Get your down payment together
Some mortgage types have low or zero down payment options. For example, FHA loans allow you to put down as little as 3.5%. But for most loan types, if you put down less than 20% of the home purchase price, you'll need to pay mortgage insurance -- for a conventional loan, it's called private mortgage insurance, or PMI for short. This can make your monthly mortgage payment higher.
Figure out what's realistic for you and your budget. If you're able to save up for a 20% down payment, go for it. If not, aim to put down as much as possible. Here's why: You can sometimes get rid of PMI once you have 20% equity in the home (when you owe 80% or less of the home's value). The higher your down payment, the less time you'll spend paying mortgage insurance every month. You can read more about PMI below.
Figure out where your down payment will come from. Maybe it'll be a combination of savings and an incoming bonus from your job. It's a good idea to set money aside in a separate savings account so you don't accidentally spend it.
Gather documentation
There are certain documents required for a home loan application, and gathering these in advance will make the process go more smoothly.
Mortgage lenders generally require:
- Two months of pay stubs
- Two months of bank account statements
- Your most recent tax return
If you're self-employed, there may be additional documentation required. Check out our guide to getting a mortgage while self-employed for more information.
Prepping to purchase a home
Once you've taken the steps above, you're ready to gear up to buy a place of your own. Here's what you'll need to do.
Select a real estate agent
You don't need to use a real estate professional to buy a home, but it's a good idea. A real estate professional can help you find the best homes, negotiate a fair purchase price, and navigate complex contracts. As a buyer, you don't pay a fee to use a real estate agent. So why not benefit from someone else's expertise?
Your ideal real estate agent should know the area well but not be pushy. The last thing you need is pressure to buy a home that's not right for you or a purchase price that's too high for your budget. You can ask friends or neighbors for agent recommendations -- that's generally the best place to start.
Choose the best mortgage type for you
Getting a mortgage can be tricky, so if you're new to the process, you can check out this beginner's guide to home loans. It'll show you how to get a mortgage and what requirements lenders might have.
From there, you'll need to decide what type of mortgage to get and what loan term you want.
Some loan terms to consider are:
- A 30-year mortgage: You'll pay off your loan in 360 installments with relatively low monthly payments.
- A 20-year mortgage: You'll have higher monthly payments, but pay less interest overall.
- A 7/1 ARM mortgage: You'll pay the same interest rate for seven years, but your rate adjusts annually after that. In some cases, an adjustable-rate mortgage could give you a lower rate upfront compared to a 30-year or 20-year mortgage. ARMs are available with a variety of terms; a 5/1 ARM is another commonly available mortgage type (the rate remains the same for the first five years, then changes annually).
Once you land on a loan term, you'll need to choose the right type of mortgage for you:
- FHA loans let you put down as little as 3.5% of your home's purchase price, and they're good for first-time mortgage borrowers who don't have great credit.
- USDA mortgage lenders offer loans for low-income applicants buying in rural areas.
- VA lenders let you take out a VA loan with no down payment -- provided you're a U.S. veteran. You will likely have to pay a VA funding fee, however.
Find a mortgage lender
Choosing a mortgage lender can be tricky. You can research lenders yourself or work with a mortgage broker.
Don't just look at rates. Also pay attention to closing costs, which are the fees you'll pay to finalize your loan. Also notice which lenders require you to pay mortgage points (a type of discount you can buy to lower your mortgage rate).
Get pre-approved for a mortgage
Getting mortgage pre-approval allows you to see what loan amount you qualify for. To get pre-approved, you'll need to provide information about your income and existing assets (for example, how much money you have for a down payment).
A lender will also run a credit check to make sure you're a trustworthy borrower. Generally, 620 is the minimum credit score for a mortgage, but some loan types are designed for borrowers with lower scores.
Mortgage shopping is the process of gathering offers from multiple lenders. You can do it yourself or use a broker. It's a good idea to compare a few offers rather than accept the first offer you're given.
The purchase process
Once you're approved for a mortgage, it's time to put it to good use. Here's how.
Make an offer
First, you'll need to make an offer on a house. You can offer to pay what the home is listed for, or suggest a lower purchase price. In some cases, you might choose to offer a higher price than what the seller asks for (for example, if you expect competition from another buyer).
If your offer is accepted, you'll put down earnest money, which is a small deposit that's placed in an escrow account until your closing.
Inspections and appraisals
Once you have a real estate contract in place, you'll need to go through a home inspection. That's when a professional comes in and checks for problems with the property. If issues are uncovered, you can generally go back to your seller and ask to have those problems fixed before you close.
Your mortgage lender will also arrange for a home appraisal to ensure your home is worth enough to cover your loan.
Closing
Once everything checks out, you'll close on your mortgage loan. You'll meet with your lender, sign some documents, and pay your closing costs (or agree to roll them into your mortgage and pay them off over time). Here's what to expect when you close on your home.
All that's left then is to get the keys to your new home.
Homeownership
Once you close on your mortgage, you get to start the fun part -- homeownership. There are several expenses of homeownership you'll need to prepare for.
Property taxes
You'll pay property taxes either monthly or quarterly. They're calculated by applying your municipality's tax rate to your home's assessed value. If your home is worth $300,000 and your local tax rate is 1.5%, your annual property taxes will cost $4,500.
Homeowners insurance
Homeowners insurance protects you from certain expenses when damage occurs to your home. It also protects you if someone gets injured on your property. You'll either pay for homeowners insurance once a year or monthly, depending on how your mortgage is set up. It's best to determine how much home insurance you need before shopping around.
Maintenance and repairs
Owning a home means doing upkeep and fixing components that break. That could be anything from a leaky roof to a leaky basement. Be sure to budget for maintenance and repairs so you're not caught off guard when issues creep up.
Private mortgage insurance
If you don't put down 20% of your home's purchase price at closing on a conventional loan, you'll generally have to pay private mortgage insurance. PMI generally equals 0.5% to 1% of your loan amount and is paid monthly. This protects your lender in case you can't pay your mortgage or it has to foreclose on your home.
You'll pay PMI until you have 20% equity in your home. If you have 20% equity, that means you still owe 80% of the home's value on your mortgage -- equity is the difference between what you owe on your mortgage and your home's value.
HOA fees
If you buy a home that's part of a homeowners association (HOA), you'll need to pay monthly dues. These are also called HOA fees. Those fees cover maintenance of common areas, like a community gym or swimming pool, as well as services like trash removal.
Buying a home isn't an overnight process, but knowing what to expect will make it easier. Now that you understand how to set a budget, apply for a mortgage, navigate the purchase process, and anticipate ongoing expenses, you can focus on searching for the perfect home to call your own.
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Eric McWhinnie