How to Buy a House in 2022

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Step 1: Determine If You’re Ready to Buy a House

Are you excited about buying your new home? Know that preparation is a huge step that can save you a lot of time along the way. Rounded up below are tips, tricks, and key things to think about as you prepare to apply for a mortgage.

Start Saving

Saving as much money as possible is something that a lot of people overlook day-to-day. Savings, no matter how big or small, add up over time. Budgeting, and finding a budgeting method that works for you (that you can stick to!) can help you get in a more comfortable spot financially.

Renting Vs. Buying

Many people miss out on the benefits of homeownership when they don’t want to part with their renting lifestyle. We get it, renting is attractive because it is relatively low maintenance compared to owning your own home. But on the other hand, homeownership builds wealth over time; it’s an investment.

On top of building wealth (home equity typically increases as home values increase over time) buying offers several more clear advantages. Homeowners enjoy the freedom to customize their house to fit their tastes, often feel stronger ties to their community, take pride in homeownership, and can experience major financial benefits.

Additionally, with a fixed-rate mortgage, homebuyers can lock in a rate and monthly payment that doesn’t increase even through periods of inflation as the cost of goods rise (including rent!).

Check Your Credit Score

Credit history is one of the major factors that lenders consider when assessing a borrower’s ability to repay a mortgage. It’s important to know what your credit score is before applying for a home loan, not only so you’re aware, but also in case you need to work on improving your score prior.

Your credit score will directly impact your interest rate. Take advantage of credit assessment tools through your bank or from free online resources so you understand your current position.

Calculate Your DTI

Your debt-to-income ratio (DTI) is another factor lenders review when qualifying for you a loan. Your DTI is your monthly debt divided by your gross monthly income. Calculate your DTI by adding up your monthly debt payments, then dividing them by your pre-tax income – it’s that simple!

Figure Out Your Down Payment

Gone are the days of strict 20% down payment requirements. Some loan programs only require a minimum of 3% down. Since the requirements vary by loan type, it’s important to talk to your lender and let them know how much you feel comfortable putting down. With an idea of how much money you’re putting toward a down payment, a lender can better align you with a loan that makes sense for you and your future.

 

Figure Out Your Home Loan Type

Loan types influence how much money you’ll be spending on your mortgage each month. With flexible loan products, our Loan Consultants are ready to match you with a loan that perfectly fits your needs. Here are some mortgages we offer:

FHA Loan

Federal Housing Administration (FHA) mortgages are government-assisted alternatives to conventional financing and are great options for those who want to put less money down or who have lower credit scores. 

FHA Loan Requirements

FHA loans allow borrowers to qualify with less-than-perfect credit, offer flexibility on debt-to-income ratios, and require as little as a 3.5% down payment, a solid payment history, and no history of a derogatory credit event in the last 2-3 years.

VA Loan

VA Loans are mortgages available to veterans, active service members, National Guard, reservists, and spouses.

VA Loan Requirements

Visit the U.S. Department of Veterans Affairs for an in-depth list of requirements or review our abbreviated version:

• Served 90 consecutive days of active service during wartime
• Served 181 days of active service during peacetime
• Served more than six years with the National Guard or Reserves (or 90 days under Title 32 with at least 30 of those days being consecutive)

There are also VA loan programs for surviving spouses of a service member who died in the line of duty or from a service-related disability.

Income Requirements

The application process works similarly to a conventional home loan. Although the VA home loan program doesn’t have income maximums, your mortgage lender will review your personal income to determine what monthly payment you can afford.

Generally, lenders require 24 months of consecutive employment, preferably within the same company or industry.

Supporting documentation that you will need to provide includes:

• Tax returns and W-2s from the past two years
• Most recent paycheck stubs
• Recent statements for checking accounts, savings accounts, retirement accounts, and other investments
• Driver’s license

Those that are self-employed must provide two years of business tax returns and a current Profit and Loss statement.

USDA Loan

USDA loans offer homebuyers living in smaller and rural communities the opportunity to own a home with zero money down. The USDA loan requires that the occupiers use the dwelling as their primary residence, with an income requirement that stipulates the owner's income cannot exceed 115% of the median household income within their State's County. 

Interest-Only Loan

Most interest-only mortgages are adjustable-rate mortgage loans. An adjustable-rate mortgage (ARM) is a type of mortgage with an interest rate that changes (adjusts) throughout the life of the loan – after a fixed rate period. You lock in a lower mortgage rate for 5, 7, or 10 years, then the interest rate changes periodically thereafter, based on the market at the time.

Conventional Loan

Conventional loans offer low down payment options, competitive interest rates, and generally require a higher credit score.

