Fully Prepare To Buy A House (Step By Step Guide)

Certified Mortgage Advisor
NMLS 1701021
Published 
January 11, 2020

How to avoid stress when buying a home

Today, we're going to be talking about how to fully prepare to buy a house. So buying a home does not have to be stressful, but most of the time it is. And the main reason why is because people don't have a plan. If you don't have a plan to buya home, it's going to seem complex over, overwhelming, stressful, and it's not going to be as fun as all of these articles online say it is.

Let's have a jumpstart!

So if you want to know how to have a confident and comfortable home-buying experience, how to prepare, read through as I discuss a couple of different steps to make sure that you are ready to go, that you have confidence moving forward, and you have a plan for your future that involves this home, helping build wealth for you and your family.

Budget

Let's go ahead and jump right in. Let's talk about your budget. Every time you're purchasing something as large as a home, we need to start with the budget.

First, that's going to drive the decision. What happens for most people is they first start off with how much house can I buy, or they see things that are shiny and you get into this shiny objects syndrome. If you do this, you're going to buy a home that's way out of your price range. And it's going to be a curse and not a blessing for you. Your home should be a blessing.

Everything should start with your your budget

Everything we do financially needs to start with your budget. One of the big things we need to look at in our budget first is your debt payoff. When you're buying a home, most of the time, it's going to be recommended to pay off high-interest loans first.

So most of the time that looks like credit cards. If you have a credit card sitting around 20%, you need to get that taken care of. You need to pay that thing down before you invest in a home, and the reason why is because home is going to have so many costs associated with it, not just your down payment, closing costs, but also maintenance and anything like improvements that you're putting into your home. You need to make sure that you're taking care of all of the debt that you can first before you go and purchase.

It will not fix your money problems

Also, something to know as well is buying will not fix your money problems. If you have money problems right now, that's not just because you're renting, buying a house will not fix your money problems.

It's like when I was in college, we had the phrase before a ring by spring where basically people are getting married before their spring season, their first year of college. Here's the deal, people thought that they could fix their relationship problems by getting married. It doesn't work. It turns out you're the same people after you get married.

The same thing, you buy a house it's only going to magnify the money problems that you have. So if you have money problems now get those solved buying a house is not going to fix it just because you put a ring on it.

Not true: Renting is throwing money

People talk about renting, being throwing money away. That's not true. Renting is buying patience. Renting is your way to patiently build up a good game plan, pay off debt, build up savings, build up money for your down payment. Renting is perfectly fine. If you're there, don't let all these articles and things online, tell you that renting is the worst thing you can do in this world.

Renting is something you want to work out of. Don't put yourself in a big financial burden just to get out of renting because some articles said so. Because who cares about the article? You have to make the decision based on your budget and your financial health. Renting is not a bad strategy to make sure that you're building on a solid foundation before you go and purchase.

How to make your home a blessing

Just like I talked about before buying, a home should be a blessing. If you already feel like you're in a little bit of turmoil with your financial situation or things are tight, buying a home is going to make that home a curse. It is not going to feel like home, it's going to feel like a house with a big payment attached to it.

If you want that home to be a blessing to you, you need to set yourself up for success. You need to have a good plan. Especially financially, have a really good, solid financial foundation before you jump into it, or else your home is going to be a curse.

Three recommendations for budgeting

Number one is a software called You Need a Budget or the abbreviation YNAB. So YouNeedaBudget.com, is the budgeting software that I use. It basically does online envelopes style banking to make sure all of your money has a job and you have plans for the future.

What's awesome about YNAB

They encourage you to pay your bills in advance and they help you get to that point. If you're still living paycheck to paycheck, it's no problem to work on it. So for example, it's January right now, I have February's bills already paid for, and that's a really comfortable place to be at. So, YNAB is great!

Dave Ramsey's Financial Peace University

Also, something like Dave Ramsey's Financial Peace University is going to give you seven baby steps to get out of debt and have financial peace. He also has a book called Total Money Makeover. These are both by Dave Ramsey. We covered the budget. We're almost there one-sixth of the way there.

Now let's talk about credit

Your minimum for credit is a 580 score. 580 is going to get you an FHA loan. Now, 580 is not ideal. 580 is the subfloor minimum. What you need to strive for is a 640 score, that is the goal. Now with a 640, you're still probably going to get an FHA loan. It's probably going to give you the most cost savings. If you get up to a 720, then you can look into a conventional loan.

