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10 Steps to Buying a Home
Congratulations, educating yourself is an important step toward becoming a homeowner. Using NeighborWorks America’s “Realizing the American Dream” curriculum, this section will walk you through the steps of the home buying process. Click here to download a checklist with each of these steps.
Signing up for a home buyer education course is the first step to becoming an informed home buyer. A home buyer education course will provide information on a variety of topics related to the home buying process.
Topics covered include:
- Money management
- How much you can afford
- Credit
- Applying for a mortgage
- Shopping for a home
- Down payment and closing cost requirements
- Making an offer
- The home inspection
- Preparing for closing
- Post-purchase responsibilities
What Does a House Payment Include?
- A house payment usually includes four things– Principal, Interest, Taxes, and Insurance (collectively referred to as PITI). The principal is the amount borrowed or still owed. The interest is the amount that the lender charges for lending the money to you. Finally, the taxes and insurance include property taxes, homeowners insurance, and sometimes, mortgage insurance.
Other Costs Associated with Buying a Home?
- Down payment. The minimum amount of the down payment is determined by the lender and loan type and is usually 3-5% of the purchase price; however, making a larger down payment will reduce the amount you borrow and your monthly payments.
Closing costs. Closing costs can range from 2-7% of the purchase price, and can include the following:
- fees paid to the lender to review the loan
- fees paid to the city, county, or state for transfer taxes or recording fees
- fees paid to professionals or businesses that provide services to make the sale go smoothly, such as lawyers, and escrow agents
- fees the borrower may be asked to pay in advance, such as a credit report fee or an appraisal fee.
Need Help With These Costs?
TSAHC’s down payment assistance calculator can also help you determine your monthly payment.
Home buyers should contact a lender for a loan pre-approval before they start looking for a home so they know how much they can afford to spend. A loan pre-approval can also demonstrate to a seller you are serious about buying a home. Be sure to shop around for a reputable lender and a loan product with rates and terms that work best for you.
4 Factors to Determine If You Are Credit-Worthy
Lenders analyze the following factors to determine if you are credit-worthy and if so, how much you can afford to spend. These factors are capital, capacity, credit, and collateral. We’ve broken each factor down below.
Capital
This is the amount of cash you have available. The more cash you have in savings accounts or other places, the more comfortable a lender is that you can afford homeownership.
You will need to show that you have enough capital to pay for the following:
- Down payment
- Loan fees
- Closing costs
- Escrow impounds (advance payments for property taxes and insurance)
- Reserves (money set aside for repairs and maintenance)
- Moving expenses
Capacity
This is your ability to earn enough income to make your mortgage payments and still pay all of your other living expenses. Lenders look at several things to determine capacity including your current income, your income history, your earning potential, and your debts.
- Current Income: Lenders look at your total household income to see that you earn enough to pay the new house payment and other expenses. The lender is going to look at your gross income to determine what you can afford; however, to be safe you may want to consider what you can afford based on your net income (or take-home pay) instead.
- Income History and Earning Potential: Lenders want to know if you have stable income or held stable jobs for the past two years. They also want to know how long you have held your current job and how likely you are to continue to earn comparable or better income.
- Amount Owed: The lender will consider your creditor debts, such as monthly payments on loans, credit cards, child support or alimony. These include car payments, furniture payments, and student loan payments. Other monthly expenses such as utility bills, auto or life insurance and groceries will NOT be included in your total debt.
Lenders will also calculate your debt-to-income ratio (DTI), also known as the back-end ratio, to determine how much of your gross monthly income is needed to cover all your debt obligations. Follow these steps to determine your approximate DTI:
- Add up all your debt (including your mortgage, car loans, child support and alimony, credit card bills, student loans, etc.)
- Divide this amount by your monthly gross income.
- Then multiply this amount by 100. This percentage is your DTI.
Credit
To check your credit history, the lender will order a copy of your credit report and credit score from the three major credit bureaus: Experian, TransUnion, and Equifax. This is how the lender determines how you have handled other debts and how likely you are to repay your home loan.
It is a great idea to review your credit report before you purchase a home.
- 1. Request Your Credit Report. To order a copy of your own credit report, visit www.annualcreditreport.com. A free copy is made available once every 12 months. It will not include your FICO credit score.
- Review Your Credit Report. Your credit report includes the following:
- Identifying information (name, current address, social security number, date of birth)
- Your credit accounts (credit cards, car loans, etc.)
- Public information such as bankruptcies, foreclosures, tax liens and judgments (will be listed on your report under the public record section)
- Credit inquiries initiated within the past two years
Review all information to make sure there are no errors. Housing Counselors working for a non-profit, government entity, or community based organization can also provide you a copy of your credit report as well as guidance when reading through it. Find a counselor near you.
- Order Your Credit Score. Home buyers can obtain a copy of their credit report and FICO score by visiting www.myfico.com. There is a charge for obtaining your FICO score.
What is a Credit Score?
The credit score is a number grade attached to your credit report. Creditors consider your score when deciding whether to approve your application for a loan or credit card as well as how much credit to extend and at what interest rate. The higher your score, the better. Scores range from 300-850.
