Last Updated on September 5, 2021 by azamqasim
Attention first time homebuyers; buying a house isn’t a hard process. Yes, you can actually enter the wonderful world of homeownership.
But even though the home buying process isn’t hard, there are quite a few steps you need to take to purchase your dream home. The sooner that you start working through the homebuying checklist, the more prepared you are going to be once that perfect home goes up for sale.
So if you want to buy a house in the next few months, or even in the next year or two, it’s time to start getting ready now.
Wondering what it takes to become a smart homeowner, so you can start building equity rather than throwing your money away on rent? Keep reading to find out what to do to get closer to home sweet home.
Why Home Buying is Better than Renting
Rent vs. lease; it’s a neverending debate. If you are on the fence about homeownership, consider these benefits over renting.
When you make rental payments, you will never see that money again. It makes its way to the landlord, who then uses that money to make his mortgage payment. There may even be a little bit leftover going into his pocket.
When you pay down your landlord’s mortgage, his equity increases, equity is essentially money in the property. It’s wealth. So when you are renting, you are building somebody else’s wealth.
However, when you own a home, you aren’t sending money to a landlord. You are instead making a mortgage payment of your own. You are paying down your loan balance, in turn increasing your own equity. So with each monthly payment, you are actually getting a bit wealthier.
So the choice between renting and buying is a matter of whose wealth you want to build; yours or someone else’s?
Fix Your Finances
So you are deciding to buy a house, so you can start building your own wealth and working towards financial security. Step number one for prospective homeowners is fixing your current financial situation.
The most important factors of your personal finances are your credit score and debt versus the income you have.
Your credit score is essentially a rating assigned to you based on how good a borrower you are. When you are really good at making loan repayments on time each month, you get a high score.
With a high score, other lenders are likely to lend to you in the future because you are a trustworthy borrower.
With a low score, however, lenders are going to be hesitant to lend to you. If they do lend to you, it will come with a high interest rate to make up for the risk they are taking on you.
To increase your chances of getting a mortgage, and get a lower interest rate, spend a few months working to improve your credit score.
Debt and Income
The other major factor regarding your personal finances is how much money you make and pay each month on other loan repayments. The more debt you have, the less you can afford to borrow when buying a house.
Say you pay $500 per month in debt repayments on credit cards and an auto loan. Compared to your income, a lender may only let you get a mortgage for, say, $200,000. But you might want to get a house that’s $250,000.
If that’s the case, you want to try paying off as much debt as you can. This would improve your debt-to-income ratio. Essentially, it allows you to borrow more money and buy a more expensive home, should you choose to do so.
Save Up a Down Payment
Once you get those financial factors in order, you need to secure a down payment. Depending on your situation, you can expect to pay between 3.5% and 20% for a down payment.
The best way to do this is simply by saving up over a period of time. For some people, it only takes a few months. For others, it can take years.
If you can’t wait that long, some lenders will allow you to use gifted funds as a down payment. So if your parents are willing to give you the money, that could work to secure your mortgage.
Get Preapproved as First Time Homebuyers
With your finances in order and down payment money in the bank, you can contact local lenders and get preapproved. This means you are officially applying for a new mortgage loan.
It’s best to do this with multiple lenders to see who offers the best interest rate, loan terms, and mortgage amount. Once you get preapproved, you will get a letter from your lender saying you are ready to buy a house.
That means you can start searching for homes and making offers.
Find an Agent
With a preapproval letter in hand, you can now contact a real estate agent. They will help you find the perfect home for your needs in the area you desire and help you negotiate a price with the sellers.
As a buyer, you don’t need to worry about paying your agent. Agents earn a commission from the seller. However, buyers typically need to pay closing costs, around 1% of the total purchase price.
Search for the Perfect Home
Work with your realtor to find the perfect house. This process can often take weeks, if not months. Since it’s such a big decision, it’s best not to rush. However, if the market is hot, you may need to take whatever you can get.
Make an Offer and Close on the House
Found the perfect house? Then it’s time to have your agent submit an offer. If the seller likes it, they will accept and notify you within a day. If not, try negotiating to create a deal that benefits both parties.
Once accepted, the closing process requires quite a few signatures and can take up to 30 days.
Build Your Wealth, Not Someone Else’s
Congratulations, you are now first time homebuyers. Sure, the process takes a long time, but it’s worth it in the end. Once you walk away with keys to your new house, you get to start building your equity and wealth with each mortgage payment you make.
Looking for more tips like this? Check out other articles on our blog today.