So the reason why 640 is the target is because most pricing models with various different lenders. It seems like 640, all of a sudden, there's this flip in pricing where you can save so much on your interest rate If you have a 640 and above.

Now again, FHA is still, probably going to be better for you. You don't want to look into a conventional loan until you're probably closer to a 720 plus, and you have some money for a down payment. If you are not in this range or if you're in 580, but you need to work up to a 640 or you're in a 640, you need to work up to a 720, you can talk with a credit coach.

Credit coach

A good credit coach is going to be someone who makes you do the work. If your credit is in a bad spot, there is no magic solution. There's no $30 a month fix that is going to all of a sudden solve your credit problems. Credit problems are real. They're not just imaginary things that go away by paying a service. You're going to have to do the work. That means you're going to have to work extra hours to pay that down, or you're going to have to follow your credit coach's instructions.

You can also DIY your credit

You can choose a DIY option. That's perfectly fine as well. If you want to go DIY, just make sure you do a ton of research, especially if you have some complicated issues with your credit. But doing it on your own can be a little difficult if you're managing derogatory accounts and trying to do disputes.

So with your credit, the whole goal is you're preparing to buy a house. So don't just settle for the minimum. Really make sure that you're doing everything you can to hit that 640 range. That way you can benefit in the future. Again, this is all about that home being a blessing.

If you get a home with a 580 credit score, you're going to get your home, but it's going to be an interest rate that you might not like. So you're going to be paying more. Over a period of time and that interest really does add up. So make sure it's a 640 or above if possible.

Down Payment & Closing Cost Conventional

Let's talk about the down payment and closing costs. So first with conventional, conventional's a little tricky. Conventional's down payment is either 3% for a first-time home buyer or 5% for non-first-time home buyers. A first-time home buyer is somebody who has had ownership of a home within the past three years.

For FHA

Most of the time, probably most of you watching this video, since you're asking how to fully prepare, to buy a house, probably going to be looking at a 3% down payment, maybe a 5% FHA is going to bump that up to 3.5% as a minimum. Now the benefit of FHA is you're paying half percent more in your down payment, but you're getting cheaper interest rates.

If you're below a seven 20 credit. The credit qualifications on FHA is, are also a lot easier to qualify for than conventional loans, especially because we're seeing just this big fiasco with Fannie Mae and Freddie Mac right now, where they're looking to go private and they're tightening the restrictions even more making FHA, going to be a pretty big option here in the future. Since conventional loans are going to be a lot more difficult to qualify for.

For USDA & VA

USDA is 0% down and VA is 0% down. Now, for USDA loans, you need to be in a rural area defined by the USDA. They also have an income limit VA loans. You have to be a veteran. So you have to make sure that you're eligible as a veteran to get that loan.

Down payment is an investment

Now, when we talk about down payments, it's easy for people to feel like their down payment is a fee. Since the down payment comes together and you'll get a document that shows your down payment, plus any costs. It's easy for your down payment to feel like a fee instead of an investment in yourself.

I highly recommend that you put down a down payment. These are the minimums, but I recommend you put down more if you can. And the reason why is because a down payment is an investment in you, that is your money. The down payment is not a fee. That is your money in the home. Nobody's taking that money from you that money's going to gain appreciation.

Put some down payment

So you want that to be in the property and one of the biggest reasons why is because if you don't put a down payment on your home, you might be stuck in your property for a longer period of time than you want to. So if your home's value is here and you have a loan for the same amount, if your property value decreases, you're now underwater on your mortgage, meaning that you won't be able to sell that property until that value comes back up and actually higher to make sure that you can cover any costs to sell the property.

So make sure you put a down payment, the minimums are here. Those are fine. Those are work put down more. If you possibly can.

Closing costs

This is a big one. Closing costs can range all over the place and it's hard to give a percentage because, in different areas, the average purchase price where I'm at is about 150,000, where it might be 500,000 in your area.

Closing costs normally we'll run 2 to 5%. That's a very broad range of the purchase price. But for instance, on a hundred thousand dollar home, you might see those looking somewhere around the four to $6,000 range. Really just depends on a lot of things like property taxes and insurance and what that all looks like.

What will you can do is talk with a mortgage broker and get an estimate of those fees. We do, what's called a total cost analysis. So we give everyone all the information up front so they can get a really realistic idea of what that looks like.

