Step 1: Estimate your budget and save for a down payment.
Knowing how much house you can afford is an important first step. You need to establish a monthly budget and stick to it. Having clear & defined goals makes saving for a down payment easier.
Build up your savings account.
To start your savings plan, you must establish a budget. Be sure to include all your monthly expenses plus an estimated mortgage payment. Once you have a budget, you can set weekly or monthly deposits to go into an account such as a high-yield checking account, money market, or CD, where you can also earn interest and supplement your savings goal.
Understanding how much you can borrow.
To create a better picture of your finances, lenders will look at your debt-to-income ratio (DTI). To determine your DTI, lenders will compare your total monthly debt payments like taxes, insurance, car payments, credit cards, student debt, and your new mortgage payment with your gross monthly income. Each lender has its own preferred DTI ratio for approving a mortgage.
For example, if your total monthly debt payments are $2,000 and you earn $6,000, your DTI is 33%.
Determine your down payment.
A down payment is part of a home's purchase price you pay upfront. Putting down more cash upfront reduces the amount of money you have to borrow. For most loan types, you will have to put down at least 3% of the cost of the home, although lenders would like to see you put down at least 20%.
For example, if you consider buying a house for $425,000, you will need to save $85,000 just for the down payment. This doesn't take into account closing costs (roughly 3% of the mortgage amount) and the money you might need to prep the house for moving in.
The higher your down payment, the lower your loan-to-value ratio, or LTV. The lower the LTV, the lower the lender's risk of loaning you money. The higher the LTV, the higher the risk, and the lender may require you to take out mortgage insurance to protect themselves if you default on the loan. Private Mortgage Insurance (PMI) must be purchased from a private mortgage insurance provider and have its own guidelines for approval.
Use our mortgage calculator to get an idea of what monthly payments you can afford.
Step 2: Check your credit score!
Alright, now you understand why saving is important when buying a home, so let's talk about a key factor to getting a loan, your credit score and credit history.
Credit scores provide lenders with an indication of how you pay your bills, and they range from 300 to 900 (the higher, the better). It would be best to shoot for a minimum score of 680; however, lower scores could still result in loan approval based on other characteristics. It's important to note that there are many scores available to lenders, and not all use the same ones. What you receive from one lender may differ from that of another.
Mortgage Lenders will obtain your score and credit report from all three agencies and use them to evaluate your application. It will be the 'middle score' of the three to determine if you qualify for the loan program you have requested and what rate you pay for that loan.
You are entitled to a copy of your credit report annually from the three major credit reporting agencies: Trans Union, Experian, and Equifax. You can set up an account with each and access information when needed. You can also use a website like www. freecreditreport.com for a copy.
Upon receipt of your credit report, check it for accuracy. Ensure that all accounts you have (for example: personal loans, credit cards, store cards, student, and car loans) are listed and that the payment records appear accurate. Should you find a mistake, contact the credit reporting agency immediately so that they can ensure the creditor researches your account and appropriately reports and/or corrects the information. You can also reach out to the creditor directly and ask them for assistance. While mistakes are rare, they can impact your score and ability to get approved for the loan.
If your score is lower than you'd like, don't worry. You can improve it! Pay your bills by the payment due date each month, limit the amount you borrow, and don't close older revolving accounts like credit cards even if you do not use them anymore. The length and depth of your credit history is important too!
Step 3: Prepare your Financial Documents and Get pre-approved!
With just a few basic pieces of information, a lender can tell you how much you can qualify for before starting your home search. All lenders will look for documentation of your earnings, how much money you have saved, and your current debt.
Have your documents ready.
It's important to prepare your financial documents and have them handy through the mortgage process. A lender will request recent pay stubs, W2s, and bank statements to paint a picture of your current financial situation. Bank statements will provide lenders with an overview of your account status and spending patterns. Pay stubs, W2 tax forms, and alimony payments verify your income and employment.
If your partner or someone else will be on the loan with you, they'll need to provide these documents as well. If you're self-employed, you might have to provide a few more documents to show your proof of income.
