Is 2020 your year to get serious about buying a home? That’s awesome! There are many steps in the home buying process, but let’s tackle the first part: getting your finances squared away. Here are the four first steps to buying your New Jersey home:
Determine Upfront Costs
Many first time home buyers are shocked at how much out of pocket cash they have to provide upfront. There’s the good faith deposit, down payment, home inspection, and closing costs, just to name the big ticket items.
The good faith deposit (or earnest money deposit) is a small percentage of your down payment that is held in escrow at the same time you put in an offer. This shows the homeowner you are serious about your intent to purchase and the money goes towards your down payment if your offer is accepted.
Home inspections vary depending on the company, but could cost as low as $200 or higher into the $500s. Make sure to chat with your real estate agent to see if they have a home inspector in mind or get a few quotes from different companies.
The down payment can range anywhere from 3% – 20% of the purchase price of the home. The amount is determined based off of what type of loan you have and off of how much money you already have saved up and are comfortable putting down. It’s important to note that the more money you put towards your down payment upfront, the lower your monthly mortgage will be.
Closing costs can be negotiated within your offer; however, these can add up to 2% – 5% of the purchase price.
Analyze Your Debt-to-Income Ratio
A debt-to-income ratio (DTI) is important in home buying because it will help lenders determine your ability to afford monthly payments. To calculate this, divide all of your debt (including your future monthly mortgage payments) by your gross income (pre taxes). The lower the percentage, the better. The Consumer Financial Protection Bureau (CFPB) advises home buyers to keep their percentage under 33% and states one might have trouble getting a loan if their DTI is 43% or higher.
Find a Lender
Today there are many different avenues to go about finding a lender, but make sure the company you choose is certified. Traditionally you can go through a bank to receive your loan. Other lenders outside of banks include mortgage brokers or online mortgage marketplaces.
Get Pre-Qualified and Pre-Approved
Both of these steps are vital to ensure the home buying process goes smoothly! Through the DTI ratio you have a good idea of how much home you can afford, but getting pre-qualified / pre-approved confirms your amount. Pre-approval means you have written notice from your lender for a specific amount. This allows you to get serious about setting a budget and allows you to confidently look at homes you can afford.
Ready for your next steps? Call me up and let’s go tour some houses.