So, you’re thinking about buying a new home in 2022? Congratulations! Home ownership, whether first-time or not, is a huge step and an exciting process. Getting started might look daunting… Don’t worry! We’ve put together a list of 8 essential steps to make your home buying journey a success.
1. Determine Your Financial Readiness
Many people think the first step is finding the perfect home. While finding the right home is an important step, it isn’t a first step at all. When you’re thinking about purchasing a first home, the first and most important step you can take is determining your financial readiness.
Determine Your DTI Ratio
Your DTI is one of the most important numbers you and lenders will look at during the buying process. DTI stands for Debt-To-Income. Your DTI ratio is essentially how much money you have coming in each month in relation to how much you owe each month.
Ideally, you’ll want a lower debt-to-income ratio—meaning your debts each month total less than your income each month. Lenders will probably be looking closely at this number when you’re seeking pre-approval. Lenders all have their own requirements, but many of them will expect to see a DTI ratio lower than 40%.
Get Your Credit Reports
Another important financial readiness benchmark lenders will use—and you should too—is your credit reports. Credit reports can be a little complex; there are multiple reporting agencies that track your credit, and they may use different data.
The three primary credit reporting agencies in the United States are Experian, Equifax, and Transunion. Under federal law, you’re entitled to a free credit report once a year from all three.
Don’t Forget: Down Payment, Earnest Money, And Closing Costs
You might already be thinking about monthly payments and monthly income and getting an idea of what your financial future might look like as a new homeowner, but don’t forget: there will be a couple one-time costs as well. Some of them might be significant.
Think About Your Down Payment. While you might not need to make a 20% down payment as was standard in the past, consider how much you’ll be able to afford putting down. Making higher down payments will impose a steeper financial burden initially. However, you can lower your interest rate and give you access to better terms.
As a buyer, you may also need to set aside some money for closing costs. Closing costs will also amount to a significant amount of money, often ranging from 2%-6% of the total cost of the home. Closing costs will be determined by your purchase contract, and depending on the contract you may pay all or some of the closing costs.
You may also opt to or be required to make a good faith deposit. People get them mixed up with down payments, but they’re different things. A good faith deposit shows a seller that you’re serious about the purchase.
A good faith deposit is generally some percentage of the total purchase price—often between 1% and 10%, and it’s held in escrow until the deal is completed. If you go through with the purchase, you get it back, and if the deal falls through, the seller keeps it to recoup any losses.
2. Get Pre-Approved
After considering your financial readiness, it’s time to seek pre-approval with a lender. People conflate pre-approval and pre-qualification but they’re different processes. We’ll discuss each one and why pre-approval is so important.
Pre-approval Vs. Pre-qualification
Pre-approval and pre-qualification look at similar things, but are different processes entirely. You can get pre-qualified in as little as an hour, while the pre-approval process might take a week or so. This is because with prequalification, your lender will mostly just be asking you questions and giving you a rough estimate.
Pre-Approval Is Stronger
When you seek pre-approval, you’ll be answering many of the same questions, but you’ll also be verifying the information. You might be asked to supply important documents proving your income or assets and provide authorization for lenders to pull credit scores. While getting prequalified might give you an idea of where you stand, getting pre-approved for a home loan will show lenders and sellers that you’ll be able to make payments on time.
3. Find A Reputable Agent
Now that you’ve been preapproved for a home loan, it’s time to find a reputable realtor to help you navigate the next part of your buying journey. Coming to the table with pre-approval will show potential agents that you’re serious about this purchase, and finding a reputable agent will ensure that you’re taken care of during the rest of the process.
Finding an agent that works well with you, and has a good network in the community, will go a long way towards a smooth buying process. They’ll be able to work with you and help you find listings that match your finances.
They’ll also be privy to nearby listings, and they might have a network of trusted colleagues, so finding home inspectors and sellers will be much easier. They also bring experience to the table—they’ve done this before and they’ll know how to help you get through this as easily as possible.
4. Find Your Perfect Home
Now that you’ve got pre-approval from a lender, and an agent to help you find the right home, it’s time to start narrowing down your options and find the home you’re truly interested in buying. Your agent can help you set up viewings and help you find listings you’re interested in based on your price range and location preferences.
5. Make Your Offer
Once you’ve found the right home, it’s time to make an offer. Your agent will help you through this process, but there are some important things to remember. While it might be tempting to lowball an offer, you might end up getting passed over for a buyer who made a better offer, so make sure you’re making an earnest offer.
6. Get Inspection And Appraisal
If your offer is accepted, it’s time to look closer at the property. Inspections and appraisals are important steps before closing on a new home. Often confused with one another, they’re each unique.
An appraisal will give you an idea of what a fair value for the property is, while an inspection will give you an idea of what kind of shape the property is in—and if you might need to make repairs in the future.
Appraisals are important for lenders who want to know what a fair value on the home is before you put money into it. Inspections are important for you to understand what you’re getting into with a new home.
7. Purchase Homeowners Insurance
Before closing on a deal, consider getting home-owner’s insurance. While it isn’t generally legally required, this will protect you as you embark on your journey as a homeowner, and it will ease concerns of lenders. Some lenders will even require that you purchase homeowner’s insurance.
8. Do Your Final Walkthrough and Close
You’ll want to do a final walkthrough before closing. This will be a time for you to take stock of the property one last time, and make sure that any repairs you requested after your inspection have been completed.
Once you’re satisfied with the home after inspection, appraisal, and a final walkthrough—it’s time to close! Your agent can help you walk through the process of signing closing documents. This is when you will make your down payment, pay closing costs, and sign legal documents for the home. After this, you can enjoy your new home!
Purchasing a new home is an exciting moment. It’s also a complex process. There’s a lot that goes into buying a home—from working with lenders to getting a home inspected and closing on a deal. Understanding what the process looks like ahead of time can give you a serious leg up when it’s time to start on your home buying journey. That’s why we compiled these eight steps to help you get started and find the perfect home.