A pre-approval provides real estate agents and home sellers confidence that you are qualified to borrow and can afford the home they are selling; it will give you a negotiating advantage. When you know the amount of money you can borrow, you can set a price range and determine how much you can comfortably spend on a home. When it's time to present an offer to the seller, they will see that you're qualified for a mortgage amount that will fund the purchase of the house. Check out this article to learn more about the pre-approval process.
It's important to note that you can be pre-approved based on the information you initially provided but may need to submit additional documentation throughout the process for final mortgage approval.
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Step 4: Time to find your dream home and choose a realtor.
Shopping for a new home is much easier than it used to be, with countless websites and smartphone apps equipped with powerful search and filtering functions. These tools, combined with the assistance of a realtor with access to massive databases of homes for sale, make finding your dream home easier than you think.
The search is on!
It is important to be prepared when you start looking for a home. First, figure out what you are looking for in a home. This includes what type of house (ex. split-level or ranch style), how many bedrooms, bathrooms, amenities, or bonuses (ex. a deck or pool), and the neighborhood.
Once you have your wish list and know where you want to look, start with homes in your price range. Visit schools, parks, retail stores, and restaurants and even pick up an edition of any local newspaper to see what's been happening. Attend "Open Houses" even if you're not interested in a property; it might give you some ideas or alternatives as you continue to shop.
When you are at each home, check out details such as plumbing (e.g., strong water pressure, hot water), electricity (turn lights on and off), and other inner workings (e.g., open and close windows and doors).
Use Jovia's Home Buyer's Worksheet to keep track of your visits to easily remember and compare the features and benefits of various homes. You may also want to take pictures or videos to help you visualize each home more clearly.
Find a Realtor.
Real Estate Agents are important partners, and you'll want to have someone who understands the home-buying process and someone you can trust who will be advocating for you. Realtors can point you to houses that you might not have noticed, do in-depth background research that's not available to you, pull selling prices of recently sold similar homes in the neighborhood, and help negotiate when it's time to make an offer.
Find a trusted real estate agent familiar with your desired neighborhood. Ask friends for recommendations or, if you are moving to a new area where you don't know many people, do research online. To find realtors specifically on Long Island, use Lirealtor.com, mlsli.com, etc. There is no cost to using a realtor. They are compensated through commission paid by the seller.
Step 5. You found it! Now make an offer.
When you feel you have found the right home, work with your real estate agent to determine a fair offer.
Making an offer.
Look at comparable homes in the same neighborhood that have recently sold. Watch for market trends like prices changes and how long houses stay on the market. These trends and information can help you know what a reasonable price is and negotiate accordingly. Leave room to negotiate and expect a counteroffer from the seller. Review these five guidelines on making an offer on a home. Once you and the seller have agreed on the price, the house will go into contract.
In most cases, sellers will ask for a good faith or earnest deposit. It safeguards the interests of the seller and the buyer. It shows the seller you're serious about buying the home. Most earnest money deposits average between 1% and 2% of the home sale. You can also offer to pay a fixed amount.
The money is placed in a trust or escrow account and is held in that account until you close on your new home. At closing, it will be disbursed according to the terms in the purchase agreement. Most buyers opt to apply their deposit directly toward their mortgage down payment.
Step 6: Get a Home Inspection.
Once you are in contract, you should contact a licensed home inspector to thoroughly review all aspects of the home, including structure, equipment, utilities, etc. It would be best to complete the inspection within a few days of your accepted offer. Your real estate agent can provide you with a list of inspectors, or you can select one on your own.
It is important to attend the home inspection to see any damage firsthand and ask any questions you may have. After the home inspection, you will receive a report covering the property's major features and note any problematic issues that may need attention.
A good inspector will take the time to walk you through the report and share their findings. It's their job to note every flaw they see, but this does not mean that everything is a cause of concern. They will let you know what might be hazardous or something that needs immediate attention.
