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STEP BY STEP PROCESS TO PURCHASING A HOME




Step 1: Decide Whether You’re Ready To Buy A Home

Buying a house is a major commitment. Before you begin the home buying process by shopping for properties and perhaps comparing purchasing options, please ensure you’ll you’re ready to be a homeowner!


Let’s take a look at some of the requirements to buy a house as well as factors both lenders and homeowners should consider.

Income And Employment Status

Your lender won’t just want to see how much money you make. They’ll also want to see a work history to make sure your income source is stable and reliable. (Self employment and part-time employment will require two years of tax returns.)


Preparing your income is all about pulling the right documentation together to show steady employment. If you’re on payroll, you’ll likely just need to provide recent pay stubs and W-2s. On the other hand, you’ll need to submit your tax returns and other documents the lender requests if you’re self-employed or receiving passive income such as investments, social security or other pensions.

Debt-To-Income Ratio

Debt-to-Income (DTI) is another tool mortgage lenders use to evaluate your loan application. Your DTI helps your lender see how much of your monthly income goes to debt payments so they can evaluate the amount of mortgage debt you can take on.


Calculating Your DTI


DTI is calculated by dividing your monthly debt by your gross monthly income. For example, if your monthly debts (credit card minimum payments, loan payments, etc.) total $2,000 per month and your gross monthly income is $6,000, your DTI is $2,000/$6,000, or 33%. Your lender will use the debts shown on your credit report to calculate your DTI.


Front-End DTI

Depending on the type of loan you’re applying for, your lender may also calculate your housing expense ratio, also sometimes referred to as front-end DTI. This is a ratio that looks at your total monthly house payment (principal, interest, taxes and insurance) compared to your monthly income. For example, if you have a $1,200 house payment and the same $6,000 monthly income, your housing expense ratio is $1,200/$6,000, or 20%.


It’s smart to review your DTI before applying for a loan. You’ll need a back-end DTI of 50% or less to qualify for most mortgage options, although this number varies based on lender, loan type and other factors.

Liquid Assets

Even with the help of a mortgage loan, you’ll need liquid assets to fund the purchase of a home. Next are a few examples of these liquid assets.


Down Payment


Buying a home with no money down is possible, but homeowners will still need to have cash on hand for binder, inspections, and appraisal.


The amount of money you’ll need for a down payment depends on your loan type and how much money you borrow. If a down payment is required, you can buy a home with as little as 3% down.


Closing Costs


You’ll also need to pay for closing costs before moving into your new home. Closing costs are fees that go to your lender and other third parties in exchange for creating your loan.


The specific amount you’ll pay in closing costs will depend on where you live and your loan type. It’s a good idea to be prepared to pay 3% – 6% of your loan amount in closing costs. In some situations, part or all of the closing costs can be rolled into your mortgage or paid by the seller as part of agreed-upon seller concessions.

Credit Health

Your credit score plays a significant role in what loans and interest rates you qualify for. Your credit score gives lenders insight into your history of paying your debts on time, so it is an important number for them.


Taking steps to improve your credit score and reduce your debt can pay off big as you prepare to apply for a mortgage. Better numbers mean better loan options with lower interest rates.


Your credit score is based on the following information:

  • Your payment history

  • The amount of money you owe

  • The length of your credit history

  • Types of credit you’ve used

  • Your pursuit of new credit


What score will you need to qualify for a home loan? Most lenders require a credit score of at least 620 to qualify for the majority of loans. A score above 720 will generally get you the very best loan terms.


It is possible that you can qualify for an FHA or VA loan with a 580 median FICO® Score. However, keep in mind that to qualify for these loans with a median score below 620, you’ll need a housing expense ratio of no more than 38% and an overall DTI no higher than 45%.


Willingness To Live In One Place

A mortgage can be a 30-year-long commitment. Although you don’t need to live in your home for the entirety of your mortgage term, it’s still a big decision. When you own a home, it’s more difficult to move. Unless you’re buying a second home or investment property, you’ll likely need to sell your current home first, and this can take time.


Decide whether you want to live in the same area for at least a few more years. Consider your career goals, family obligations and more. Each of these factors will play a major role in the type of home you buy and where you set up your primary residence.


Timing

Deciding whether it’s a good time to buy a house depends on a variety of personal factors (such as financial readiness and lifestyle preferences) and market conditions (such as economic health and current mortgage rates.


Ultimately, the right time to buy a home depends on your unique situation. A loan officer can help you decide if the timing is right for you.


Step 2: Calculate How Much You Can Spend On A House

Once you decide you’re ready to buy a home, it’s time to set a budget. A good place to begin is by calculating your DTI. Look at your current debts and income and consider how much money you can reasonably afford to spend each month on a mortgage.


Homeownership comes with several costs you don’t need to worry about while renting. For example, you’ll need to pay property taxes and maintain some form of homeowners insurance. Factor these expenses into your household budget when determining how much home can you afford.


Having trouble coming up with a number? Use the Rocket Mortgage Home Affordability Calculator to get a rough idea of how large of a mortgage you can afford.


Step 3: Save For A Down Payment And Closing Costs

You can save for your home purchase in several ways, including through investments and savings accounts. If you have relatives who are willing to contribute money, you may be able to use gift money toward your down payment. (If so, ask your lender because letters vary from lender to lender).


But how much do you need to save before buying a home? Let’s look at some of the major expenses related to the purchase, and how much you might want to save for them.


Down Payment

Your down payment is a large, one-time payment toward the purchase of a home. Most loan programs require a down payment.


Many home buyers believe they need a 20% down payment to buy a home. This isn’t true, though. Plus, a down payment of that size isn’t realistic for many first-time homebuyers.


