Thursday, 7 May 2015

Ready to buy your first home? Great!

But to make it go as smoothly as possible, you'll want to be fully prepared. Here's a summary of the major steps it takes to become a homeowner:

Line up your financial information

Buying a house is likely the biggest financial transaction you'll ever make, so you'll need to assemble a lot of documents to show a lender that you're ready for the responsibility. Before you get to that stage, you need to have accumulated enough money to make a down payment—which could range from 5 percent to 20 percent, depending on the mortgage. On a $250,000 house, that translates into anywhere between $12,500 and $50,000. So start saving today if you haven't already!

Once you have the down payment ready, you'll want to do the following:

Have your credit in good shape

In addition to how much cash you've pulled together, banks want to know if you're financially responsible. Check your credit scores and credit reports to make sure there aren't any errors about your payment history. If there are, correct them. Mistakes about your credit status could cause a bank to turn down your loan request. You can check your credit score and report with each of the three major credit bureaus for free by going to  annualcreditreport.com once a year.

Be able to prove your income

You'll need to be able to demonstrate that you can repay a loan. Relevant documents include your W-2 tax forms or your federal tax returns from the past two years. You'll also need your bank statements from prior months, as well as your recent pay stubs and any other proofs of income.

Get pre-qualified for a loan

This is a relatively quick, easy method of figuring out how much of a mortgage you would likely qualify for. Simply call your bank and ask if you are able to be pre-qualified. It's not a confirmation that you'll receive a mortgage of that size, but it can let you know how much credit you likely can afford. You'll get a more exact number after you apply for a loan and the underwriter takes a look at your debts and incomes.

Research different kinds of mortgages

There are several options when it comes to mortgages. If you plan on staying in your new home for a long time or suspect that interest rates will rise, a fixed-rate loan could be best for you. But if you expect to move again in a few years, or you think that interest rates will fall, you may want to look into an adjustable-rate mortgage (ARM).

There are also 15-year mortgages and 30-year mortgages to provide flexibility with monthly payments, as well as loans that can be obtained through the Federal Housing Administration (FHA).

Take a look at our article on mortgages to learn more.

Figure out what kind of house you need

Figuring out what you want and need in a house is time-consuming—but essential. Consider how many bedrooms and bathrooms you'll need, and if your family will continue to grow. If you need some guidance,  here's an article that gives more tips on buying a home.

Get the purchase contract

When you've found the house that meets all your needs and an owner willing to sell it to you, you'll want to get it down in writing in the form of a purchase contract. Such an agreement specifies the property that will be purchased, the price and terms, the down payment amount, closing date, items included in the sale, warranties and disclosures, commissions, and signatures. It will also spell out actions that need happen before the contract begins, such as the home inspection, loan approval, and title clearance.

Get the home inspected

Your dream house could turn out to be infested with termites, or filled with ancient pipes that need to be replaced. A home inspection will make sure that you're not buying a house that's falling apart.

An appraisal will almost always be required by your lender during the lending process, so wait until you know what that process is before having the appraisal. Lenders often require specific appraisers.

Buy homeowner's insurance

Typically, lenders require you to purchase homeowner's insurance as part of the loan process. It's easy enough to shop for, and the cost is usually included in the mortgage payment.

Close the deal

All of the documentation required to buy a house comes together at the closing—and there are plenty of documents for you to sign, so expect to spend about 90 minutes reviewing and signing paperwork. You'll likely be provided a list of items to bring to the closing, including:

A certified check or cashier's check—to cover the down payment and closing costs. You'll be told the exact amount ahead of time.

Proof of insurance—to show you have homeowner's insurance for the property.

Photo ID—a driver's license or passport will suffice.

Attorney or agent—Have someone go with you who understands the process. Some states actually require that you have an attorney present.

Purchase and sales contract—Having this original document on hand is helpful in case you want to double-check the closing paperwork for accuracy. It will help you determine whether anything in the closing paperwork differs from what you had intended when you agreed to buy the property.

It's a lot of work, but when you've done it well, buying a house can be a very rewarding experience—personally as well as financially.

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