can also consist of gifts , grants, and other funds, but some loan programs require a minimum amount of the down payment to come from the borrower’s own funds.
When it comes to down payments, the more you can put down, the more likely it is that you could get a lower interest rate . The median down payment is 13% , but in most cases, you’ll need a 20% down payment to avoid private mortgage insurance (PMI). Even so, 60% of first-time homebuyers put 6% down—that’s $12,000 on a $200,000 home.
SoFi offers Jumbo mortgage options with as little as 10% down and no PMI.
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Don’t Forget Closing Costs
Closing costs cover a variety of expenses related to the home-buying process. This could include things like property valuation, property taxes, homeowners insurance, title search, or title insurance. Generally the seller pays the real estate commission for both the listing and buyers agents. The seller may also pay for some or all of the buyer’s eligible closing costs. This is spelled out in the purchase contract. The lender may also give a credit toward closing costs.
Typically, closing costs total between 2% and 5% of the purchase price. That’s in addition to the down payment. Consider your negotiation skills and work with your real estate agent to see if you can negotiate a seller credit to pay some or all of your closing costs. You might also look at your budget to determine what you can afford and consider having a solid investment plan to buy a house.
Good Credit Score
Your credit score is one of the primary factors lenders will consider when reviewing your mortgage application, so being aware of your current score might go a long way in helping you understand what loan programs you may be eligible for and, in some cases, how much mortgage you are eligible for. The government offers a free annual credit report for consumers to review their credit history, but this report does not give a credit score. You can check for this service at many sites, including one of the three major credit bureaus .
Proof of Income
Even if you have a stellar credit score, for the majority of loan programs, you still have to prove your income to the lender prior to loan approval. This is the lender’s way of verifying that you have the means to pay the mortgage back.
When you meet with a mortgage lender, you typically need to bring things like a W-2, recent pay stubs, and your most recent federal tax return documents for the lender to verify your income.
In some cases, an existing relationship with the lender, such as your primary bank, may also help you show loan worthiness. Depending on their policy, they may offer to pull up your account information and review your banking history and activity.
Your debt-to-income ratio, or DTI, is also used to determine your mortgage amount and can be a factor in other things such as the type of loan program. The ratio is calculated by adding up monthly debt payments and dividing it by gross monthly income , which is your income before any deductions, like a 401(k) and health insurance. For self-employed borrowers, depending upon the business structure, net income may be utilized for this calculation.
Historically, mortgage lenders would typically look at two components when determining your DTI—a back-end ratio and a front-end ratio. A front-end ratio looks at how much gross monthly income goes toward the mortgage payment, property taxes, homeowners insurance, HOA dues, and other assessments.
A back-end ratio, which is primarily used today, includes the portion of your income that is needed to cover ongoing monthly debt obligations, like student loan payments, credit card debt, and car loans, plus your monthly mortgage payment as noted above.
Find a Mortgage That’s Right for You
As you go through the home buying process, you might want to shop around to find the right mortgage for your personal situation.
SoFi offers mortgage loans with a variety of options, and you can begin the process online. Get pre-qualified in two minutes. There are no hidden fees, and, once approved, funds are usually available in about 30 days.
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