Step 1: How much can you
afford
Probably the most important step, and certainly the step you should take first,
is to figure out how much you can afford to spend on a new home. If you haven't
set up a budget that shows you how much you're spending on everyday things, now
is the time to do it.
Step 2: Getting Pre-approved
for a Mortgage
The difference in getting pre-qualified and getting pre-approved is that
pre-qualified just means that you have told a lender your income level and your
debt and credit information, and the Home Mortgage Company, Inc.has estimated
what you can afford.
Pre-approval, however, puts you much closer to the actual loan and means that
the lender has done the legwork of pulling your credit report, checking your
debt-to-income ratio, and has done a more in-depth analysis of your financial
situation. The benefit of being pre-qualified or pre-approved is twofold. Not
only do you have the added comfort of knowing what you can afford, the seller
may also accept your offer over another if you are pre-approved and the other
party is not.
The logic here is that a pre-approved offer is more likely to result in a
completed sale, while an offer by a buyer that has not been pre-approved is not
such a sure thing. The seller often doesn't want to take the chance of losing
the sale -- even if your pre-approved offer is slightly lower.
Step 3: Other Costs
In addition to the mortgage itself, you'll also have to add property tax and
insurance to your monthly payment. And, if you don't make at least a 20% down
payment, you might also have to add Private Mortgage Insurance. Also, don't
forget the expense of closing costs. It can eat into the cash you have available
for the down payment.
All of these additional costs add up, so make sure you are comfortable with the
total amount of your monthly payment and know how much you can put into a down
payment before you begin your search and fall in love with a house you can't
really afford.
Step 4: Find a house that
you want
When you've found the house and are ready to make an offer, you need to
make sure the offer includes all of the contingencies, concessions, and other
details you need it to cover. Once negotiations are complete, now is the
time to make formal loan application, and order your home inspection (which is
recommended).
Step 5: Closing
Assuming the inspection turns out well, and all other contingencies are met,
you're now in the home stretch. Your title company will do due diligence, which
includes a title search to determine if the seller does indeed hold the title to
the property and there are no other legal claims against it.
Once everything is clear, then you're ready to sign what may seem like the
largest stack of documents you've ever seen, since your formal loan application!
It is at the closing that the title to the property will be transferred to your
name, your homeowners' insurance (which you have to have already secured) begins
coverage of the property and you are officially committed to your mortgage. It
is, unfortunately, also time for you to plunk down your cash for the down
payment and closing costs.