Pre-qualified

Now let's talk about getting pre-qualified. So the whole reason why you want to get pre-qualified what to know the estimate of what you can borrow. Basically what getting pre-qualified does is lets you know how much you can go shop for. It's going to make sure that you don't have any heartbreak because you don't want to go shopping for a home. Find one that you love and then try to get pre-qualified and find out you can only qualify for a certain percentage of that price or you find out, maybe you have some credit issues that you need to work through in your timeline that looks a lot longer.

Yes, mortgage brokers can help

Getting prequalified is one of your earliest steps after you've looked at your budget, what's comfortable for you, you've looked at your credit, you know that you're in a good place to begin applying, and you're comfortable with those down payments and costs look like, go ahead and talk with a mortgage broker.

They can help you get on a good plan to know what all of your costs look like, help you with credit issues if you need to, and paint the entire picture together. So you can see what that looks like. A good broker is going to make sure that all of the moving pieces, so you don't have to do it on your own.

And that's one of the most overwhelming parts of buying a house is how many different pieces there are moving together. And what I like to do as a mortgage broker is piece all those together as much as I can. So we show all the costs, we help people with building credit, we help them figure out what's going to work in their budget for how much they're comfortable on spending each month and making sure that their home is set up as an asset for them and their family in the future.

Know your numbers, avoid getting terrified

So getting pre-qualified is going to help, your numbers before you shop. Here's the biggest problem that I see people face is they go under contract and then they're going to get a document from the loan company called A Loan Estimate, and the loan estimate shows their rates, their payment, and their total cash due at closing. The problem is people are writing offers on homes. They get that accepted and they don't know how much they're going to have to pay monthly until they actually sign and accept the offer. That's terrifying.

You just legally obligated yourself to a contract and you weren't aware of the numbers. Getting pre-qualified is going to make sure that you know your numbers before you write an offer. That way you can confidently say, I want to purchase this home. And I know it's going to cost us a lot of money because this is the sheet that the broker gave us.

So getting pre-qualified, it's going to help, your numbers before you shop. Also, you're going to have an advantage over all other buyers in the market.

Why WTHYL?

The whole reason why I call my YouTube Channel "Win the House You Love" and why my website is WintheHouseYouLove.com is that I want you to be able to win the house that you love.

You're going out, you're finding a house that you want to live in. The problem is other buyers want that same home and you have to beat them out. I believe the way to do that is by arming yourself with the knowledge and the plan and the timeline that you have. So you can take action and move on to things that you want to do that are not based on emotion.

When you base things out of a plan out of solid facts that are then surrounded with emotion, you're going to beat out 95% of all other buyers who are just doing everything based on whim and emotion. So you have a higher chance of winning the house. You'd love it if you get pre-qualified first.

Finding an Agent

Now let's talk about finding an agent. You need to be working with a real estate agent because purchasing real estate is complex. You have a lot of people who are going to try to cheat you out of what you're trying to do. They're going to try to take advantage of you and make sure that they get the best deal and you need an agent who's going to represent your best interests.

So when you find an agent, you need to make sure that you are interviewing. Don't just go with an agent who you first called and you liked, or they answered. You need to interview different agents. Find the ones that are going to work with you, let them know your communication preferences. What you're looking for, and how you want them to represent you in the deal. Then you can move forward with that agent.

That agent is going to make sure that they represent you from a legal standpoint. Now agents are not lawyers, but they are licensed in contract and real estate law. So they're going to help you take the contract for an offer on a home and make sure that you have everything set up so that you're protected. They're going to negotiate on your behalf for things that you want to make sure that the process is as seamless as possible.

You can do it on your own and you probably will not succeed very well because for most people most agents in the last month closed more deals than you probably will in your lifetime.

So they have seen all of the weird anomalies and things that happen, and all of the issues that come up with real estate are clunky. There is no need to try to do it on your own, especially because the seller is going to pay the realtor's costs if you're the buyer. The seller is going to pay normally on average 3% to the realtor.  You won't have to pay that, it's coming from the seller.

Know your contract

Also, something that you need to be familiar with is your contract. It's a legally binding contract. You need somebody to represent you who knows the contract's in and out so that you have ways to protect yourself. Because you really can get taken advantage of in real estate. If you don't know what you're doing.

Let's talk about your timeline

Your timeline needs to be realistic. The reason you need to have a timeline is that it's super easy to say all of a sudden flip the switch and say, yes, I want to go buy a home. If you don't have a realistic timeline, you're going to be set up for disappointment. If you're not sure of what everything looks like.

