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Home Buying Overview

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Buying a home is no simple feat. It is a very long and expensive, not to mention stressful, process. But before you buy a home, or even start looking, you'll need to familiarize yourself with the main steps toward home ownership. Follow the information below, and you'll be on track toward owning a home.

Get Your Finances in Order

Perhaps the most important thing to do before buying a home is to make sure you will be able to afford it. You don't want to go through the process of buying a home only to realize down the road that you won't have enough money. By knowing what your financial situation is, you can get the best home for your budget. Aside from that, any loan provider will look into your finances to determine whether they will give you a loan or not.

Mortgage lenders will be more willing to give you the loan if your monthly debt load is under 36% of your income. That percentage will include the 25-28% of your income that would go toward monthly mortgage payments. Thus, all of your other debts, like student loans, car loans, and credit card payments, should ideally only comprise 8-10% of your income. If these expenses comprise more than this percentage, you should find ways to reduce your monthly spending.

It is also good to have some money put aside for a down payment. Though you could get a mortgage by putting as little as 5% of the total cost of the home down, you will probably end up paying higher interest rates. If you can save for a 15-20% down payment, you will get a much better interest rate.

Get Familiar with Mortgages

In addition to figuring out your financial situation, it will be smart to familiarize yourself with mortgages before you try to get one. Since your home loan will be such a big part of your life (you can spend up to 30 years and a lot of money paying it off), you'll want to be as informed as possible.

Firstly, you should know about the different types of mortgages available to you and what each type involves.
Though there are several types, the most common are found below:
  • Fixed-rate mortgage - This is the most common type of mortgage. In fact, 70% of home loans are a fixed-rate mortgage. With this option, the interest rate will stay the same for the entire term of the loan. This way, you will know what your monthly payment will be each and every month.

  • Adjustable-rate mortgage - With this type of mortgage, your interest rate can change based on market conditions. The interest rate for adjustable-rate mortgages will generally start out low, with the assumption that it will increase over time.

  • Government mortgage - For first-time homebuyers or those with low income, a government mortgage may be your best option. These loans are guaranteed by the Federal Housing Administration (FHA) and are easier to qualify for than the other loans. They can be attained with a down payment as low as 3% and generally have lower interest rates. There are also government mortgages available to those who are veterans or living in rural areas.
Based on your finances, you should select the type of mortgage that best meets your needs.

Get Preapproved for a Mortgage

Another common step in the home-buying process is getting preapproved for the mortgage. In this process, the lender will examine your financial situation to determine how much they will let you borrow. Although getting preapproved isn't required to own a home, doing so has plenty of advantages:
  • By getting preapproved, you'll have a good idea of what you can afford.

  • This will save time as you search for a house, since you can narrow down your search to homes within your budget.

  • By getting preapproved, you will have better bargaining power to negotiate the price of a home you'd like to buy. Since you have proof that you are in good financial standing, you may be able to get a home for less than the listed price.

  • Since the mortgage lender will have already examined your financial situation and preapproved you for the loan, you can close on the home more quickly.

In order to get preapproved for a home loan, lenders will look at your credit score. Though each lender has different standards for granting preapprovals, your credit score should be above 650. In addition to your credit score, lenders will examine your finances. As mentioned above, they'll examine your debt-to-income ratio to determine whether you can handle the financial burden of buying a home.

Though there are many advantages to getting preapproved, there is at least one thing to look out for. Just because you get preapproved for a loan, this doesn't necessarily mean that you'll be able to afford a home. You could very well get preapproved for a loan that is too big, which could lead to you defaulting on the payments and potential foreclosure.

Finding a Home

Once you have ensured that you can afford the house, selected the type of mortgage that best meets your needs, and gotten preapproved for the mortgage, you can shift your focus to looking for a home to buy. You probably already have a good idea of what type of home you're looking for. After getting preapproved, you'll have a better idea of what you can afford in a home.

With your housing needs and price range in mind, you can start looking at homes in print or online real estate listings or by simply driving around a desired neighborhood. If you decide to work with a real estate agent, he or she can be a big help in finding the right home.

Once you have decided on a property, you will need to make a formal offer (which your real estate agent can help you with). If your offer is accepted, then you will be well on your way to owning a home. Keep in mind, though, that there are additional costs involved as you finalize the purchase of your home. In addition to the down payment, you'll need to pay the fees for your mortgage, relocation expenses, attorney fees, and any other costs involved in the closing.

Buying a home is a very complicated process; these are just the basics of getting one. By figuring out your finances, studying the different types of mortgages, understanding the preapproval process, and knowing how to find that perfect home, you can have an easier time procuring a loan and buying a home.

Patrick Hanan  Posted by Patrick Hanan on June 15, 2010

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