Jumbo Loan

Some home purchases require maximum borrowing power. Jumbo mortgage loans give you all you need to enjoy big real estate opportunities. Jumbo loan limits are set at the State County level, and the typical limit you could expect to see for a Jumbo Loan is $647,000. This means any loan amount that exceed $647,000 will be considered Jumbo. 

 

Step 3: Get Pre-Approved

After figuring out your loan type, its time to make your buying power official with a Pre-Approval or Pre-Qualification. 

Pre-Approval vs Pre-Qualification: What’s the Difference?

A pre-qualification is free and that determines how much a homebuyer could borrow prior to officially applying for a loan. Lenders get an idea of your income, assets, and credit to tell you what loan amount and program you are most likely to qualify for that will best fit your needs.

A pre-approval takes pre-qualification one step further. Your loan goes though underwriting upfront, which is the review process behind the scenes, where your information is verified, and credit is pulled. With a pre-approval letter, you gain the negotiating power and let sellers know that you’re financially set with a lender.

 

Step 4: Start Your Search

After getting Pre-Approved, its on to the home search. The home search is often the part homebuyers get most excited to begin; this is where your imagination springs to life, and where things get very real!

Contact a Real Estate Agent

Before you start your home search, it’s important to weigh the pros and cons of working with a real estate professional versus jumping into the process on your own.

Whether you choose to work with a real estate professional or not, online home search tools make filtering, narrowing down your options, and clicking on your perfect home easier than ever! They’re designed to simplify the search process so you can look at properties that have a healthy balance (if not all) of your needs and wants!

House Hunting Checklist

A house hunting checklist makes narrowing down your wants, needs, negotiables, and non-negotiables easier, and can help you make decisions when it comes time to make an offer. 

Exterior

Paint

Degradation such as bubbling, cracking, and peeling are red flags that are indicative of weather exposure or even a defect in paint application. Breakdown of paint can point to structural issues, so it’s important to note on your checklist.

HOA

If there’s a Homeowner’s Association (HOA) be sure to learn about their rules and regulations. Is there an obligation to join and pay monthly HOA fees? Does the HOA have exterior home rules, like only potted plants or palm trees are allowed? These questions can often be answered on the listing or by contacting the homeowner/HOA directly.

Landscaping

Lawn maintenance is important. Discolored grass could lead to time and money spent down the road. Consider consulting with a professional landscaper if you have any concerns about the grass on a property prior to making an offer. Lackluster landscape could also be used as leverage when negotiating an offer.

Neighbors

Neighbors can often make-or-break a forever home. Take a look at the surrounding properties to see if there are any red-flags that catch your eye. 

 

Interior

Wall Condition

Inspect the walls to make sure any visible cracks aren’t too wide or covered up with paint. Check the windowsills for areas that may be soft, uneven, or saturated. Repairing structural damage could ultimately cost money, so due diligence is key!

Flooring

Discoloration on the floorboards is a sign of water damage. It could also point to problems with the walls, roof, and foundation.

Odors

Musty smells can be a sign of mold and mildew which could ultimately cause health issues or be a sign of a broken sewer line. Test outlets, showers, and toilets to make sure things are running smoothly. Open bathroom and sink cabinets to look around water pipes or drains for mold and mildew.

Windows

Pull back the curtains to check for lopsided frames and try to see if the windows slide easily. If they don’t, it could be a sign of foundation issues or improper installation. Even new windows could have been installed incorrectly or not be properly insulated.

 

Must-Haves

This is where you get to personalize your own checklist! Want a pool? Add it. Want an outdoor kitchen? Add it. Want a move-in ready home? Add it. You get the point. Compile a list of what you want, keeping in mind sometimes the perfect home is harder to find based on market conditions.

 

What else will I need?

Check out our graphic below that highlights what documents and information will be needed, like pay stubs, credit reports, and bank statements:

           

Step 5: Make an Offer on the House

You've found "the one". It checks most or all of the boxes you've set forth, and you want to move forward with the process. Its crucial at this point to consult with your Loan Officer and Real Estate Agent, if you have one.

 

The Offer Letter

Your offer should be in the form of a purchase and sale agreement. Your agent will draft it, and you’ll sign or e-sign before it’s submitted. 

It’s common for the negotiations to go back and forth a few times, typically with the advice and assistance of the respective agents. It’s important to remember that price isn’t the only item open for negotiation. Other possible items include repairs, inspection contingencies, fixtures, and a closing timeline.

The purchase and sale agreement becomes legally binding if the seller accepts your offer. At that point, the purchase and sale contract will become a key component of the paperwork that guides the sale. 