What Determines Your Credit Score?
- Your payment history – What is your track record paying bills on time?
- The amount of outstanding debt – How much is too much?
- The length of your credit history – The longer the better.
- The types of credit you use – Is it a healthy mix of installment, credit cards, etc.?
- New Credit – How many new accounts have been opened lately? Too many in a short period of time can be trouble.
No Credit or Bad Credit? Beware of “Quick Credit Fixes”. Most of the companies that make these claims charge you money for things you can do on your own. Nonprofit financial counselors are available to help you for little to no cost. Find a counselor near you.
Collateral
Your new home will be collateral for your loan. The lender will order an appraisal of the home to ensure it is worth as much money as you are borrowing.
- The appraiser uses his or her professional training to estimate the fair market value of the house you want to buy. The fair market value is used to calculate your loan-to-value ratio (usually described as a percentage), which is the loan balance you owe, compared to the appraised value of the house. Because lenders want you to invest some of your own money in the house, they will generally lend less than the fair market value.
- Lenders review the appraisal and inspection report to determine fair market value and to make sure the house is in decent condition. If the appraisal or inspection report shows that any of the major parts of the house are not in good shape (for instance, the house needs a new roof), the lender may only agree to make the loan if the roof is replaced first. This is called a property contingency. It is for your protection as well as the lender’s.
Once you know how much you can afford, you can start thinking about what features you want in a home and what features are absolutely necessary.
Factors to consider:
- Parks and entertainment
- Size of family
- Lifestyle
- Special circumstances
- Schools and child care
- Accessibility
- Work commute
- Location
- Neighbors
- Grocery stores
House hunting can be fun. Take your time, look at many homes, take notes and ask questions. And know that there are many professionals available to help you find a home and ensure the home buying process is successful.
Professionals may include:
- Homeownership Counselor– Neutral third-party trained to educate you about the home buying process.
- Texas REALTOR®– Licensed by the state and specially trained to help people buy, sell, or rent houses.
- Lender– Banks, savings associations, credit unions, or mortgage companies licensed to provide home loans.
- Home Inspector– Checks structural and mechanical parts of property and reports on major problems discovered before home is purchased.
- Appraiser– Determines fair market value of home you want to purchase.
- Surveyor– Checks the measurements of the property and land around it. Usually required by lender.
- Insurance Agent– Assists you in finding homeowners insurance that covers both hazards and liability. This insurance is required by the lender.
- Escrow Officer/Title Agent– Manages the “escrow period”, which is the time between the date the purchase contract is signed and the date the closing takes place.
- Title Insurance Officer– Researches the public records and issues a title report that documents ownership and other important information about the house (liens, easements, zoning restrictions, etc.)
The offer is a written purchase proposal signed by you and anyone else that will be a part-owner. Generally, your REALTOR® will write the offer for you.
The offer should include:
- Price you want to pay for the house
- Amount of earnest money you are willing to commit (generally 1%-3% of the purchase price) and who will hold the money during the escrow period. Earnest money serves as a good faith deposit and is usually applied at closing to your down payment and closing costs.
- Option period/money– A non-refundable fee paid to the seller for an agreed upon number of days during which the buyer can cancel the contract for any reason without penalties
- Legal names of all of the buyers and sellers
- The address and exact legal description of the house
- The closing date
- Make sure the date is realistic – you will need time to obtain financing and have inspections
- Generally this is within 45-90 days
- How you intend to pay for the property
- A list of material goods you expect the seller to leave in the house, such as appliances, hanging lamps, and draperies
- All contingencies (things that have to happen or the contract may be canceled)
- If a loan is involved, the contract is usually contingent on the bank approving the loan
- Breakdown of who pays the closing, title, loan and escrow expenses and the cost of any required inspections
- Time limit for the seller to accept the offer
- Usually 24-48 hours
- Once you and the seller have negotiated a price and you have both signed the offer, you have a binding contract.
After the offer has been accepted, you should find a professional home inspector immediately and make an appointment to meet him or her at the property. You will usually have to pay the inspector on the day of the inspection.
Next Steps:
- The inspector will send you the written inspection report within a few days. Your lender may want a copy. If the inspection shows major problems with the house, you may cancel the contract.
- If the problems are minor, your REALTOR® can help you negotiate with the seller to repair or lower the price of the home.
- Depending on where you live or what type of home you are buying, other inspections may be required, such as to detect lead-based paint or pests or to check water quality and septic systems.
- Most lenders will wait until you have received a satisfactory home inspection before they order an appraisal. This is to ensure that you still plan to go through with the purchase as planned and enables the lender to factor in any price adjustments you may have negotiated based on the inspection.
After you have a signed purchase contract and have completed the inspections and final negotiations, you apply for the mortgage loan by completing a standard mortgage loan application.
Once you’ve applied with a lender, they will be required to provide you with an official Loan Estimate within 3 days of your application. The Loan Estimate provides you with important information, including the estimated interest rate, monthly payment, and total closing costs for the loan. The Loan Estimate also gives you information about the estimated costs of taxes and insurance, and if the interest rate and payments may change in the future.
