If you’re a Millennial like I am, chances are you’re in the market to purchase your first home. It’s exciting! But since it’s most likely the largest purchase you’ve ever made, it can quickly turn into a nerve-racking endeavor. Having just completed a transaction, I found that following these guidelines can ensure a smooth process.
Every homebuyer’s experience will be different because of a number of variables such as what state you live in and the condition of the housing market there. But here are some basic guidelines to see you through the process.
The Financial Preparation
Hopefully you started saving for a down payment months or years before you were ready to purchase a home. Before you start touring homes with a Realtor, your financials need to be in order. Here are some items for your checklist:
- Maximize your down payment. Put 20 percent down, and you’ll typically avoid paying Private Mortgage Insurance. PMI lowers the risk to the lender making the loan. It protects the lender, not you, in the event that you fall behind on your payments. While many lenders now have programs for first-time homebuyers that require as little as 3 percent down, if you don’t meet the 20 percent down payment, you’ll most likely have to make monthly PMI payments.
- Check your credit score. Your credit score is a key factor in determining whether you’ll be approved for a mortgage and the interest rate you’ll be charged.
- Calculate how much home you can afford. Play with online mortgage calculators to determine your price range. Keep in mind that some calculators only show the monthly principle and interest. They don’t include property taxes and homeowners insurance that are usually combined with your monthly payment.
- Get pre-qualified before you start shopping. This gives you an estimate of the loan amount a lender will likely be willing to approve for the purchase of your home.
The Fun Part
Perhaps the most exciting part of purchasing a home is shopping for one. If you’re an inexperienced homebuyer like I was, an experienced real estate agent can help you find homes in your desired location and walk you through each step of the process.
Once you find a house that feels like home to you, consider how much you’re willing to pay for it. Real estate websites often show the listing price of a home and maybe even the previous purchase price. A real estate agent can assist with this as well so your offer is reasonable.
If at all possible, avoid a bidding war. In competitive real estate markets with limited inventory, the house you want may receive multiple offers. You’ll have to increase your offer to stay in the running. Don’t let your emotions take over. Stay disciplined and stick to your budget. You’ll find another home that meets your criteria – and doesn’t break your budget!
The Purchasing Process
Once you and the seller have agreed to the purchase price, the mortgage process begins. At this point your lender will require several pieces of information from you such as bank statements, pay stubs, and tax returns. The whole process can be confusing. Don’t be afraid to ask questions! Lenders want to make sure buyers understand all the terms and consequences. The more you know, the less of a risk you will be to them.
Now is the time to begin shopping for homeowners insurance. Tip: If you bundle it together with your car insurance you might save some money.
Prior to closing, a third-party professional will inspect the house for any defects that the sellers did not disclose. If the inspector uncovers any issues, you can renegotiate with the seller to have the items fixed or the price adjusted.
The final step is the closing, which will take place on a predetermined date. You’ll meet with the sellers to sign a seemingly endless number of legal documents and pay costs and escrow items. After everything is signed, you’re a new homeowner. Congratulations!
This article isn’t meant to be a comprehensive guide to the home-buying process. Hopefully knowing the basics of what to expect will help you through what can feel like an overwhelming process. Just remember this: As long as you set a budget, get professional help and seek answers to any questions you have along the way, you’ll be successful in your first purchase!
Austin Stagman is an Investment Advisor with Bedel Financial Consulting Inc., a wealth management firm located in Indianapolis. For more information, visit their website at bedelfinancial.com or email Austin.