 

Earnest Money

Earnest money is a deposit you'll make toward the purchase of the house. An earnest money deposit shows a home seller that you're committed to buying. Typically, the money goes into an escrow account, and once the sale closes, you can keep the cash or put it toward the purchase.

Technically, earnest money is not required, however, it’s something to strongly consider offering during a tight housing market. Like gaining a pre-approval, it will show that you’re serious about buying and give you a leg up against other buyers.

 

What if my offer is rejected?

If your offer ends up differing substantially from the asking price, consider including a letter summarizing the market conditions or comparative analysis that led to your offer. A well-intentioned letter will help the seller understand the quantifiable reasons behind your offer.

Every seller has their own needs, possibly including time to find another home to buy after their house sells. Gain an understanding of things from their perspective and you will have a much better idea of how your offer can meet their needs and yours.

Remember that buying a home in today’s market will likely require you to make more than one offer. According to the Zillow Group Consumer Housing Trends Report 2021, “42% of buyers who make an offer on a home do so multiple times before succeeding in buying one.”

 

What if the seller makes a counteroffer?

If the seller rejects your offer, you have the option to counter or say no thank you. This decision often depends on the reason they didn’t accept your offer. If the seller makes a counteroffer, discuss the situation with your real estate agent to help make an informed decision on whether to accept the new offer or make a new one of your own. The expertise of your real estate agent will be a huge asset for you during counteroffer negotiations.

 

Step 6: The Home Inspection

A qualified home inspector will not only identify any issues that are immediately apparent but also help determine if there are also issues with the house that you might have to deal with in the future. It is your responsibility to choose and pay the home inspector for their work.

A thorough home inspection will cover every area of the house including heating and air, foundation, structure, walls, ceilings, and roof. If mold or radon is suspected, it’s advised to get a more specialized inspection.

If a home inspection uncovers problems that weren't included in the seller's disclosures, you may be able to negotiate with them about the price.

 

Requesting repairs or discounts

Another question to raise is will the seller be making any necessary repairs or providing you with credit to make repairs on anything that needs to be fixed? Negotiation leverage can be determinant on prevailing market conditions.

For example, during a strong seller's market, it can be difficult to get concessions, because there will be other offers. However, if it's a glaring issue that will come up during any home inspection you may still have some negotiating leverage.

 

Step 7: The Home Appraisal

A home appraisal is a review that determines the current value of the property you want to buy. An appraisal is a must before you buy a home with a mortgage loan.

However, a few things to know going in are that a bigger house doesn’t always mean a higher appraisal. A property’s value is measured by if it’s the type that would usually be built on that lot. Bigger homes can also mean bigger utility bills.

During a home appraisal, appliance upgrades may not be as valuable as measurable data such as square footage and the number of rooms.

 

Consider an appraisal contingency

Appraisal contingencies are designed to allow buyers to back out of a purchase (or negotiate a lower price) without losing their earnest money deposit if the home appraises for less than the offer amount. As with inspection contingencies, appraisal contingencies may vary, therefore, understanding your agreement is very important.

 

Step 8: The Walkthrough

Do a final walkthrough of a new home before you close, even if your heart has already decided on the place. This time allows you to check and make sure that the seller has everything in order and hasn’t left any belongings.

Check any repair areas and look out for any unexpected pests. Double-check the home’s systems one final time to make sure it’s all systems go. If everything checks out, it’s time for closing.

 

Step 9: Closing

The Closing Disclosure

This is a five-page form summarizing the interest rate, fees, and closing costs on your mortgage. It’s the last document you’ll need to sign in the mortgage loan, and it’s issued at least three days before you sign the closing paperwork.

Be sure to compare the Closing Disclosure with the final loan estimate from your lender to check for any changes.

 

Settlement Statement

A settlement statement is a document that summarizes the terms and conditions of the settlement. A loan settlement statement provides full disclosure of a loan’s terms, including the fees and charges that a borrower is required to pay beyond a loan’s interest.

 

Buying a House - Frequently Asked Questions:

How long will it take to buy a house?

The steps to buying a house can make for a process that may take months.

How Much You Should Put Down on a House

Determine how much you want to keep for savings, costs of furnishing the home, any renovations, and an emergency fund (many borrowers aim for 3-6 months’ worth of housing expenses). After your subtractions, you likely will end up with an amount that is comfortable for you.

What other out-of-pocket costs should I expect? 

Closing costs typically run about 2-5% of the total purchase price of your home, but they can go as high as 7%.

What will a loan officer do for me?

Seek the help of a loan officer and real estate agent who have helped others navigate through these perilous times and can help you stand out from the pack with your offer. The right home buying team at your side can make all the difference in helping you make the most prudent financial decisions possible, particularly with one as important as purchasing a new home.