The Beginning of the Home Buying Process
Where does the home buying process begin? In short, you start with yourself. Before making a decision on the house to buy you have to take a practical and introspective look at your financial standing, your budget, and your aspirations. Before the work of looking for a loan and the house to buy begins, it is important that you have an understanding of your needs and means. It's easier said than done, but here are a few points to talk over with your family:
Look into your savings. Your savings, or whatever money you have to contribute as a down payment, will form a huge part in your purchasing decision. Although most loans require a 20% down payment (meaning 20% of the cost of the home you want to buy), there are alternatives like an FHA loan which has down payments as low as 3.5%, or VA loans which may have no down payment requirement. Bear in mind that the bigger your down payment, the lower your rates. Also, larger down payments reduce the amount of interest you pay. Beyond the down payment, you'll also need cash for closing costs and fees. Although some loans have lower costs than others, you will still need to pay for costs out of pocket.
Credit score and credit reports. A credit score is a numerical representation of your credit risk -- the higher the number, the better your creditworthiness. Credit scores are one of the important criteria when applying for a loan. It affects the terms of the loan (with a better score comes better terms and rates). You'll also have an easier time securing a loan if your debt-to-credit ratio is low. A debt ratio below 43% is deemed acceptable by most lenders.
Talk to your lender. Before you go house hunting, know what you can afford. This will save you time and heartache, since you'll avoid falling in love with a house you can't afford. Get pre-qualified by a potential lender, if you can, in order to get a realistic picture of how much house you can afford. Some borrowers choose to be immediately pre-approved for a loan as it gives them a stronger bargaining position during price negotiations. Naturally, being pre-approved has a more detailed and involved process than being pre-qualified.
Make a financial plan. What you can get from the lender is not necessarily the best financial decision for you. Ask yourself if you can handle the payments and still have the quality of life you desire. You're allowed to ask for a lower amount than the approved loan.
House searching. It helps to have a plan to execute at this stage. Draw up a profile of the home that you would like: a single family home or a condo? How many bedrooms, bathrooms, and square feet? What school district? Once you have a clear idea of the house you want, sorting through your options will be far easier.