12 Step Smart Buyer Process

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Buying a home for the first time can be a daunting prospect. There's just so many moving parts to the process of becoming a home owner, and so many possible routes you could take. While you're probably aware that a mistake could end up costing you a fortune, you might not know about the many advantages a first-time home owner enjoys.

Here at CMS, we believe in treating our customers like family, so we naturally want to help you out with all the tough decisions you're making concerning acquiring a property. To that end, we've put together a step-by-step guide to the mortgage process, complete with helpful tips that'll help you through the whole ordeal, and set you up for success as a home owner down the line.

12-Step Smart Buyer Process
  1. Decide Whether You're Ready to Buy A Home
  2. Calculate How Much House You Can Afford
  3. Save For A Down Payment And Closing Costs
  4. Get Preapproved For A Mortgage
  5. Find The Right Real Estate Agent
  6. Begin House Hunting
  7. Make An Offer On A House
  8. Get A Home Inspection
  9. Get A Home Appraisal
  10. Ask For Repairs Or Credits
  11. Do A Final Walkthrough
  12. Close On Your New Home

Let's take a closer look at what each of these steps entails and what you'll need at each step.

Let's take a closer look at what each of these steps entails and what you'll need at each step.

Step 1: Deciding whether you're ready to buy

Buying a house is a major financial decision and one that you can't rush if you want to do it properly. Before you can start looking at your options, you need to decide if you're actually ready to take on the added costs and change in lifestyle that homeownership entails.

Here are some of the factors you need to consider:

Income and employment status

Most of the time, a lender will need more than just proof that you're currently employed. You'll likely need to produce a work history (usually one that shows at least the past two years of your employment history).

If you're on the company payroll, you'll likely just need to show pay stubs. If you're self-employed though, you should expect more scrutiny; a lender may request a copy of your tax return filings and other related documents.

Debt-to-Income ratio

Your debt-to-income ratio (often called a DTI) is a financial ratio mortgage-lenders use to evaluate your loan application. Your DTI tells a lender how much of your current monthly income goes towards debt repayment, letting them know how much mortgage debt you can afford.

To calculate your DTI, you should divide your total monthly debt payments by your gross monthly income. Debt payments include installments on credit cards, loans, and any other form of debt you may be carrying. If these, for example, total $3,000, and your monthly income is $10,000, your DTI comes out to 3000:10000, which comes out to 3:10. That figure means that 30% percent of your income goes towards pre-existing debts. A lender will use the figure in your credit reports to determine your debts.

You should calculate your DTI before sending in your loan application since it's a crucial part of letting a lender know you're financially solvent. Most lenders will require a DTI of 1:2 or lower, meaning that they'll require that less than half of your monthly income goes towards debt repayment. This number can vary depending on the lender and the type of loan you're applying for, so do check with your intended lender in advance.

Liquid Assets

Liquid assets are basically indicators of how much money you can afford to spend directly. Even with the help of a mortgage, you'll still need assets you can liquidate to fund some of the bigger costs associated with purchasing a home, provided you don't have the cash lying around. These costs include:

Down payment: The down payment is the initial sum you agree to pay with respect to the property you're acquiring. Depending on veteran status, financial standing, and other factors, you may be able to find loans that require as low as zero percent down, though in most cases, it is advantageous to put down more.

Closing costs: You'll also need to pay closing costs before you can move into your new home. Closing costs are the fees and administrative costs you pay to a lender for creating your loan. The specific amount you pay will vary from case to case, but it's good to be prepared for around five percent of your property's value. In some cases, you may be offered the chance to roll over your closing costs into your mortgage, or they may be paid for by the seller using concessions.

Credit Health

Your credit score plays a primary role in helping decide which loans and interest rates are available to you. A higher score tells a lender that you're reliable as a prospective debtor.

Taking steps to improve your credit score in advance of your mortgage application holds many benefits. You might even be able to get a loan with relaxed terms and lower interest rates.

Your credit score is based on the following information:

  • Your payment history
  • The amount of money you owe
  • How long you've owed money
  • The types of credit you've utilized

If you're wondering about how high a FICO score you'll need to qualify; most lenders need a credit score of at least 620 to qualify for the majority of loans, while a score above 700 will generally qualify you for the best loans with the best terms.

Whether you're ready to live in one place

A mortgage means tying yourself to a single property for the foreseeable future. Mortgages are multi-decade commitments, and most people can't afford to move out without first selling their homes. Make sure you're ready to live in your current area for at least a few more years. Ask yourself about your career goals, family obligations, growth potential, and other long-term prospects. All of these factors will play a major role in deciding the type of home you buy and where you buy it.

Whether now is the right time

Just because you can afford to put money down on a home doesn't mean it's a good time to buy. When considering whether or not to take the leap, be sure to consult someone with experience with real estate to determine whether market conditions are currently favorable.

We understand that homeownership is a milestone and a necessity for many people, but there's never a need to rush such a big decision. Make sure you take your time figuring out whether it's time to buy.

