What do you need to buy a house? This may seem like a simple topic, but it’s one of the most common questions I'm asked by new home buyers as well as new real estate agents. There are so many steps involved when buying a home, it's not uncommon for first time home buyers to completely overlook one or more of them.
This article will cover all of the major things that are required for most home purchases. There are other requirements that may come from your mortgage lender, such as previous years tax returns, employment verification, credit scores, etc. In this article, I'll stick with the most important items that typically cover the amount of money that you need. I also created this handy infographic that you can save and use as a reference.
Mortgage Loan Pre-Approval
Mortgage Pre-Approval - The first step in buying a home is to acquire the money to buy a home. For most people, that means getting a mortgage. A mortgage is a type of loan used to buy a home. So how do you get a mortgage pre-approval?
There is no end to the amount of places you can go online to get a mortgage. In Colorado Springs, we have some excellent mortgage lenders who we regularly recommend. A good mortgage lender will help you understand all of your borrowing options and make the whole process as easy as possible.
Once you have found a mortgage lender, they will run a credit check, ask you some questions about your current financial situation, and determine your eligibility based on these answers. They will work with you throughout the whole buying process once you have found a house. They will also issue you a pre-approval letter to share with Realtors, buyers, and home builders. This letter lets everyone know that you are able to purchase a home within the price range recommended by the lender.
Earnest money is money that you have to provide right up front when you buy a house. Think of earnest money as your way of saying, “I EARNESTLY want to buy your house so I am putting this money with my offer.” It’s kind of like a deposit to prove that you are serious about purchasing the sellers home.
In Colorado Springs, earnest money is usually around 1% of the purchase price of the home. If all goes well and you get to the closing table with the seller, that money is credited back to you at closing. If you terminate your sales contract within your inspection or loan objection deadlines, you will typically receive your earnest money back. If you are past those dates, it's much harder to get your earnest money back, if at all. Earnest money is usually held by the title company or listing agents office.
Money for Your Down Payment
Once you talk to a mortgage lender about your pre-approval, they will be able to tell you tell you what amount you need as a downpayment to purchase a home. There are loan types, like VA loans or USDA loans, that do not require a down payment and offer 100% financing. You will need to check with your loan officer to determine if you are eligible for these type of loan products.
The most common downpayment amount required is usually 3% to 5% of the purchase price. Some lenders will require a 20% down payment if you already own a home and are looking to purchase a second home. In Colorado Springs, most loans above $417,000 will require a minimum down payment amount of 10% down. There are many different options available that your lender will help you navigate. If you need a recommendation for a good local loan officer, contact us and we can help you with that.
Money for Closing Costs
When you purchase a home with a mortgage, your mortgage company will have fees that they charge to originate and generate your loan. These can be anywhere from 1% to 4% of the loan amount, depending on the type of loan that you choose. Talk to your loan officer to get a good estimate of what your closing costs might be for your loan type.
It is also possible to ask the seller to contribute to your closing costs when you write the purchase contract. This option will be dependent upon the market that you are in and the demand for homes in your price range. If homes are selling in a day or two in your area, it’s much more difficult to get a seller to agree to offer money towards your closing costs. I typically advise finding a way to save up that money just in case you find the perfect house but the seller will not offer any closing cost assistance.
Money To Hire A Home Inspector
Once you have found a home and you have an executed contract with the sellers, you’ll need to hire a home inspector. In Colorado Springs, we usually write a 7 to 10 day inspection period that allows enough time for home buyers to hire a home inspector to make sure that there are no major issues with the home.
The average cost of a home inspection can be from $250 to $600+ depending on the size of the home and the scope of work. Depending on the type of property you are purchasing, you may also consider hiring a radon, septic, well, structural, mold, pest, or methamphetamine inspection. Your real estate agent will help advise you on these options and also help you determine the extra expense of these additional inspections. If you require multiple inspections, make sure that you write enough time into your Inspection Deadline to complete all of them.
Buying a home is a huge commitment. It's not like buying any other item. You can't take it back later if you have buyers remorse. For this reason, it's wise to research as much as you can before buying a home. Research your loan officer and Realtor online before committing to work with them. If you are sceptical, then find a new professional to work with. Don't move forward until you have all of the proper pieces in place. Once you have the 5 things above taken care of, along with a good loan officer and Realtor, then you're ready to buy a house.
Your Realtor is your most valuable asset when buying a home. They can help you with each of the 5 steps above and help guide you through the entire buying process. They are your "go to" contact for almost every question that you may have. If you are feeling intimidated by the process, let your agent know. If they are not helping things make more sense, let them know. You should feel like you are completely informed of all your options and have an advocate in your corner who fights for you when you need them to. A good Realtor will make the complicated process of buying a house feel like a simple transaction. They do a lot of work behind the scenes, so be sure to thank them when they do a good job for you. :)
Now that you are prepared for these 5 critical things that you need to purchase a home, you can be sure that you have what it takes to get into the home of your dreams. Happy house hunting!
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