For most people, buying a home is the biggest purchase they will ever make. Despite (
reasonable) fears that it will always be out of reach, there's hope in the numbers: The percentage of millennials buying homes has been on the rise in recent years. A 2016 report from Zillow found that half of all homebuyers in the United States are under the age of 36, with 47% of them being first-time buyers.
But if you do want to get your piece of the American Dream, where do you even begin? We asked Priya Malani, founder of
Stash Wealth, for step-by-step tips on navigating the home-buying process. While each experience is different — especially depending on where you live and how much you have to spend — these guidelines should help set you on the path to having your very own home. The process of buying your first property is obviously a major commitment that goes far beyond signing on a dotted line. But with a little bit of planning, the right information, and a trustworthy team, this seemingly insurmountable process can be manageable.
Illustrated by Abbie Winters.
When buying your first home it can be very easy to forget about the costs that extend beyond the down payment and monthly mortgage payment. Because we tend to over-simplify the costs involved, it’s not uncommon to overestimate what you can afford. A good place to start is with an online calculator, like
this one from NerdWallet. This will help you prepare for the monthly mortgage-related costs including standard home insurance. If you live in a part of the country where additional protection is necessary, like flood insurance, that will be another cost to factor in. Other costs could include ongoing property maintenance (yard work and erroneous upkeep — usually between several hundred and several thousand dollars per year) and home owner association fees. There are also those one-time costs like appliances and furniture, which should certainly be part of the “what I can afford” discussion. There’s a reason why most furniture stores provide 0% financing deals — and that’s another monthly debt obligation to pay. For these reasons and others, it's best not gauge affordability on the total monthly mortgage payment alone. As any home owner will tell you, there are always “surprise” costs including a host of installs and upgrades you will want to do. Keep that in mind when calculating the costs.
You might think that having debt (student loan, credit card, car loans) might prevent you from getting a mortgage, but think again. The total amount of debt you have is less important to lenders than the minimum monthly payments you make. Add up all your monthly debt payments, including student loans, personal loans, auto loans, and so on. As a rule of thumb, most lenders want to see that your monthly debt payments, along with the monthly mortgage payment they'd lend you, amount to no more than 36% of your total monthly income.
When you formally apply for a mortgage (beyond just pre-approval), the bank will want to make sure that you can pay them back for the loan. The bank is taking a risk in lending you money, so looking at certain criteria will help them figure out if you're trustworthy.
The first thing they'll check is whether or not you have a job and steady income. People who work for traditional companies and receive a paycheck every month, also known as W2 employees, will have the easiest time, as most banks will feel comfortable lending to them. On the other hand, freelancers, small-business owners, and contract workers without steady incomes are seen as greater risks. Given those concerns, financial institutions will typically want to see proof of income over a two-year period of time. If you fall into the latter category, make sure that you have two years of 1099 forms to demonstrate that you have consistent income.
Illustrated by Abbie Winters.
It’s a myth that you
must put 20% down on your new home. These days, more and more lenders can get you into a home with 10% down. There are pros and cons to this. For one, putting less than 20% down may make you a less desirable buyer in more competitive real estate markets, which means you could have a harder time getting sellers to accept your offer. At Stash, we rarely advise going below 10%. While it might be tempting to jump at an opportunity where you could just put down 5% (or nothing!), there is the risk that your property will be worth less than what you owe the bank if the real estate market dips. Then, if you want or need to sell your home, you would have to pay the bank the difference — which can be a lot. To decrease the probability of going underwater, commit at least 10% to a down payment. You'll also want to maintain some equity in the property so that your monthly carrying costs are reasonable relative to your income level. To put it more simply: Putting less money down may increase your monthly payments to an amount that's higher than you can reasonably afford.
Illustrated by Abbie Winters.
Like any other major purchase, shop around to compare rates and programs. If you don’t want to do the work yourself, you can use a mortgage broker who will do the research for you. Also, keep an eye out for deals and promotions. For example, right now if you hold a Chase Sapphire Reserve card and close on a mortgage through Chase before August 31, they will give you 100,000 rewards points on your credit card. Even if you don’t want to use Chase, you can use this deal as a point of negotiation with your chosen lender.
Once you have a sense of how much you want to spend, and a down payment in the bank, you’ll be ready to talk to a mortgage lender and seek pre-approval for your loan — something you definitely want to do before scouting any houses.
