There are few things that make you feel more like a bona fide Adult with a capital A than buying your first home. Now that you’ve decided where you want to settle down and separated your musts from your wants, the next step is actually purchasing the home, which is unsurprisingly not as simple as swiping your credit card (unless you’ve got a cool $100K lying around).
Assuming you’ve selected your dream home, gathered all the necessary paperwork and checked your credit score, the final step to make your nesting dreams come true is choosing a mortgage plan, which comes with a lot acronyms and financial savvy we admittedly can use a helpful hand with. So we rung up Erin Lantz, VP and GM of mortgages for Trulia, who gave us a crash course explaining all the ins and outs of what the slightly tedious but necessary process entails. Ready to dive in? Your dream home awaits.
STEP 1: GET PRE-APPROVED
To start the mortgage process, you want to get pre-approved. For that, you’ll have to substantiate the funds you’ll be using to pay for the monthly mortgage, which can include your monthly income pay stubs and any other liquid assets you may have, including savings accounts and retirement accounts if you’re eligible. The lender will then use all your amalgamated assets to calculate your debt-to-income ratio, which will help them assess your ability to pay back your loan.
Term to know: debt-to-income ratio. Your goal here is to reach a favorable DTI, which is calculated by dividing your existing debt (think credit card bills, student loans and monthly payments like car insurance), including your desired monthly mortgage payment, by your total gross income. You want a low debt-to-income ratio, with lenders favoring 28 percent to 33 percent.
STEP 2: PICK BETWEEN A FIXED OR ADJUSTABLE INTEREST RATE
Your second goal is to achieve a low interest rate. You can pick between a fixed rate or one that can be adjusted over time. Typically a fixed rate, though stable, will have a higher interest rate than the initial rate offered with an adjustable loan. However, keep in mind that an adjustable loan is subject to change over time, potentially resulting in a higher interest rate overall.
Term to know: jumbo loan. Based on your state and county, Fannie Mae or Freddie Mac have decided what the loan limits should be (find your county’s specific loan limits here). Anything below the limits is called a “conforming” loan. Once surpassing that limit, you’ve now entered into a “jumbo loan,” which grants the lender more flexibility to structure the loan program to offer more varied jumbo products.
STEP 3: CHOOSE BETWEEN A GOVERNMENT-INSURED OR CONVENTIONAL LOAN
There are three types of government-insured mortgages, which are for veterans, rural residents with modest income and the more widely applicable: FHA.
Term to know: Federal Housing Administration loan. This loan is offered by the U.S. Department of Housing, and it’s an attractive loan, thanks to its very low-interest rates and lenient qualification requirements. You only need a minimum credit score of 580 (the average is 750) to qualify, and a down payment could be as low as 3.5 percent of the home’s purchase price (the average is 20 percent).
But an FHA isn’t your only option when searching for low–down payment loans. Lantz says, “It really pays to shop around and find the lender that suits your needs.”
STEP 4: SHOP FOR THE BEST HOMEOWNERS INSURANCE
Now that you’ve selected a mortgage plan, you’ll also need to factor in property taxes and homeowner’s insurance. While there isn’t anything you can do about your property taxes, you can (and should) shop around for the best deal on your homeowner’s insurance (not to be confused with your mortgage insurance from above).
Term to know: homeowners association. If you are joining a condominium, townhouse or gated community, there’s most likely a homeowners association fee you will be responsible for, which covers the building’s shared amenities and upkeep (think pool, gym or a doorman).
STEP 5: MAKE AN OFFER
After considering all the monthly fees and shopping around for the best lender for you, you can then work with a real estate agent to make an offer. Should the seller accept, you head into escrow, the period of time between settling on a purchase agreement and the day you get the keys.
There are a couple things that must happen before you close, such as your lender getting the home appraised. This is to make sure that your home is truly valued at the price it’s being sold for. Next is a home inspection, which will fall on your shoulders. You’ll need to hire a professional inspector to do a noninvasive examination of the house. This is to make sure that there aren’t any serious issues to the home, such as faulty circuit breakers, structural cracks or water damage that may end up costing you more in renovations in addition to the purchasing price. Should the inspector find serious issues, you will be able to back out of the purchasing agreement and retrieve your deposit.
Term to know: escrow. Escrow not only refers to the time it takes between the purchasing agreement and receiving the keys, it can also refer to a fiscal account in which a third party holds your down payment for the house. Once the house passes inspection, the third party will “close the escrow,” which will transfer the funds and any closing costs (such as real estate agent fees) to the seller and transfer the title of the house to you.
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