November 24, 2020
There are several steps to the homebuying process regardless of if you’re a first-time homebuyer or an experienced homebuyer. Even if you've purchased a home in the past, you can forget a good deal about the homebuying process in between moves. Your financial situation, interest rates, and rules and regulations may have changed, so understanding each step and doing your research ahead of time is time well spent.
Your home buying process may not flow in the exact order that’s outlined in this article. For example, you may be driving around a neighborhood, see a great house you fall in love with, and immediately want to find an agent before you've even thought of doing research or figuring out how much you can afford. Don’t feel like you’re doing it wrong — everyone is different — but planning ahead of time will help you make the smartest decisions and having a good understanding of the home buying process is a great way to get into your new home.
How do I get started buying a home?
Looking at an overview of the steps to buying a home will help you decide where you need to spend more time or research more to make the best decisions. Here are some questions you should research before taking the plunge into home ownership.
How much home can I afford?
Understanding how much home you can afford includes numerous factors such as your salary, overall expenses, debt now and in the future, and your credit score. PenFed has a great tool to help you understand how much home you can afford with theirHome Affordability Calculator.
Here are some other things to consider when figuring out what you can afford:
- Mortgage costs
- Insurance costs
- Property taxes
- Home ownerships costs
- Maintenance costs like lawn work, tools, and repairs
- Electric and utilities
What do I need to save for a down payment and closing costs?
- Down Payment. If you plan on getting a VA loan, you may not need a down payment. This will help you avoid private mortgage insurance (PMI). If you plan on getting a conventional loan, the standard down payment is 20%. Many people, particularly those buying their first home, have a difficult time coming up with a 20% down payment, so the minimum down payment on a conventional loan — like a 30-year conventional loan — is 3-5%. Federal Housing Agency (FHA) loans are also available for a 3.5% down payment.
- Closing Costs. Closing costs are provided to you by your lender in the form of a loan estimate within 3 business days of your application. The loan estimate will outline all of the costs needed at closing. It's difficult to estimate your exact closing costs within this article because there are so many factors like tax requirements in your area, insurance, and your down payment are all taken into account.
Here is an example of a down payment and closing costs on a $200,000 home:
- Down payment of 5% = $10,000
- Closing costs between 3-6% = $6,000-12,000
The approximate total down payment and closing cost estimate on a $200,000 home is between $16,000 and $22,000. This calculation can end up higher or lower depending on many factors.
How do I get prequalified or preapproved for a home loan?
Prequalification is an early sign from your lender that you can begin your search within a specified price range. To get prequalified, you'll need to supply your income, debt, and credit history to receive a maximum home price you will likely be approved for. This is an easy process and can usually be completed over the phone with your lender. Although the home price you will likely qualify for is not a guarantee, prequalification provides a basis for you to start your home search. The easiest way to think about a prequalification is — here is what I can likely afford.
Preapproval moves you closer to getting your mortgage. Your lender will need additional financial information such as bank statements, pay stubs, and a full credit report. This is also not a guarantee you will get a loan, but a preapproval shows real estate agents — and the seller — that you are serious about buying a home and ready to negotiate a price.
In What Are the Steps to Buying a Home? Part 2, you’ll learn the following:
- How do I find the best real estate agent?
- What are my housing priorities?
- How do I make a smart offer on a home?