Unlock the Door to Homeownership: 7 Tips to Make It Happen

Unlock The Door to Homeownership: 7 Tips to Make it Happen

Buying your first home can be an exciting and overwhelming experience. It's a huge step in life and a major financial investment, but with the right knowledge and resources, you can help make it smoother. This guide will walk you through the seven essential steps to make your dream of homeownership a reality. From understanding your finances and credit to finding the perfect home and closing the deal, we've got you covered.

1. How Much House Can You Afford

From understanding your finances and credit to finding the perfect home and closing the deal, we've got you covered.

The first step is estimating how much house you can afford. The 28/36 rule can help you calculate this.

To qualify for a mortgage, lenders prefer that you spend no more than 28% of your gross monthly income on your mortgage principal and interest, property taxes, homeowners insurance, and any homeowners association fees.

Lenders also prefer you spend no more than 36% on total debt. This includes your mortgage, property taxes, insurance, HOA fees, car loans, student loans, credit card debt, and other debts.

Lenders use the 28/36 rule to evaluate a borrower's creditworthiness and to ensure that they will be able to afford the mortgage payments over the long term.

When considering how much house you can afford, you'll also need to consider additional ongoing costs – like utilities and repairs – and upfront costs, such as a down payment. Borrowers who put down 20% or more on a home typically qualify for lower interest rates, which can save thousands of dollars over the life of the loan. If you put down less than 20%, you will usually be required to pay private mortgage insurance (PMI), which can add hundreds of dollars to your monthly mortgage payment.

It's important to note that putting down 20% is not always necessary or feasible for everyone, and there are other options, such as FHA loans. These loans generally require a lower down payment, but your monthly payment may be higher because you will have less equity in the home.

2. Mortgage Pre-approval 

You'll want to get a pre-approval letter to demonstrate to sellers and real estate agents that you are a serious buyer. This is a statement from the lender that they have reviewed your financial situation and confirmed your ability to take on mortgage payments.

During the pre-approval process, the lender will review your financial record and assess your current situation to determine that you would be a good risk. They want to understand your ability to repay a loan based on your debt-to-income ratio and credit history.

To prepare for your pre-approval letter, follow these steps:

  • Focus on your debt-to-income ratio: Ensure that the amount of your potential mortgage payment, along with your other debts, does not exceed 36% of your income.
  • Review your credit report: Your credit report offers a glimpse into your debt repayment habits and is crucial to the lender's decision-making process. Check your credit report to understand what information your lender will see.
  • Know your credit score: Your credit score is essential to your overall credit picture. You can obtain your credit score for free from credit scoring websites or your credit card issuer. A credit score of 670 or higher is considered good, while a score above 800 is excellent.

3. Choose a Real Estate Agent

Next, you'll want to choose a real estate agent to help you with homebuying.

When choosing a real estate agent, look for someone with experience in the local real estate market. They will better understand the area and be able to provide valuable insights. Here are some additional factors to consider when choosing a real estate agent:

  • Track record: Look for an agent with a track record of success in your local market.
  • Knowledge: Choose an agent knowledgeable about the type of property you're looking for.
  • Satisfied clients: Check the agent's online reviews and testimonials to gauge their reputation and level of customer service.
  • Licenses: Ensure the agent is licensed and affiliated with a reputable brokerage.
  • Communication: Choose an agent who communicates effectively and is responsive to your needs and concerns.

Once you've chosen your agent, they will assist you as a licensed professional to help protect your rights, get you access to homes for sale, and manage the complex buying process.

4. House Hunting

Now comes the fun part – finding the kind of home you want and where you might want to live. With a clear understanding of your budget, you can now focus on finding the perfect home that matches your lifestyle and preferences. Do you like the space and privacy of a single-family house? Or is the condo or townhouse life more your style?

Remember that you should consider several costs beyond just the purchase price. These may include:

  • Homeowners association (HOA) fees: These typically cover services such as grounds maintenance, pool upkeep, trash removal, and more.
  • Maintenance costs: These can vary depending on the age and condition of the home.
  • Commuting expenses: Costs can vary based on proximity to major transportation hubs and access to public transportation.
  • Property taxes: These can vary significantly based on the neighborhood.

When choosing your desired location, consider the quality of schools in the area, local amenities, and nearby development. Let your agent know your housing budget and what you're looking for in a home. They can help you narrow down your search.

5. Make an Offer

Once you've found the home of your dreams, it's time to make an offer. Your real estate agent will draft the purchase offer, present it to the seller, and assist you in negotiating any counteroffers. After your offer is accepted, there are still a few important tasks to complete before the sale is finalized.

  • Deposit earnest money: An earnest money deposit is often required as soon as your offer is accepted. This deposit, typically between 1% and 3% of the sale price, demonstrates your commitment to the home purchase and is held in an escrow account. The funds can be applied toward your down payment or closing costs, and it's important to have clarity in the contract about when and how you can retrieve the deposit in case the sale falls through.
  • Finalize financing: Once your offer is accepted, inform your lender and proceed with choosing your mortgage type, completing the necessary paperwork, and potentially locking your interest rate. Once you do this, refrain from making large purchases or increasing your debt, which could affect your credit score.

6. The Home Stretch 

You're almost there! But before you can close on the house and pick up the keys, you and the lender must complete a few final tasks. These include:

  • Professional appraisal: A lender appraisal is a professional evaluation of a property that a certified appraiser conducts. The appraiser will assess the property's value, taking into account factors such as the property's size and condition, any improvements made, and comparable sales in the area.
  • Title search: The lender will also do a title search, which is the process of researching the history of a property to determine the ownership of the property and to identify any liens, judgments, or other issues that may affect the property.
  • Home inspection: You'll want to have the home professionally inspected. The inspector will assess the home's overall condition and identify potential issues or necessary repairs. It's important to comprehensively understand the property's condition before making a purchase decision.
  • Homeowners insurance: You'll also need a homeowners insurance policy to protect your new home and its contents.
  • Walk-through: Before the closing, you and your real estate agent will walk through the home you are buying to make sure the property is in the condition agreed upon in the sales agreement. This is also the time to check to see if any repairs you negotiated after the inspection have been completed.

7. Closing Day

It's time to put pen to paper and make your new home official. You'll meet with your real estate agent, the seller's agent, a representative from the title company, and other professionals to sign all the closing documents. After all the signatures are in place, you'll provide certified funds – usually cashier's checks or a wire transfer – for the down payment and closing costs. On average, closing costs for buyers typically come out to be between 2% to 5% of the loan amount or about $2,000 to $5,000 for every $100,000 worth of the home's value.

Finally, the moment you've been waiting for - the handover of the keys to your new home! Take a deep breath, pat yourself on the back, and relish the excitement of starting this new chapter.

If you're ready to begin your journey, contact one of our friendly mortgage specialists today at Mortgages@crcu.org or call 832.926.7222