A Family Guide To Buying a House
From selecting a realtor that you trust to securing a competitive mortgage and tracking down first-time homebuyer programs, the process of purchasing a home for your family can be daunting, if not downright overwhelming.
It doesn't help that we're also experiencing one of the most competitive real estate markets the country has seen in decades—there are fewer homes for sale thanks to COVID-19, and it's not unusual for new listings to be snapped up by prospective buyers within just one week.
To help families survive the process, we've created a home-buying guide full of expert tips covering everything from the mortgage application process to navigating closing costs.
Finding a real estate agent
Working with a professional, knowledgeable, and trustworthy real estate agent can make a tremendous difference in your overall home-buying experience. Finding an agent who is committed to your family's best interests (and not just obtaining commission from a sale), is critical. But how to find such an individual?
"Most people have a friend, family member, or acquaintance who is either a realtor, or knows someone who is. However, not all agents are created equal," Jenn Newman, a realtor at Phoenix, Arizona-based The Brokery, tells Parents. "It is imperative that you work with someone who is fully invested in the industry and has made this their profession."
Newman says word of mouth can be especially helpful when searching for a real estate agent. If someone you trust highly recommends an agent based on their own previous experience, it is worth interviewing that agent.
"A true professional will be able to outline the expectations of the entire process, listen with great intent, and create a game plan as you embark on the process of purchasing a home," continues Newman. "A great agent will function as your advocate, ally and trusted advisor."
It's also a good idea when selecting a real estate agent to ensure that the individual has an in-depth understanding of the neighborhood you want to live in, says Ruth Shin, founder and CEO of PropertyNest. You also want to find someone who you can communicate easily with.
"Speak with a few different agents and see if they develop a good rapport with you," Shin tells Parents. "Avoid pushy or aggressive agents, because they might not have to your best interests in mind."
Determining how much home your family can afford
Before embarking upon home shopping, it's important to first determine what your budget will be for the purchase. How much of a monthly mortgage payment can your family comfortably afford? Answering this question before your heart is set on a dream home can eliminate unnecessary heartache.
It's also a good idea to establish your shopping budget with a bit of restraint and avoid maxing out your family's free cash.
"Prospective buyers should be asking themselves 'How much should I borrow?' instead of, 'How much could I borrow?'" AJ Barkley, neighborhood and community lending executive for Bank of America, tells Parents.
To develop a sense of how much you might reasonably be able to afford, Barkley suggests multiplying your monthly income before taxes by 28 percent. The resulting dollar amount is typically how much a manageable monthly payment might be (including property taxes, home insurance, and private mortgage insurance.)
Bank of America is one of many financial institutions that offers an online affordability calculator to help you do the math.
"Determining how much your family can put down and how much you can afford to pay as a family each month is a difficult but incredibly important first task," adds Scott Lindner, national sales director at TD Bank Mortgage.
Lindner suggests sitting down with a mortgage professional who can help you crunch the numbers.
"Meet with a loan officer at the very start of the process, prior to looking at homes, to understand how much of a mortgage they qualify for. Doing so sets appropriate expectations at the outset of the process and helps families create a realistic budget," continues Lindner.
When meeting with a prospective lender, lay out all of the details about your finances. Being transparent and thorough can help the lender calculate important factors like your debt-to-income (DTI) ratio, which determines how much mortgage your family can really afford.
"A knowledgeable loan officer will also take into account other expenses like saving for college programs, or a car purchase that families should consider when thinking about future mortgage payments," says Lindner.
Finding first-time homebuyer programs
For families who are purchasing their first home, there are a number of first-time homebuyer programs across the country (at the national, state and local or county level), that will help cover everything from the down payment to closing costs.
These programs can make saving for a home purchase somewhat less onerous; this state-by-state list of first-time homebuyer programs from NerdWallet is just one example. Don't cheat yourself out of what is essentially free money by failing to investigate the options.
You might also consider working with a U.S. Department of Housing and Urban Development (HUD)-approved housing counseling agency that will help guide you through the home buying process and provide information and answers regarding every step in the purchase of your first home. Those who participate in the type of housing counseling offered by HUD-approved agencies average $11,300 less in household debt, according to the government agency.
For still more guidance on first time home buyer programs, ask mortgage lenders in your area what is available.
"Know that you may have options to help overcome the upfront costs of homeownership, so research your financing options," says Barkley, who points to Bank of America grant programs such as Bank of America's Down Payment Grant and America's Home Grant®, which give eligible borrowers up to $17,500 in down payment and closing cost assistance with no repayment necessary.
Securing a competitive mortgage
One of the biggest favors you can do for yourself when taking out a mortgage is to shop around. And then shop around some more. The message here is: do not settle on the first mortgage offer you come across.
"Run different lending scenarios at different providers," suggests Lindner.