Purchase offers are usually contingent on a home inspection to check for signs of structural damage or items that may require repair before closing. This is an opportunity for the buyer to ask the seller to make necessary repairs or decide to leave it as is and potentially renegotiate the price. Repairs and other contingencies should be documented in the contract for both parties to sign
Step 7: It's time for a Mortgage Loan.
Once you have signed a formal contract, you will need to apply for a mortgage. A mortgage is a type of loan used to finance property. Mortgages are secured loans using a house as collateral. A lender (like Jovia) will help you understand all your loan options, including rates, loan terms, fees, and closing costs, to determine which mortgage best suits your needs.
Choose a lender.
To find the right mortgage lender, you need to do your research. You'll want to find a lender who can not only offer you a great rate but can support the loan you want and be a trustworthy partner. Do not feel obligated to use the same lender who did your preapproval. Consider all options like direct lenders such as your bank or credit union or private lenders who initially fund your loan but sell it to a larger financial institution. If you want help finding the right lender, a mortgage broker can help.
Mortgage Loans options.
There are many types of home loans. Each comes with different requirements, interest rates, and benefits. It's important to understand which type of loan best suits your financial situation. The most common types you might hear about are conventional loans through a private lender. They can include:
- Fixed-rate mortgage - Best for borrowers who want the predictability of the same payments throughout the entire loan
- Adjustable-rate mortgage - Best for borrowers who do not plan to stay in the home for a long time and are comfortable with the risk of larger payments down the road
There are also non-conventional loans that include jumbo loans for those looking to buy a more expensive home or government-backed loans such as FHA Loan or VA loans for active military.
Learn more about the advantages and disadvantages of different home loan options.
Lock in your rate.
Once you have chosen your lender and loan terms, it is good to lock in your interest rate. There will still be a period of time left before the loan closes, and interest rates change daily. Lenders will offer a rate lock to guarantee the interest rate you discussed when submitting your loan application.
Your monthly payments.
Your basic mortgage payment consists of two components: principal and interest. Principal is the loan amount you borrow from a lender to buy your home. Interest is the percentage of the principal you pay to your mortgage company as a fee for lending you the money. In the early years of the mortgage, a larger portion of the monthly payment is applied to the interest due. Over time, less interest is owed, and more of the monthly payment is used to pay down the principal.
Some homeowners choose to include their real estate and school taxes and homeowner's insurance into their mortgage payments. In this case, the lender collects the payments and holds them in escrow until those payments are due.
Have your paperwork in order.
As you move along the mortgage process, there may be additional financial documents that your lender will need. Having these documents ready ahead of time will accelerate and simplify your application process. Review our list of important documents needed for a mortgage application.
After you have applied, respond promptly to any requests for additional information from your lender and return your paperwork as quickly as possible. Delays could affect your loan closing, resulting in potentially losing your dream home and any deposit you may have put down.
Step 8: Complete a Home Appraisal and Title Search.
The appraisal and the title search are two separate processes but are necessary before you can close on a new home. If there are any issues uncovered, there may be an opportunity to resolve them with the seller.
A home appraisal is when a licensed professional conducts a thorough inspection of a property to assess its true worth or fair market value. The appraiser determines the value based on market conditions, home amenities, curb appeal, etc. The appraiser will compile all their findings into a report and generate the home's appraised value.
Your lender will arrange for an appraiser to contact your real estate agent to schedule an appointment, which typically takes seven to 10 days to complete. The appraiser is a member of a third-party company and is not directly associated with the lender.
If the property appraises for the same or more than the sales price, you'll usually get the loan amount you applied for. If the appraisal comes out lower and you still want to move forward with purchasing the home, you could try to negotiate with the seller to reduce the sales price or put more money down to cover the difference between the appraised value and the sales price.
Here's more information about the home appraisal process and how it affects your loan application.
A property title is a legal right to ownership of a property, including the right to sell. When purchasing a home, the title transfers from the seller to the buyer.
During a title search, the title company or attorney will review public records on the property to confirm the seller is the owner and if there are any claims or liens on the property. They look at current data and historical data, following each sale of the home, mortgages attached to the property, liens, property taxes, and more.