Savings

First, we need to look at a timeline with savings. So let's go back to our down payment and closing costs. If you're not there yet if you say I have debt, I need to work on and I do not have money for a down payment, then your timeline, we need to back it all up and say, let's start with our savings.

What's a savings timeline you can get on how much money can you save by a certain date? Maybe next year is your goal to see. $5,000 or your goal is to save up $10,000 or whatever that savings timeline looks like. Make sure that's in your timeline. 

Moving

Make sure your moving is in that timeline as well. So if you know that you're going to be moving to a different state or a different city, you're accounting for that.

Changing Jobs

Also if you're changing jobs, make sure that you're factoring in. Did we have time to visit the city that we're changing jobs to? Have we been able to interview in different places? Do we know what the onboarding schedule looks like for that job?

Timeline, don't be impatient

So once you figured out these you're also going to have to keep in mind that on average, people search for their home for about two weeks. So once you're pre-qualified and looking around for homes, it takes people on average two weeks to find a house. Because you're going and viewing the property, or you're looking at the properties online, and then you're doing a showing. It's going to take a little bit of time for you to find the house that you want.

And it might take a while for a home to pop up on the market. So don't be discouraged. If you say I'm ready to buy a house, you get everything set up and prepared. And then the home is not. It's waiting for you. It just might not be there yet. Just be patient. It will come up. But keep in mind that it's not going to be instant.

Don't let that discourage you. All right. If you have a solid plan and your timeline and are comfortable with it, you'll be ready to take action. And again, be better than 95% of the other buyers who are just acting on emotion the entire time. Okay. Once you're under contract congratulate. You now have about 30 to 45 days until you close.

This is on average, how long it takes to close with a mortgage. Again, there are lots of moving parts. You're doing an inspection. You have an appraisal. You're going through the mortgage process and I have some other videos talking about what that process looks like. But on average, you'll probably be running about 30 to 45 days from when your offer gets accepted until you finally close on that deal.

Occupancy

Sometimes in the contract, occupancy is assigned on the closing date. Occupancy just means when do the keys formally get exchanged. So you might close on a home, but the seller says, "Hey, I need a week to move out". So that means occupancy's pushed back for a week. So you'll negotiate in the very beginning of your contract, what occupancy looks like, but it's something to keep in mind. Make sure of that especially if you're moving from city to city or state to state that when you close, you also know what occupancy looks like, because you might have another week or two that you need to find another place to live until you have occupancy of the home.

Buying & Selling

If you were buying and selling at the same time, That can be confusing because you just took one real estate transaction and all of its complexity and added another one on top of that can be a bit overwhelming. So if you're buying and selling at the same time, I highly suggest talk with a loan advisor, like a broker or talk with a realtor as well. Let them know what you're trying to do. They will help you get a good game plan rolling.

I highly suggest, start now talk with a mortgage broker now. It is never too early to help to get them involved so that they can help you afford and qualify for a home. That's what I do all day as I help people qualify for homes and if they can't qualify, then I give them a game plan to work on.

And I'm never upset if somebody comes to me and says, I know I'm not gonna be able to buy until two years from now. What I say is, "let's talk about what we need to do now, what's the game plan". We need to work on it now because there are a lot of moving parts and you shouldn't have to feel like you're doing it on your own.

Focus on preparing

Hopefully, this gives you a good idea of how you're going to prepare to buy a home. And really keep in mind this is all just about preparation. Don't feel down on yourself, just because of articles about certain things that you should be doing, or other things on social media about what you should be doing.

Don't be social media envy

One of the most difficult parts about living in this period of time is especially with the prevalence of social media and how quickly we see technologies. It's very easy to see other people in your life who have different lifestyles than you have, and maybe something that you want. Other people having families or homes, and maybe you're not there. And if so, that's fine. You're not different because of that. You are on your own timeline and you need to follow that. There's no point in keeping up with the Joneses. The Joneses are broke as Dave Ramsey says.

Follow your happiness

Follow what's on your timeline, follow the things that are going to make you happy and not the things that you think you should do to make other people happy.

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Only for educational usage. All calculations should be verified independently. Win The House You Love LLC is not a lender, does not issue loan qualifications, and does not extend credit of any kind. This is not an offer to lend and should not be used to make decisions on home offers, purchasing decisions, nor loan selections. Not guaranteed to provide accurate results, imply lending terms, qualification amounts, nor real estate advice. Seek counsel from a licensed real estate agent, loan originator, financial planner, accountant, and/or attorney for real estate and/or financial advice. Read the full disclaimer here.