Do your research first to establish a clear idea of what and where you want to buy before you speak to the lender. In big cities, most real estate brokers won't even speak to you without pre-approval because that document shows what you can afford, and it demonstrates that you’re a serious buyer who won’t have trouble securing a mortgage, making you all the more attractive to sellers. To get pre-approved, you generally need the following financial documents: your two most recent pay stubs, two months of bank statements, and two previous years of tax returns. The form you’ll likely fill out is called a 1003 mortgage application. (Feel free to name drop it; you’ll sound super prepared!) Pre-approval is generally effective for 60 to 90 days, so if you don’t find something and indicate that you’re going to be buying it during that time (with an accepted offer and accompanying documents, such as an acceptance of offer letter) you’ll need to reapply.
You've got a down payment saved, but you'll need more in savings than just that 10 to 20%. Every lender has different requirements for cash reserves. If you’re a city-dweller and looking at a co-op, you might need a cash reserve of as much as 12 times the monthly mortgage payment. (For example, a $2,000 monthly mortgage payment might require an extra $24,000 of cash on hand.) Then you’ll have to cover those ever-present closing costs, which are usually 3 to 4% of the purchase price. Closing cost estimates will come from your lender in the form of a loan estimate.
Once you've got pre-approval and cash reserves, it's time to start hunting for your dream home. This process can be difficult, especially in competitive housing markets. Give yourself time and space to find just the right place, with the knowledge that you might need to move quick once you've found the one.
Generally, making an offer is handled by your real estate agent directly. First, they will help explain the seller’s asking price and based on comps and other factors, where to start with your offer. Sometimes, if the market is very hot, they might even suggest that you put in an offer above the asking price. Either way, they will work with you to come up with the right number so that you are taken seriously but also have room to negotiate. Then, they will communicate with the seller’s agent or the sellers directly and keep you in the loop to let you know if your offer was accepted or countered. This process will go on until you get an accepted offer.
At the same time your real estate agent is negotiating your offer, you need to get in touch with your mortgage broker. They will help you evaluate various mortgage options and begin drafting your mortgage documents. Depending on how much you can pay each month, your lender may recommend a 15-year term or a 30-year term, meaning you’ll make payments for the next 15 or 30 years. Ask them to give you all your options, and feel free to do a little research on the side or consult a financial advisor for additional guidance.
Illustrated by Abbie Winters.
Next, you’ll need to hire a real estate attorney to help you make sure the contracts you are signing are fair, and the house you want has no outstanding liens against it (meaning the previous owners owe money and used their home as collateral). The attorney will also guide you through the entire closing process. Your mortgage lender or real estate agent may be able to recommend a solid real estate attorney in your area.
Now for the hard part: patience. It's crucial you don’t change your financial profile during the mortgage application process. This includes: opening a store credit card, buying a car (or a boat, or pricey new furniture, etc.) on credit, making large purchases with cash, signing a new lease, changing jobs, withdrawing or depositing over $2,000 without a good explanation.
Any and all deposits and debits into and out of your accounts will be scrutinized during the application process, and applicants will be asked to explain anything out of the ordinary to the bank that's considering issuing your loan. It can be a little stressful, as the mortgage approval process can drag on for a bit. It's something to consider before you start house-hunting: Have you reached a point in your life where things are steady for a moment? If you're looking to make a bunch of big life changes, this might not be the ideal time to dive into first-time home buying.
This is the day when you'll sign a
ton of papers, so bring snacks and water — you'll need it. Your real estate attorney and mortgage broker will probably both be present to guide you through every step. You can expect them to walk you through each form and explain what they all mean, with the big legal takeaway for you being this: "I agree to pay this mortgage. I accept the responsibility and confirm that I understand my home will be taken from me if I stop making the monthly mortgage payment." They will show you how much you’ll pay as the principal, and in interest over the life of the loan. (Don't worry — you won't be alone in thinking that this form is a little scary.) Once everything is signed and sealed, congratulate yourself. You may now take the keys!
Want a better idea of what you might be expected to shell out to buy a home? Here's a rough estimate of what your costs might be for a $250,000 home.
HOUSING COSTS AT A GLANCE
Purchase Price: $250,000 Earnest Money (Your deposit, which will be held in an escrow account): $2,500 - $7,500, or 1% to 3% in most of the country. In big cities like New York/L.A., this might be as much as 10% (especially if you’re putting less than 10% down). Down Payment: $25,000. Your earnest money would count towards this. Total Mortgage: $225,000 Closing Costs: ~4% (or ~$10,000) Additional Expenses To Consider
Cash Reserve (For A Co-Op): Monthly mortgage cost x 12 Furniture Expenses: Will depend on your budget — but you might not want to furnish your dream home with hand-me-downs just because you forgot to save money to furnish your new home. Moving Costs: If you have really large, really delicate, or really unwieldy items that will need professional care, you should also make sure to put some money away for hiring movers.