The First Steps You Need to Take When Preparing to Buy a Home

Imagine this: You start swinging by an open house or two on the weekends…just testing the water. You take a peak at your finances one night and find you have a pretty decent amount set aside for a down payment. You walk in to the house of your dreams one Saturday afternoon and think to yourself “this is it!!”. One phone call to your Realtor 5 minutes later to say you want this house and BOOM! - the process begins. But wait….have you been pre-approved for a loan? How big of a loan can you qualify for? Hang on….it’s going to take a couple of days to get pre-approved? What’s that you say?….someone else made an offer on my dream house????

BACK UP!….how can we avoid this? Here are the steps to take to ensure you are ready and able to buy a house. The first few steps are the very early stages of consideration. You may even want to sit down with a lender for preliminary numbers and to get a clear understanding of what your road map to purchasing a home will look like. The remaining steps are the best way to prepare when you are within a few months of your search.

1.Save Save Save (years/months prior to seriously looking for a home)

The more money you start setting aside now, the more you will have towards a down payment, closing costs and anything you want to fix or change in your new house. Pretty simple, right?

Unless you qualify for a VA Loan, you will need a down payment ranging anywhere from 3%+. To give you some perspective - if you are interested in an $800,000 house, with a down payment of 3% ($24,000) and closing costs at 2% ($16,000), you will need $40,000 in the bank. Keep in mind, the smaller the down payment though, the higher your monthly mortgage payment will be.

PMI’s can be another thought to consider when saving for a down payment. If you are putting less than 20% down you’ll likely have to pay mortgage insurance, known as PMI. This can tack on a few hundred dollars per month.

Another area lenders will look at down the road in the process is where your funds came from. We call this “seasoned funds” aka funds that have been in the borrower’s bank account for over 2 months and/or that the funds came from a legitimate source. Lenders want to be sure funds are “seasoned” for several reasons: to make sure buyers have “skin in the game” with their own funds going towards the down payment, to make sure a buyer didn’t secretly borrow down payment funds that have to be paid back (impacting debt ratios), and ensuring the buyers have the ability to save. Any and every “unusual” deposit has to be explained. “Unusual” would be a deposit that is over 50% of a buyers monthly income (for a conventional loan) and over 1% of the purchase prices (for FHA). Jumbo loans have their own rules that vary from lender to lender. If a buyer is intent on using funds that cannot be paper-trailed, they need to be sure to deposit it into their accounts at least 3 months prior to making any offers on a home. This would ensure that those deposits do not show up on any bank or investment account statements. So, start saving!

The type of market you walk into when ready to buy will play an important role as well when it comes to how much “cash” you have. At the time of writing this post, we are in a very competitive market. Most buyers are coming in with 20% or more which is more attractive to sellers. In a “regular” market, 3.5%-10% would be much more acceptable. We are also in a “sellers market” and have seen homes selling above asking price. You may initially ask, “then why buy?” in this type of market if it’s so expensive. Well, if you have the down payment to partake, you will find that interest rates are incredibly low in this type of market. When it sways into a buyers market, you will typically see interest rates tipping with it.

2.Check Your Credit (months prior to seriously looking, unless you already know you have great credit)

What does your credit score look like right now? This is what your lender will look at to determine the rate you will be charged. To clarify - the higher your credit score, the lower your interest rate. It’s ok if this step sets your timeline back a little bit…I know…you may have stumbled upon this post when you felt you were a lot closer to buying, but if you take a little more time to get your credit score up, it will be worth it in the long run!

3.What is Your Budget? (a few months prior to your search)

What you can afford to buy will be determined by your income and any current debt payments. Try checking out an online mortgage calculator to get a rough idea. This tool will base everything off of the price of the home, the down payment you have on it, interest rate, loan term and other expenses such as homeowners insurance and property taxes. If you type “mortgage calculator” into Google, you will see their calculator pop up (below the ads!). Begin by “turning on” the option that says “include taxes and fees” - if this isn’t on, you may be shocked by the additional monthly expenses that will come with your mortgage! Ensure you are on the tab “monthly payment” and not “purchase budget" and under “home price” enter the price you think you can afford, let’s say $800,000 for example. Under “down payment” you can either type the percentage you are aiming for, or the dollar amount you have/want to have. (20% would be $160k on $800k). If you put down 20% or more you will avoid PMI’s. If you don’t have 20% down, this calculator will estimate PMI’s at the bottom. Projections show 3.4% for interest rates in Q1 of 2022, so you can enter that for now under the “interest” box and a “loan term” of 30 years (common loan term). Put your credit score into the range options and there you have it - your monthly payment on a home. Outside of the cost of your mortgage and insurance/fees you will want to consider your other monthly expenses. What could your electric/water/gas/trash bills look like? Do you budget for groceries? Are there other costs associated with the house to consider in the near future, such as the need for a new roof in a couple of years?

