How to Buy a House
How to Buy a House-To buy a house may be the American dream, but it’s not a financial step you should take lightly. Owning your home comes with significant advantages, such as predictable housing expenses, the potential for value appreciation,tax benefits, freedom to make changes to your home, and lower monthly payments.
How to buy a house:
- Check your credit report and score
- Find out your debt-to-income ratio
- Figure out what you can afford
- Get pre-qualified for a mortgage
- Check the closing costs
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- Find the right home
- Find a good real estate agent
How to buy a house: 9 crucial steps to followKnowing how the process works can mean the difference between reaping those benefits or suffering the consequences.
To avoid the latter, consider the nine factors below before you invest in a home.
Know your credit score when you buy a houseYour credit rating is one of the most important factors mortgage lenders will consider when you apply for financing. So, the first thing you should do is check your credit score. Getting approved for a home loan is fairly easy if you have good credit. If your score is below 600, however, you might want to hold off on applying for a mortgage until you can boost it. Otherwise, you’ll likely have to pay a substantial down payment and a higher interest rate.
Find out your debt-to-income ratio before you buy a houseAdd up your total debt, including housing costs, and compare it to your total income. This number will give you your debt-to-income ratio (DTI). Ideally, your debt shouldn’t exceed 36% of your gross income. However, the standard DTI to qualify for a home loan is 43%. It will vary from one lender to the next, though. Regardless, make it a priority to pay off your other debts until you can get your DTI down to at least 43% (the lower, the better). Doing so will boost your credit score and open up the door to more mortgage options.
Figure out what you can afford before you buy a houseA common mistake with home loans—which leads many people down the wrong path—is borrowing as much as a lender will agree to loan. You may qualify for a $300,000 mortgage, for example, but that doesn’t mean you can afford to pay it back. That’s because buying and owning a home involves more than just a monthly mortgage payment. The general rule of thumb is that your total housing expenses should be no more than 28% of your gross monthly income. As such, it’s vital that you take time to create a detailed budget that accounts for all the guaranteed and potential extra costs of homeownership.
Homeownership expenses you should budget for:
- Monthly mortgage payment.
- Down payment.
- Mortgage insurance.
- Inspection fees.
- Closing costs.
- Home insurance.
- Property taxes.
- Homeowner’s association fees.
- Furniture and utilities.
- Maintenance and upkeep.
Get pre-qualified for a mortgageOnce you’ve figured out how much you can afford, the next step is to learn about the different mortgage options so you can pick the right one. You can get a home loan through a bank, a credit union, a private lender (a person or business). Similarly the government, or builder financing (some homebuilders will offer you incentives to finance directly through their in-house mortgage company). The most common mortgage options include:
Conventional loanThis is a traditional loan which generally requires a credit score of 620 or higher to qualify. You’ll typically have to pay at least a 20% down payment to avoid paying for private mortgage insurance.
FHA loanFHA loans are insured by the Federal Housing Administration. With a credit score of 580 or above, an FHA loan allows you to buy a house with a down payment as low as 3.5%. You can still get approved if your score is between 500 and 579, but your down payment will be 10%. FHA loans charge mortgage insurance premiums—this can become more costly than private mortgage insurance over time.
VA loansInsured by the U.S. Department of Veterans Affairs, VA loans are designed for eligible military members and their families. There aren’t any set-in-stone credit score requirements— however, most VA lenders usually require a score of 620. VA loans don’t require a down payment, but be prepared to pay a funding fee. Your fee will depend on a few factors including your eligibility status, down payment, and how many VA loans you’ve had.
USDA loanUSDA loans are insured by the U.S. Department of Agriculture. They were created to incentivize people to buy a house in eligible rural areas. You won’t have to pay a down payment and you’ll generally need a credit score of 580 to be approved. Exceptions can be made, however, for people with a lower score. You’ll have to pay an upfront and annual guarantee fee, but it’s typically lower than what you’ll find on VA and FHA loans, as well as private mortgage insurance.
Find a good real estate agentThis is especially important if you’re a first-time homebuyer. A good realtor can help you navigate the process to create a smoother experience. They’ll be able to identify homes based on your preferences, negotiate with the seller for a better deal, and help you see things that you wouldn’t otherwise see on your own.