The beginning of the home buying journey typically brings on a whirlwind of emotions for prospective buyers. While you are starting an exciting path of homeownership, the financial processes standing between you and your dream home can be intimidating. Many start their house hunt just by finding the best realtor or running to the nearest open house, but it is pertinent that you take into consideration all money-related aspects before starting your search. With proper understanding and education, you will certainly set yourself up for a positive purchasing and ownership experience.
Of course, in order to buy a home, you will need an ample amount of money saved up. Based upon your income and savings, you have the options to buy your home entirely in cash or explore lending options and pay a down payment. For many of us, financial assistance from a bank or lender is much more feasible. If this is the case for you, it may be helpful to actually calculate how much house you’ll be able to afford before searching. Once you come up with a number, you can estimate your expected down payment which will typically fall between 3-20% of the home’s purchase price. However, you should be sure to save extra money to account for additional deposits, fees, and home closing costs.
Build Good Credit
Having a great credit score is incredibly important to the home buying process as it will help you become eligible for more loan options and greater term leniency when financing. If you are opting for a conventional loan, for example, it’s recommended that you have a FICO credit score of at least 620. If your score falls below that, you run the risk of paying a significantly higher interest rate on your mortgage from month to month. Ideally, you should aim to build your credit up to a score greater than 700 and practice healthy spending habits in order to optimize your chances of affording your dream home.
Now that you’ve saved enough and built up a sufficient credit score, you can begin your search for a loan officer. When deciding on a loan company or officer to select, you should always look to your friends, family, and career network for personal recommendations. You’ll typically start the process by submitting an array of financial information to your officer to receive a mortgage preapproval letter. This letter will give you an accurate picture of what housing price you can afford, your loan options, expected down payment, and estimated closing costs. It will then be used later down the line as a supporting document when putting an offer in on a house. Once selecting the mortgage loan terms that are right for you, you will be preapproved in a few days and ready to begin the house hunt with a realtor.
After narrowing down your search, putting in an offer, and signing the purchasing agreement with the home’s current owner, the home will typically go into escrow. You are then allotted time to do a sufficient inspection on the home before the closing is completed. While you may have a keen eye for spotting small cosmetic issues in the house, you should hire a professional home inspector to thoroughly search the property and confirm that it is in fact safe and up to codes. An adequate inspector will search for everything from the stability of the home’s structure and roofing, to any possible insect or pest infestations hidden in the home. If by chance you do find that the home isn’t up to standard, you will then be able to renegotiate the price with the owner because of those setbacks. If everything checks out and all parties settle on a price, you will then be able to officially secure your loan with your bank or lender.
Once you have decided on your home and are beginning the closing process, you should receive homeowners’ insurance. While it is not required by law to attain, it will be required by your lender typically within the time it takes to close on a home. However, you should begin the search for optimal insurance once you begin to put offers on homes. Homeowners insurance reduces the risk of your house being damaged with the payment of a monthly premium to your insurance company. Some typical insurance coverages are dwelling, other structures, personal property, loss of use, liability, and medical payment which are made to protect your property entirely. For dwelling coverage, you are typically given a deductible amount that you will pay per incident as well as an amount that your insurer will pay. Other structures, personal property, and loss-of-use coverage’s amount limits are typically a percentage of your dwelling coverage, while liability and medical payment coverage are given a standalone maximum limit that the insurer will pay for incidents. While a number of damages to your home can be covered under homeowners’ insurance, other natural disaster incidents such as floods and earthquakes will not and will require a separate insurance plan.
Lastly, after you have purchased and closed on the home, it may be ideal for you to purchase a home warranty as well. At its core, a home warranty is relatively similar to homeowners insurance in that it will provide protection and damage coverage for parts of your home. However, home warranties specifically handle your home’s appliances and systems as opposed to the larger structural aspects of the property. Based on your warranty provider and coverage plan, you can typically select if you will need coverage on both appliances and home systems or just one of the two.
With the signing of a home warranty contract, you will pay an upfront cost for a specified contract term. In return, you’ll be able to reach out to your provider and submit a claim for damage or repair to a system or appliance at any point within that term. They will then send an appropriate contractor to attend to the issue at a small deductible price. Be sure to thoroughly review the terms of your warranty contract as it should specify whether local contractors will be selected by the warranty company itself or by you as the homeowner. Ultimately, a home warranty contract can save you hundreds, if not thousands, of dollars in the future.
Your first home purchase should be one of the best investments you will make. While the hunt and search for the right design and layout may be fun, you have to be cognizant of the financial processes of the purchasing journey as well. By keeping in mind these key steps, you are sure to find a house that you can afford and that is protected for you and your family.