Google Mortgage Calculator Example

4.I Can’t Stress This Enough - GET PRE-APPROVED NOW

As I threw out as an example in the beginning….imagine finding your dream home only to realize you weren’t prepared to actually MAKE the offer on it? When acting as a buyers agent, I ensure my clients are 100% ready and able to make an offer on a home the moment they say “this is the one”. The previous steps, and the pre-approval in your email inbox are the first steps to this. A sellers agent won’t even look at at an offer in today’s market without a pre-approval letter included. Your pre-approval is only good for a few months though, so do not take this step until you are serious about your search.

You also want to work with a quality lender. I recommend using someone local, preferably referred by an agent. I would love to explain WHY in more detail to you. If you reach this stage of the process, feel free to ask me details on this and I can even make a recommendation for you! My preferred lender is one that my entire team uses and recommends. Though I haven’t been in the business long enough to have had repeat buyers/sellers, the clients my broker has done multiple transactions with continue to use him!

When you sit down with a lender, your credit will be pulled and lenders will also look to see how much debt you carry. Your DTI will be determined in this meeting (Debt to Income ratio) by questions regarding your income and assets. Documents your lender may ask for are: W-2’s, tax returns, pay stubs, bank statements, savings/retirement statements. If you package these types of documents up ahead of time, you will be in good shape! Typically it will take about 24-48 hours for a lender to get your pre-approval back to you.

Remember, just because you are pre-approved for a certain amount does not mean you need to find a house that hits your cap! Keep in mind the cost of repairs, emergency funds, savings and other expenses. At the end of the day, let your agent know what you are comfortable spending on a home.

5.Happy House Hunting!

We’re finally to the fun part!!! This is where you sit down with me and we enjoy a cup of coffee or a glass of wine while chatting about what you are looking for in your future home. We will talk what is important to you and I will be here to guide you into the right direction as we search. I will be honest and realistic when it comes to your budget, expectations and what is on the market. Because I already know the area so well, I can tell you pros and cons to people I’ve known who have lived in the area you are looking in. I can show you when and where you will see traffic or how to detour out of a neighborhood. I will offer recommendations for the closest restaurants and the cheapest gas station near by. Because I continue to educate myself on the build of each home here, I can let you know where I’ve seen walls taken out that were load bearing or cosmetic. I can tell you when the home was built and if the pool is original and the type of flooring hiding under the carpet. I can get you the answers to questions you may not have even thought of when you are interested in a home we look at.

I can have newly listed homes sent to your inbox each morning if you’d like. I can map out a house hunting day and see anywhere from 1-10 houses on a Saturday if that’s what you’d like to do! You can scroll through your computer at night and text me with the address of a home you want to go see and I can set it up for you. The approach you want to take is up to you and I’m here to help you enjoy the search and support you in making the best decision for your home.

6.Make the Offer

We’ve searched high and low and you found the house you want to pull the trigger on. Let’s make an offer! Typically, I will head back to the office and begin drawing up a purchase agreement. We then discuss the purchase agreement together. This will include: purchase price, length of escrow, down payment, contingencies, appraisal, inspections and loan, escrow and title, pre-approval letter(!) and other details we’d like to include depending on the situation.

Once we have this part figured out, I present it to the listing agent. Depending on how long it takes for the sellers to review and respond (anywhere from a few hours to a few days) you will hear back on if your offer has been accepted or not.

So that’s the process when preparing to buy a home! Stay tuned to learn more about the escrow process - after your offer has been accepted! Don’t hesitate to text or email me with ANY questions about buying or selling - 805.443.5330 chanda@chandalubinski.com