While you're at it, look for knowledgeable lenders who will take the time to explain product options and different loan terms that could raise or lower the total costs of the loan.
"Having the right professional on your side that you can trust to help you navigate the process will make a significant difference and could save you money," adds Barkley. "Doing your research by shopping around for mortgage rates is the best way to see considerable savings."
And here's another pro tip, courtesy of Barkley: If you like a lender but their offer is missing something you saw in another offer, communicate this. In most cases, lenders want your business and will be willing to work with you.
One additional point to consider on the mortgage application front: Prospective homebuyers can often leverage existing relationships with a bank for additional savings. For example, Preferred Rewards members at Bank of America get a discount of up to $600 on mortgage origination fees.
Lastly, if you're having a hard time finding a good loan, a reputable mortgage broker can help guide you through the process.
"Mortgage brokers are like your own personal shopper, comparing rates across a wide network of lenders (called wholesale lenders) who don't advertise to consumers directly and may have more capacity to connect you with the right loan," says Andy Taylor, general manager of Credit Karma Home.
Getting your credit score in good standing
Having a solid credit score will be essential to securing a competitive, affordable mortgage, one that comes with good terms and lower rates. Increasing your credit score prior to applying for a mortgage is one of the best ways to improve your chances of obtaining a loan with better terms, says Taylor, of Credit Karma Home.
"Having bad credit can make it much harder for a borrower to find a mortgage with good, or even decent terms," says Taylor. "Federal Housing Administration loans are likely the best option for those with lower credit scores, and for veterans or those currently serving in the military, VA loans backed by the Department of Veterans Affairs often come with less stringent credit requirements."
Getting debt under control
You can help improve both your credit score and your chances of obtaining a mortgage by getting your family's debt under control. Prospective lenders consider the share of your income that goes toward paying debts each month—also known as your debt-to-income ratio (DTI)—when reviewing applications. Most lenders look for a DTI that is less than 43%, says Taylor.
"Some lenders might be more stringent. According to Wells Fargo, it's good to have a DTI ratio of 35% or less," adds Taylor. "Your DTI is an important factor because it shows a lender that you won't be using up all of your remaining cash on making your house payment."
There are two key ways to lower your DTI ratio—reducing your monthly debt, or increasing your income. There are a few ways you can fast-track this effort in preparation for buying a home:
- Reduce your day-to-day expenses so that you can make a bigger dent in your debts, such as your student loans or auto loan balances
- Make extra payments to your credit card each month to lower the balance more quickly
- Take on a part-time job or freelance work on the side to boost your income
- Avoid making large purchases on credit that aren't absolutely necessary
- Avoid taking out any new loans or lines of credit
Preparing for closing costs
Many first-time home buyers forget about the closing costs that are part of a home purchase and have sticker shock when these fees become due as a sale reaches finalization.
"Having cash is critical for closing," says Shin, of PropertyNest. "Closing costs vary depending on where you live and what kind of property you are buying. For example, in New York City, buying a condo in a new development will result in higher closing costs and transfer taxes, and the developer's attorney fees are generally passed onto the buyer. In addition, New York City has mansion tax rates on anything priced at $1 million or more."
Some lenders allow you to roll closing costs into your mortgage, so be sure to ask about this possibility. And don't forget: Many first-time home buyer programs pay closing costs for you entirely.
There are also private lenders who offer credits and other programs for first-time homebuyers. All of these things can help pare down your out-of-pocket closing expenses. But you'll need to have such programs lined up and secured long before you reach the day of closing on your home.
For families who are not first-time home buyers, be prepared to have money set aside for closing fees, says Christian Wallace, head of real estate services for the home ownership platform Better.
"Closing costs refer to the fees homebuyers have to pay before signing their new loan. They include points and credits, third-party settlement fees, interest, escrow, and taxes," Wallace tells Parents. "Usually, costs add up to about 2 to 5 percent of the loan amount."
Ongoing expenses of being a homeowner
The purchase of a home is merely the beginning of the expenses associated with ownership. As you will quickly learn once you're settling into a new property, there are many ongoing expenses that you don't have to pay when you're merely renting.
"One of the most underestimated costs might be property taxes and maintenance costs," says Shin. "As a homeowner myself, I also am keenly aware of the broad variety of maintenance costs that homeowners have, from keeping the driveway clear during the winter to making sure the gutters are cleaned and the heating is working properly. A house is an ever-evolving project. There is always something you either must fix or want to improve."
One of the expenses you won't want to skimp on is homeowners' insurance. Shin stresses the importance of securing ample coverage for your home and its valuables. After you've gone to all the trouble of purchasing a home, be sure to pay attention to this final step.
"The worst thing that can happen is that there is a natural disaster or a horrible incident that destroys your home and you don't have enough coverage to get the repairs done or your home rebuilt," says Shin.