Buying a home can be a long and complex process. New homebuyers are faced with many big decisions, and one small mistake can have a major impact on the transaction. If you are a home hunter in search of your dream house, take the time to acquaint yourself with the ins and outs of real estate transactions with these home buying tips.
Obstacles During the Home Buying Process
The home buying process begins when you get prequalified or preapproved for a mortgage. This will tell you how much you can realistically borrow. Next, you will want to find a real estate agent who can show you homes and negotiate on your behalf. Once you have toured some homes and found the right one, it is time to make an offer. Sometimes an offer sticks, and other times you will need to negotiate with the seller.
After reaching an agreement on price, you will need to get a home inspection. Most purchase offers are contingent on home inspections to ensure that there is no major structural damage or other problems that need to be fixed. If problems are found, you have time to renegotiate your offer or withdraw it without risk of penalty.
If the home inspection goes well, you can then work with your mortgage lender to have your home loan approved and finalized. Part of this process involves arranging for an appraiser to provide an estimate for the value of the property. This third-party company should be not associated with neither the buyer or the lender.
Once the appraisal has been completed, all the necessary paperwork is reviewed, signed, and filed. Your lender will generally arrange for a title company to handle this paperwork and to check that the seller is actually the rightful owner of the home being sold. At closing, you will need to sign more paperwork and wait for the loan to be funded. After the check is delivered to the seller, the home is yours and you are ready to move in immediately.
While the process may some cut and dried, there are many things that can happen in each step of the process. Your loan application may be denied, you may not have enough for a down payment, you may underestimate the cost of repairs and renovations, the lender appraisal may be too high, or the seller may pull out at the last minute. When these types of obstacles occur, it is important to respond appropriately.
1. Know Your Options for Funding a Down Payment
Most people do not have the necessary funds to purchase a home without a mortgage, and unless you apply for a VA loan which requires zero down, you will need to come up with a down payment. While most conventional loans require 20 percent down, FHA loans require a minimum down payment ranging from 3 to 15 percent of the sales price. If you are a first-time homebuyer, programs may be available in your area that can help you with your down payment.
2. Check Your FICO Score and Credit History
Before going to your local bank to apply for a home loan, take the time to check your credit score and history. Lenders look for a credit score of 720 or above if you are applying for a conventional loan, and 620 or above if you are interested in an FHA. If your FICO score falls below these numbers, you may not qualify.
3. Be Prepared for an Unexpected Appraisal
Before a lender will finalize a home loan, they will send an appraiser to determine the value of the home. If the appraisal comes in below the desired purchase price, the lender will not approve the loan unless you are able to come up with the difference out-of-pocket. If this happens, you have a few options. You can ask the seller to adjust the price, pay the difference, get a second appraisal, or walk away from the transaction.
4. Understand that Rejections Happen
Just because you received a prequalification or preapproval from your lender does not mean that you will definitely receive the loan. During the underwriting process, the underwriter may discover new information that could change the circumstances of your eligibility. For this reason, it is important to disclose everything about your finances and purchasing history to the lender.
5. Take the Time to Pay Off Existing Debt
Ideally, you do not want to walk into a mortgage carrying a lot of debt. Most lenders will not approve a home loan if you are spending more than 36 percent of your gross monthly income on all your debts. The higher your debt-to-income ratio, the more of a risk you are. If you have a lot of debt, try to pay most of it off before applying for a loan.
Learn More About the Home Buying Process
The home buying process comes with many unexpected obstacles. However, by familiarizing yourself with these challenges and how to overcome them, you can become a successful purchaser. For more information about the home buying process, contact the Katie Zarpas Group.