Buying a house is a major life decision and requires careful consideration. With the current pandemic, homeownership is more affordable than ever due to record-low mortgage interest rates. It is important to understand the process of buying a house, from budgeting to making an offer, in order to make the best decision for you. When budgeting for a house, lenders use credit scores, also known as FICO scores, to assess the potential risk of lending you a loan.
The higher the number, ranging from 300 to 850, the better your score. According to the Consumer Financial Protection Bureau, the best mortgage rates go to borrowers with credit scores between 700 and above. The Federal Housing Administration's formula recommends allocating no more than 31 percent of your monthly income to your housing payment. Buyers with no other debt can budget up to 40 percent of their monthly income for housing.
Due to the pandemic, open houses have been canceled and replaced with private introductions or virtual tours. Virtual tours can sometimes hide defects such as creaky floors or poor lighting, so be sure to ask for measurements and feel free to ask questions. If you find a house that you are interested in, it is important to understand that making an offer on a house is sometimes the beginning of a psychological game. Conventional wisdom says that you should start at 5 percent below the asking price, but market conditions will largely determine how much leeway you have.
In a competitive market, multiple bidders may be involved and in a soft market, where listings haven't been sold, you'll have more bargaining power. It is also important to consider if you are emotionally ready for homeownership. Even if it's just going to be your starting home, you're making a big financial commitment and putting down roots. You'll want to set aside money for more than just the down payment; closing costs generally range from 2% to 5% of the total cost of the loan and it's also a good idea to have some emergency funding in case the house needs unexpected repairs.
When choosing a mortgage loan, you may have the opportunity to choose between a fixed-rate mortgage or an adjustable-rate mortgage (also called an ARM). As you probably guessed from the names, fixed rates are static; adjustable rates can go up or down. You'll also need to choose the term of the mortgage; thirty-year mortgages are the most common but terms of 10, 15, or 20 years may be available. As a first-time buyer, you have access to state programs, tax breaks, and federally backed loans if you don't have the usual minimum down payment or are a member of a certain group. The lender will also review the home you have chosen through an appraisal and request a title search.
You choose the home inspector and pay for the home inspection. If you discover issues that weren't included in the seller's disclosures, you may be able to negotiate with the seller. At closing, you (the buyer) will attend along with your real estate agent and possibly other parties such as the seller's agent and closing agent who may be a representative of an escrow or title company or real estate attorney. Real estate is definitely a good investment but don't just buy now because that's what everyone else is doing. Knowing how much money you can spend on your purchase will likely limit your search and reduce the work involved in buying a home.