Step 2: Figuring out how much you can afford to spend

Once you're done mulling over the decision and doing your due diligence, you'll need to calculate how much you can afford to pay in mortgage costs every month.

There are many costs associated with homeownership that you don't need to worry about while renting. Insurance, taxes, and maintenance are all manageable costs, but you need to stay proactive with regards to them to ensure you're not in for any unpleasant surprises.

A good place to start would be to assess your excess income and savings, as well as your DTI ratio. If you have trouble with this step, you could always drop by at one of our offices for a consultation, and we'll help you out.

Step 3: Putting together a down payment and closing costs

There are many ways to start saving for your new home. Aside from the money you've put away yourself, If you have relatives who are willing to contribute, you should discuss the possibility of using gift money towards your down payment (be sure to provide a gift letter!).

Let's take a look at some of the larger expenses related to the purchase of a home.

Down Payment

As stated earlier, your down payment is a large lump-sum payment you give to your lender at the initial stage of setting up your mortgage. A down payment helps your lender mitigate the risk of default on your part, so a larger down payment will always put you in a lender's good books, and therefore get you better terms. A higher down payment (20 percent or more) will get you smaller monthly installments and lower interest rates, and you'll be able to look at more mortgage options. You also won't have to purchase private mortgage insurance.

As a first-time buyer, you'll likely want to get by with as little money down as possible. Generally you should expect to pay at least 5 - 10 percent down, though there are initiatives that let you buy with as low as zero percent down. Be sure to visit your local HUD, FHA, and USDA offices (and the VA if you've served) to see if you qualify for a zero or near-zero down loan.

Closing Costs

You'll also need to be able to cover closing costs - i.e. the fees you pay for processing your loan. There are many moving parts to determining just how much you'll pay to close, but you should be prepared for between 3 and 6 percent. So if you're buying a home worth $300,000, you'll likely pay between $9,000 and $18,000 in closing costs.

The specifics will depend on factors like where you live and who you're borrowing from. All homeowners pay for title insurance and appraisal fees, while a government-backed loan could have you paying a funding fee as well.

Before you close, you'll receive a document called a Closing Disclosure from your lender. It'll detail all of your closing costs, so be sure to vet it thoroughly before you pay.

Aside from these two major costs, you'll also have to pay specialized inspection costs for certain kinds of loans (for example, A VA loan might require a pest inspection). A lender will likely schedule the inspection on your behalf and pass the cost along to you at the time of closing.

Make sure you're vigilant when it comes to these costs because they can pile up very quickly.

Step 4: Getting pre-approved for a mortgage

Once you're done getting your finances in order, it's time to get yourself pre-approved for a mortgage. Once you apply, you'll get a pre-approval letter from your lender stating how much you can afford to pay. Showing that letter to your real estate agent will help them find homes for you within your budget.

You'll need to apply with your lender before you can get preapproved. The preapproval process usually involves some questions about your financial status and the home you want to buy, as well as a credit check.

The different types of loans

Conventional Loans

Conventional or conforming loans are the most common type of mortgage loan out there; they're the standard option for most homebuyers. Conventional loans are backed by either Freddie Mac or Fannie Mae, and you can get one for as low as 3 percent down.

FHA Loans

The Federal Housing Administration backs FHA loans. Because the government insures them if you stop making payments, FHA loans are less of a risk for lenders. This is why these loans tend to have less stringent credit score requirements. You can get an FHA loan for as little as 3.5 percent down.

VA Loans

VA loans are mortgage loans exclusively for veterans, active-duty members of the Armed Forces, and qualifying surviving spouses. VA loans require no money down, which makes them a popular option among those who qualify. They're also insured by the VA, mitigating the risk of default for a lender.

USDA Loans

USDA loans are meant to encourage people to settle in rural areas, and you can get one for zero percent down. However, there are property price limits that apply, and there are other caveats as well (you'll be required to use the home as your primary residence, for example). If you're buying a property in a designated rural area, you might want to see if you qualify.

Step 5: Finding the right agent

A real estate agent is your guide to the home-buying process and your representative throughout that process. They'll help you find homes that suit your needs, help schedule showings, and negotiate with sellers on your behalf. Aside from this, they'll also help you write up offers and handle other essential paperwork.

In most cases, you'll be dealing with an agent for free. The agent will receive a commission from the seller once a deal is finalized, so it won't be coming out of your pocket. Commissions usually amount to three percent of the purchase price.

The best way to find yourself an agent is to ask around amongst friends and associates, especially those local to the area you're considering moving to. A direct referral is often the most reliable way to find an agent.

While it's possible for you to go through the home-buying process without an agent, we wouldn't recommend it, especially for first-time homebuyers. Purchasing a home is a complex process with potential pitfalls at every turn; your best bet is getting an agent who can help you through it.

Step 6: Beginning the house-hunt | Assessing properties

Once you've found yourself an agent, it's time to start looking at properties. Think long and hard about what your priorities are and what you're willing to compromise on. It's also important to ask yourself whether you're looking for a starter home or one that you'd like to live in for the foreseeable future. For most first-timers, it'll be the former.