After the search is complete, the title company creates a report containing all the facts and findings. In order to move forward and establish a closing date, a complete title report must be received and cleared by the Closing Agent.
Step 9: Review your application and be prepared for closing!
After your application is submitted, you'll also receive a Loan Estimate (LE) that estimates your loan's fees and costs. Familiarize yourself with this document and reach out to your lender with any questions.
Prepare for closing.
Three (3) days before closing, your lender will send you a Closing Disclosure (CD), which lists all your loan details, including interest rate, monthly payments, fees, and closing costs. Be sure to spend some time understanding and budgeting for closing costs. Closing costs are fees that you must pay to close your loan. While it can vary depending on where you live and the type of home you buy, charges that typically go into closing costs include administrative and processing fees, escrow and recording fees, tax and title services, certifications, and inspections. A good rule of thumb is always to build a buffer into your budget and plan for unexpected expenses.
Being timely with paperwork is key.
Taking inventory of your closing documents will ensure you and your lender have everything required for closing. Make a list of all the documents and the deadlines for turning them in. Check them off as you send them to your lender and verify that they were received.
Hire a real estate attorney.
Having your own real estate attorney review all contracts and loan documents before signing them is important. The attorney will ensure they are accurate and reflect the fees you and the seller agreed to pay. They will also help interpret any language you do not fully understand and negotiate on your behalf if any last-minute issues pop up. If you do not know a real estate attorney on Long Island, start by calling your local Bar Association for suggestions.
Step 10: Close on your home and get the keys!
On average, it takes about 30 - 45 days to close on a home, from filling out your mortgage application to showing up at the closing table. You will sign all the paperwork required to complete the purchase, which can last about 1-2 hours as long as everything goes as planned.
Do a final walk-through.
A final walk-through helps ensure that the property you are about to buy hasn't changed or been damaged since the last time you saw it. Your real estate agent will arrange your final walk-through anywhere from a week to 24 hours before closing. Be sure to set aside ample time to check the property thoroughly.
Verify all contingencies are met.
Make sure you and the seller meet any contingencies. For example, if you asked the seller to fix something the inspector found wrong, you'll want to check to ensure the seller has everything fixed before you close on the sale.
Pack these items.
To ensure you don't forget anything on this exciting day, create a checklist of all the items you need and check off your items as you prepare. Start your list with these required items:
- Photo ID, like a driver's license, passport, or government-issued photo ID
- A cashier's or certified check in the amount of the closing costs due if necessary as all costs can be financed into the loan
- Your Closing Disclosure to compare to the final paperwork
- Proof of your homeowner's insurance
Get your pen out!
At the closing, you will sign a lot of paperwork, so bring your favorite pen. The two main parts will be completing your mortgage loan documents and the transfer of the home into your name. Reviewing and signing these documents is the most time-consuming part of the closing. After all the paperwork is signed, you will pay any remaining closing costs and escrow items.
Once you have signed all your paperwork and officially completed your mortgage, you are ready to get your keys and move into your new home!!
Congratulations!! You are a homeowner!
This is the beginning of a new life in your new home. To help you manage it all, make yourself a checklist of things to do as you move. Here are some important items to include:
- Make sure your utilities are turned on
- Change all your locks
- Update your address
- Test all carbon monoxide and smoke detectors
- Store your closing paperwork in a safe place
- Review your Home-Inspection Report to see if there are any items to address
Although homeownership is a big commitment, it truly is a rewarding one. Be proud of the hard work it took to get here and of your new investment. We hope you enjoy our dream home and continue working towards a successful future. Now it's time to put together that housewarming party guest list!
It’s Easy to Apply!
Jovia’s mobile-friendly application makes the pre-approval and mortgage application process a breeze...you can apply for a mortgage in less than 15 minutes! Click here to get started!
Still have questions? Chat with one of our local mortgage advisors. We're your neighbors so we understand the local real estate market. Click here to contact a mortgage specialist!