Spend time shopping for your mortgage loan and compare Loan Estimates from various lenders. The goal is to get the best loan product, rate, and terms, but you also want to find a lender who will take the time to understand your situation. Remember, you don’t have to use a lender just because they provided you with a pre-approval letter or a Loan Estimate.
Interested in our down payment assistance programs? Work with a TSAHC-approved lender.
Next Steps:
- Loan Processing: Once the loan application is completed, it is assigned to a loan processor. The processor completes your loan package by ordering your credit report and an appraisal of the property, verifying your employment, rent and bank account balances.
- Underwriting: An underwriter reviews your complete loan application package and decides whether to approve it according to the lender’s loan program guidelines.
- Approval: If you are approved, your lender will send you a commitment letter. The commitment letter is a formal loan offer that states the amount and terms of the loan. You will be given a set amount of time to accept the offer and close the loan by signing this letter.
Homeowners insurance is required by the lender in the amount of the mortgage to protect you and the lender against hazards like fire or storms. Most homeowners, however, opt for a more comprehensive policy that also offers liability protection. Some may even purchase flood insurance if their home is located in a flood plain.
Cost of Insurance
Factors that affect the cost of your insurance include:
- Geographic loss experience – if an insurance company has lost money in your location
- Type of construction
- Type of fire protection & proximity – professional vs. volunteer fire department
- House size & condition
- Type of contents
- Your credit score
- Type of policy
- Size of deductible
- The company you choose – shop around or bundle with auto insurance to save
Types of Insurance Coverage
Property Protection
Property protection covers your property- home, other structures or possessions- if they are lost or damaged due to perils such as lightning, fire or wind (All policies will tell you which perils are covered). Most policies are divided into 4 main sections:
- Coverage A: The home (dwelling)
- Coverage B: Detached Structures
- Coverage C: Contents (personal property)
- Coverage D: Additional living expenses
Your insurance agent will help you decide on an amount of insurance to purchase to cover the house.
Replacement Cost
In some cases, the insurance company requires that you purchase enough insurance (an amount equal to at least 80 percent of the value of your property) to get replacement cost coverage. The insurance value is different from the appraised value of the house; it is what it would cost to repair or replace a property and not what the market thinks is the value of the home.
Liability Protection
Liability insurance is called third-party coverage since it pays other people, not you. A typical homeowner’s policy provides $100,000 of liability coverage, although the amount can be increased or decreased. This coverage applies if you, any relative or dependent person in your care who lives in your home or your domestic pets become legally liable for injuring someone else or damaging their property.
In addition to liability insurance, your policy will include medical payment coverage that pays the medical costs of those hurt on your property regardless of liability. It is usually limited to $1,000 to $10,000.
Flood Insurance
This is typically an additional policy that is procured in addition to the traditional homeowners’ insurance policy. It is a good idea to get this insurance if your home is located in a flood plain as traditional homeowners’ insurance does not cover flood damage in this case. See more details in our Blog.
The closing is the day when the seller receives the check and the buyer receives the deed to the property. Generally, this is the also the day that the buyer receives the keys to their new home.
Prepare for Closing Day
- At least 3 days before the closing, both you and the seller should receive a copy of the Closing Disclosure, which states the final terms of the loan. It tells the seller how much money they will pay or receive at closing and tells you how much money you need to close. Compare this with your original Loan Estimate. Now is the time to resolve problems—if the Closing Disclosure doesn’t match your original Loan Estimate, ask why.
- Do a final walk-through inspection one or two days before closing to make sure that the house is in the same condition it was at the time the offer was made or any repairs required before closing were made.
- Get a cashier’s check or wire instructions to fund your down payment and closing costs.
- Meet with the lender or title company to sign the mortgage papers to borrow the money. Be sure to allow enough time to read all the documents and ask as many questions as you need so that you understand the terms of the loan.
- Call the utility companies and arrange to have the utilities transferred to your name as of the closing date.
Closing Documents
At the closing table you will be signing many binding contracts, and it’s important that you understand what you are signing. The most common documents include:
- The Closing Disclosure: discloses final terms of the loan and is completed by the escrow agent/title agent, is an itemized list of all services provided and fees charged to both you and the seller.
- The Mortgage Note: your promise to repay the lender according to the agreed terms.
- The Mortgage: document used to secure the mortgage note. Recognizes your ownership of the property but gives the lender the right to claim the property if you fail to meet the terms of the note.
- Affidavits: can vary and attest to certain information in writing.
- The Deed: legal document conveying title to the property from seller to buyer.
- Title Insurance: policy that protects against any title defects, such as liens or other claims against the property.
- Title Abstract: summary of the public records that relate to ownership of property.
- Survey of Property: contains boundaries of the property and all structures and important features of property.
- Escrow Analysis: provides detailed information on your escrow account. An escrow account is an account set up by your lender to pay certain property-related expenses, such as property taxes and insurance premiums, on your behalf.
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