Here are some factors to consider when looking for a house:

● Price

● Square footage

● Home condition and the possible need for repairs

● Access to public transportation

● Number of bedrooms

● Backyard/swimming pool

● Local entertainment options

● Local school district ranking

● Property value trends

● Property/real estate taxes

Put all of those factors in a ranked list from most to least important and hand that list over to your real estate agent. They'll use it to find properties that suit your needs. Of course, finding the right property can take quite some time, so be prepared for the long haul and don't try to rush it. Make sure you see plenty of homes before you put down an offer, and keep your realtor or agent in the loop.

Eventually, you'll find a property that meets all your needs and is priced within what you can afford to pay. Now it's time to make an offer.

Step 7: Making an offer

Once you've decided on a home, you have to formally declare your intent to buy it to the seller. This is usually done in the form of an offer letter. An offer letter usually contains details like your current address, as well as the amount you'd be willing to pay for the property. You'll also include a deadline by which the seller should respond.

While making an offer, you'll also put up an earnest money deposit, often just known as earnest money.  The deposit goes towards your down payment and is a way of showing you're serious about buying that specific property. It's usually between 1 and 2 percent of the purchase price and isn't returned in case a deal falls through.

Either you or your agent will send the offer letter to your seller or your seller's agent. The seller can respond in one of three ways:

● Accept the offer: If the seller accepts the offer, you can move on to the next step.

● Reject the offer: If the seller rejects your offer, you can handle that in one of two ways. You'll either submit another offer, or you'll move on to a different property.

● Give you a counter-offer: A counter-offer will likely be sent if your seller accepted most of your terms but had problems with a few specific clauses. You can choose to accept, reject, or respond with a counter-offer of your own.

The offer-counter-offer discourse will continue until both you and the seller can settle on terms. In some cases, you'll have no choice but to walk away and consider another property. In the end, you'll find a home and a seller who is willing to sell on terms acceptable to both you and them. Then it's time for appraisals and inspections.

Step 8: Getting a home inspection

An inspection isn't a necessary part of the home acquisition process, but we'd recommend you get one. An inspector will go through the property and look for problems that could cost you in the long run during an inspection. They'll check the structural integrity, utilities, safety precautions, appliances, and more. Once they're done with their assessment, they'll submit a report detailing the problems they found.

You'll want to go through that report while looking out for major issues. A couple of cracked bathroom tiles or creaky floorboards are an easy fix; a faulty gas-line or asbestos in the ceiling is a cause for alarm. If you find any major issues, you can ask the seller to rectify them before you close the deal. If you can't work something out, you can always move on to another property.

You'll be liable for any issues you encounter after you've closed, so you'll want to do your homework before closing. You can also include a home inspection contingency clause in your offer so that your earnest deposit isn't forfeit if you choose to back out of a sale due to the results of an inspection.

Step 9: Getting a home appraisal

Where an inspection helps you identify issues, an appraisal lets you know the current value of the home you're trying to buy. An appraisal is a necessary part of the buying process; you'll have to submit the appraisal report to your lender before they can sign off on loan. You might have trouble getting a loan if you're offering an amount higher than the appraised value. You can also contest the appraisal if you feel like it's undervaluing your property.

An appraisal contingency helps you negotiate in the event that your appraisal value comes back lower than your offer amount. Depending on the exact clause, you can renegotiate the amount or even back out of the deal due to a low appraisal value, all without losing your earnest money. Be sure to consult your agent when drafting the offer and to consider contingencies to put in.

Step 10: Asking for repairs or credits

With your inspection results in hand, you might find issues in the home that you would like fixed before you settle on a deal. You can ask your seller for concessions in one of three ways:

  • Ask for a discounted price considering the issues
  • Request credits that cover your closing costs
  • Ask the seller to fix the problems before you close

Once you've submitted your request, you simply wait for a response from the seller. If they reject outright, you may want to consider walking away from the sale. If you have an inspection contingency, you can do so without forfeiting any of your earnest money deposits.

Step 11: Doing a final assessment

As a final measure, before you close, you should do a final walkthrough of the home. You should keep an eye out for the things you requested repairs for and see if any progress has been made. Also, check your utilities and appliances one final time and check if anything's been left behind by the previous owner.

If everything looks good, you're all set to close.

Step 12: Closing on your new home

Your lender will give you your Closing Disclosure three days before closing. Read through your Closing Disclosure and make sure the numbers don't stray from your Loan Estimate, which you would have received three days after your initial application.

Once you've reviewed your Closing Disclosure, it's time to attend your closing meeting. Bring your ID, a copy of your Closing Disclosure, and proof of funds for your closing costs.

You'll sign a settlement statement, which lists all costs related to the home sale. This is when you pay your down payment and closing costs. You'll also sign the mortgage note, which states that you promise to repay the loan. Finally, you'll sign the mortgage or deed of trust to secure the mortgage note.

Once you're done closing, congratulations! You're now officially a homeowner.