A traditional home loan is the most common type of financing in real estate. These loans usually have strict lending requirements, including credit score and income amounts. They also require a sizable down payment, usually 5-20%. Various federal programs exist to help you if you don’t quite meet the bank’s requirements for a conventional loan. FHA, USDA, and VA loans have less stringent credit requirements, and also allow for smaller down payments. The catch is that most of them charge annual funding fees and mortgage insurance premiums, which are added to your monthly payments. Traditional mortgages are generally ideal for home buyers with average or above-average credit scores.
The Buying Process
Before you start looking at homes to buy, talk to a few different mortgage lenders to determine what type of loans you qualify for. By supplying some basic financial information, you will receive an estimate for an interest rate along with some guidance on what different price points look like as a monthly payment. The lender should also include estimates on taxes and homeowner’s insurance to give you an idea of your entire monthly bill. Even if you qualify for a larger loan amount, always look at the monthly payment amount to decide whether or not you can afford it. Also compare at least a few different lenders to see which is offering the best interest rate at the time. Once you are pre-approved, you will receive a pre-approval letter, which is generally valid for 60-90 days. This is helpful to have when making an offer on a home, because it demonstrates to sellers that lenders are willing to work with you and the deal is less likely to fall through.
Select a Real Estate Agent
Once you have decided on your maximum budget, choose a real estate agent to help you with your home search. Your agent receives commission from the sale of the home, which is paid for by the seller, so as a buyer, there should be no fee charged. Ask friends and family for recommendations and read customer reviews online. A good real estate agent will help you prioritize your needs and wants in a home while providing insight into neighborhoods, home values, and more. He or she should also be responsive via both phone and email. If it takes your agent longer than a day to get back to you, consider finding someone else. A lot can change in 24 hours when it comes to real estate, and you could quickly lose out on your dream home because of an unresponsive agent.
Begin Your Home Search
These days, most people begin their home searches online through websites like Zillow, Trulia, and Realtor.com. Your real estate agent will also likely have an online portal where you can enter in your home preferences like budget, size, and location, so you can perform searches and receive updates when new homes hit the market. When you find a house you would like to look at, try and do a drive-by before setting up an appointment. This saves everyone time (including yourself) if you can tell from the neighborhood or street that the property won’t work for you. If you drive by and like how the house looks, your agent will set up an appointment for you to take a tour inside.
Make an Offer
Once you decide on a home, it is time to make an offer. Work with your real estate agent to perform research on comparable properties in the area to see how accurately the home is priced. Decide on your absolute maximum offer before you start negotiating – otherwise you’re likely to add “just a few thousand” here and there. Also, your maximum offer shouldn’t necessarily be your maximum budget. Overpaying for a house could result in financial loss later down the road when it is your turn to sell.
Get a Home Inspection
Your offer has been accepted! Next it’s time to check the condition of the home. Hire an inspector to review the property’s overall condition. It will cost a couple hundred dollars, but could save you thousands in the long run. While not an exhaustive report, your home inspection notifies you of any potential major issues, like the home’s framing and foundation, roof, electric, plumbing, heating, cooling, and more. However, the inspector just does a visual scan of these features, so there is no guarantee that he or she will find every problem. If there is a major issue that needs immediate attention, renegotiate your contract to either have the seller fix it before closing or provide the funds for you to fix it when you move in. If there is a huge issue, like a foundation problem, consider walking away and finding a new home to purchase.
Submit Your Mortgage Application and Close
Ideally, the home inspection was a piece of cake and you are ready to close. You’ve already been pre-approved for a loan, so now you need to submit supplementary documentation for your official loan application. Lenders usually request W-2s from the last two years, your most recent pay-stubs, a list of your debts, and proof of assets such as bank statements. Your lender will also arrange for a home appraisal to be completed. This is different from the inspection in that the appraiser assigns a value to the home, which must be greater than or equal to the loan amount. If the appraisal comes in lower than your loan amount, your bank most likely will not make the loan. The seller will either need to lower the price or you’ll have to walk away from the deal. Assuming the appraisal comes in as expected, you simply need to wait for your loan application to be processed and approved. Depending on how busy your lender is, this usually takes between 30 and 60 days. Once your lender sets a closing date, it is time to start packing!
You should have already received an estimate on closing costs so you can be prepared with any money you need to bring to the table. Then you’ll simply sign dozens of pages of paperwork, and receive your keys. Congratulations!