How Much Do You Need For A Down Payment?


Fortunately, buyers who can’t afford a 20% down payment have several options. For example, you can get a conventional loan with as little as 3% down. Federal Housing Administration (FHA) loans have a minimum down payment of 3.5%. Department of Veterans Affairs (VA) loans and United States Department of Agriculture (USDA) loans even allow eligible and qualified borrowers to put 0% down. Also, many states also offer down payment assistance programs to qualified buyers, so be sure to research whether any assistance is available to make your home purchase more affordable.


A larger down payment does come with certain advantages, however. For one, it typically means you’ll have more mortgage options. It also usually means you’ll have a smaller monthly payment and a lower interest rate. Plus, if you put at least 20% down on a conventional loan, you won’t need to pay for (PMI) private mortgage insurance.


Closing Costs

You’ll also need to save money to cover closing-costs and prepaids – the fees you pay to get the loan. Numerous variables factor into how much you’ll pay in closing costs, but it’s best to prepare for 3% – 6% of the loan amount. This means that if you are borrowing $200,000 for your purchase, you might pay $6,000 – $12,000 in closing costs.


What Factors Affect Your Closing Costs?


The specific closing costs will depend on your loan type, your lender and where you live. Almost all homeowners will pay for items like appraisal fees and title insurance. If you take out a government-backed loan, you’ll typically need to pay an insurance premium or funding fee upfront.


Before you close on your loan, your lender will give you a document called a (CD) Closing Disclosure, which lists each of the closing costs you need to cover and how much you’ll need to pay at closing. Look over your Closing Disclosure carefully before you close to know what to expect and catch any errors.


Other Costs Based On Loan Type

The type of loan you choose might require a specialized inspection as well. For example, a WDO Inspection is often required before being approved for a VA loan. Most lenders will schedule this inspection on your behalf and pass the cost along to you at closing.


These expenses might seem minor when held up against the other costs associated with buying a home, but they can add up, so be sure to budget wisely.


Step 4: Decide What Type Of Mortgage Is Right For You

Before you can apply for a mortgage, you’ll need to decide on the best type of loan for you and which one you’ll qualify for.


Conventional Loans

Conventional loans are mortgages that are not backed by an agency of the federal government. Most conventional loans are also conforming loans, meaning that they conform to the limits put in place by the Federal Housing Finance Agency (FHFA) to regulate how large a loan can be and remain eligible for purchase by government-sponsored enterprises (GSEs), Fannie Mae or Freddie Mac. However, Jumbo conventional loans, which exceed these limits, are also available.   Conventional loans are always a popular option for home buyers, and you can get one with as little as 3% down.


FHA Loans

Backed by the Federal Housing Administration, FHA loans are less of a risk for lenders because the government insures them if you stop making payments. As a result, FHA loans have credit score requirements that aren’t as strict as conventional loans. You can be approved for an FHA loan with a down payment as small as 3.5%.


VA Loans

VA loans are mortgage loans for veterans, active-duty service members, reservists or National Guard members, and surviving spouses who all meet certain eligibility requirements. The most popular benefit of VA loans for home buyers is the absence of a down payment requirement.


Rocket Mortgage offers VA loans with a minimum credit score of 580. VA loans are insured by the Department of Veterans Affairs.


USDA Loans

Another type of government-backed loan, a USDA loan helps people in rural and suburban areas buy homes. You can get a USDA loan with 0% down, but your home must be in an acceptable rural area and you must meet income eligibility rules.


Rocket Mortgage doesn’t offer USDA loans at this time.


Step 5: Get Preapproved For A Mortgage

When you’re ready to start house hunting, it’s time to get preapproved for a mortgage. After you apply, your lender will give you a preapproval letter stating how much you’re approved for based on your credit, assets and income. You can show your preapproval letter to your real estate agent so they can help you find homes within your budget.


To get preapproved, you need to apply with your lender. The preapproval process typically involves answering some questions about your income, your assets and the home you want to buy. It will also involve a credit check.


Mortgage lenders will want to verify your credit, income and assets with documentation you provide, such as W-2s, pay stubs and account statements. This can help strengthen your standing in a competitive bidding war with other buyers who may not have such an approval in hand.


Step 6: Find The Right Real Estate Agent For You

At first glance, the terms “Realtor” and “real estate agent” may seem as if they can be used interchangeably. After all, both terms refer to licensed professionals who help people buy, sell, and lease residential and commercial property. This is their key similarity. But, there's also a key difference. A Realtor—and more formally, a REALTOR®— is a licensed real estate agent who is an active member of the National Association of REALTORS® (NAR), the largest trade association in the U.S.


Multiple people are involved when purchasing a home. and buying a house. As your representative in the home purchase transaction, your realtor will look out for your best interests by finding homes that meet your criteria. They’ll also get you showings, help you write offers and negotiate on your behalf.


As a buyer, you can usually work with a realtor for free. In most cases, the seller will pay the buyer’s realtor's commission. The buyer’s agent commission is usually 3% of the purchase price.


A realtor represents you and helps you understand how to buy a house. Your agent will show you properties, write an offer letter for you and assist in negotiations. Real estate agents are local market experts and can also advise you on how much to offer on a property.


Can You Buy A House Without A Realtor?

It’s possible to buy a house without a realtor. But this isn’t recommended, especially for first-time buyers. The process of buying a house can be complicated and emotional. Having an agent by your side can help you navigate the housing market, submit a legally sound offer and avoid overpaying for your property.


How Do You Find A Realtor?

How do you find the right realtor? Begin by asking family members and friends for recommendations. Direct referrals are often the best way to get unbiased information on agents in your area.



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