The process of buying a home is an exciting yet stressful experience, especially if you’re buying a home for the first time. It is a complex and massive investment that you cannot afford to get wrong. Preparation is key.
Before you even begin the process of looking at different homes, there’s a lot of prep work that you must do to ensure you get the house that you want at a price that you can comfortably afford.
How To Prepare For Your Home Purchase
Step 1: Improve Your Credit Score
Your credit score is the key to your financial life. Consequently, you must first of all do everything you can to improve your credit score. Your credit score is pretty much the most important aspect of your financial life. It determines everything about your financial life.
Your financial score determines whether you will get credit, what type of loans you will qualify for and the interest rate you will pay. Essentially, the higher your credit score, the more competitive interest rates and terms you’ll be offered on homes, vehicles and credit cards.
This means that you’ll get more competitive interest rates. Conversely, the lower your credit score, the more credit risk you will represent, and the higher the rate of interest you’ll pay, which means the more expensive it will be for you to get a loan. In the case of a mortgage you could be looking at a difference of hundreds of thousands over the term of the loan. This is why you need to prioritize improving your credit score.
Step 2: Save For Downpayment, Closing Costs
Saving for a mortgage deposit is a really smart thing to do. This will not guarantee your loan approval, but it certainly helps.
A downpayment is typically 10% to 25% of the purchase price, and it means you’ll have more equity in the home which will help you qualify for interest rates, and ultimately lower monthly payments. You’ll become a more attractive buyer because you present a better credit risk for your lender. This can translate to savings of thousands or even tens of thousands over the loan term.
It may take years for you to come up with the right amount, but saving up is absolutely worth the effort you put in.
Step 3: Get preapproved.
Once you have made the decision to buy a house, you need to determine how much you can reasonably afford to borrow in order to buy a home.
Although a mortgage affordability calculator will provide a general idea of what your payments are likely to be, you should get preapproved in order to get a better idea of the price ranges of homes to view. This is because getting preapproved provides an idea of what loan amount and purchase price you can afford. It also strengthens your offer to the seller and their agents.
Step 4: Determine which is the best loan for your circumstances
When shopping for a home mortgage loan, the internet is the best place to start. Start by doing a broad online search in the area you’re interested in to get a sense of the market.
You also need to keep an eye on mortgage fees. Sometimes you can get a great deal if you’re willing to pay additional fees. If you’re a first time buyer, look into first-time buyer programs and FHA loans.
Next, get in touch with banks, credit unions and other lenders in your area. Here’s what you need to find out:
- A list of current interest rates for available mortage loans.
- Are the rates being quoted the lowest for the day or week?
- Are the rates given for various products fixed or adjustable?
- What fees does the lender typically charge for each loan product?
- What is each loan’s APR?
Step 5: Find the right estate agent
After you have been preapproved and you know exactly what price range you qualify for, you can start working with estate agents in the area you’re interested in living.
You need to find a solid estate agent because they are solid partners when you’re buying a home. A good estate agent can offer you with meaningful information on homes and neighborhoods that you cannot easily obtain. Their understanding of the home buying process, negotiation skills, and local knowledge can be extremely valuable. Furthermore, you won’t be paying anything for their services – they’re paid from the commission paid by the seller of the house.
Once you have found a home you like, you can work with the estate agent to draft an offer and fill out a purchase agreement. The seller may respond with a counter offer and you may go back and forth until you reach an agreement on price and terms.
Once you have reached an agreement, escrow will be established. These are typically 30 days, but there are also 45 and 60-day escrows.
Make sure that you understand all of the details of your loan program including the rate you want, closing fees, etc. before you move forward with it.
Step 6: Work with a mortgage banker to select your loan
You’ll discover a variety of competitively priced loan facilities. You will typically have various questions when you’re buying a house, and you’ll need an experienced, responsive mortgage bankers to assist you and make the entire process easier. They can also help you accomplish different goals such as keeping your monthly payments low or making sure that your monthly payments never increase.
Step 7: Lock in your mortgage rate
If you are happy with the mortgage rate, communicate this to your lender. They will send you a lock agreement to solidify the terms of the loan as well as the rate. After you approve the agreement, your mortgage broker will collect a lock deposit fee to lock in your rate. This will be credited to your closing fees at the conclusion of the transaction.
After the lender has received the signed lock agreement and lock deposit, the lender will send you some formal documents including the good faith estimate and truth-in-lending disclosure to review and sign. These documents speciy the terms of the loan.
Step 8: Home inspection and appraisal
Once you have established escrow, it is highly recommended that you arrange for the house to be inspected by a professional who will perform a thorough inspection of the property to identify red flags such as structural damages, defective applicances, and other items that are in need of repairs. You need to ensure that any major issues are addressed before the close of escrow date.
This contingency protects you by providing you a chance to renegotiate your offer or withdraw it without penalty if the inspection reveals significant material damage.
Step 9: Appraisal appointment
Lenders will arrange for an appraiser to provide an independent estimate of the value of the house you are buying.
The lender will arrange an appraisal appointment with the seller’s agent to provide an independent estimate of the value of the home as your loan is being reviewed and processed.
The appraiser is from a third party company and is not directly associated with the lender. This is a requirement to confirm that the home is worth the amount you’re paying for it.
Step 10: Approval, signing and closing
When the lender has everything required for completion, your account manager will submit your complete file to the underwriting department for approval. You will be required to sign all of the paperwork required to complete the purchase, including your loan documents.
Once approved, loan documents will be prepared for you to sign at the escrow office. Once the lender has received and reviewed the signed local documents and everything is complete, you your home loan should be funded 3 days upon signing.