Reader question: “I’m working toward buying my first house next year, and I want to make sure I’m taking the right steps early on in the process. I know I have to save up a certain amount of money for a down payment. But what else do I need beside that? What do I need to buy a home in 2012?”
You’re right about the down payment. Unless you qualify for a VA home loan, you will need to make a down payment of some kind when you buy a home. But that’s just one of several things you will need along the way. Here’s a more complete list.
1. You Need to Make a Budget Before You Buy a Home
If you ask a real estate agent or mortgage broker what you need to buy a home, they will probably focus on the mortgage-approval side of things. They will talk about your down payment, your credit score, and other things needed to qualify for a loan. But in reality, this only scratches the surface. You will need a lot more than these minimum requirements in order to be successful.
The housing budget is one example of a critical item that is often overlooked by first-time home buyers. It’s my job to make sure you don’t overlook this important item. I’ve written an entire article on the subject. So I don’t want to repeat it all here. Suffice to say you need to figure out how much money you can afford to pay each month toward your mortgage costs. You need to do this before you start applying for a loan.
We’re not talking about advanced accounting here. Were talking about some basic budgetary math to determine how much money you have available each month to cover your mortgage payments. Subtracting your monthly expenses from your take-home pay — that sort of thing. Nothing fancy. But it needs to be done before you move any further into the home-buying process.
“Okay, so I need to establish a budget. What else do I need to buy a home in 2012?”
2. You Need Decent Credit to Buy a Home
When you walk into a lender’s office, call them on the phone, or request a mortgage quote through their website, one of the first things they will do is check your credit score. You need to “pass” this preliminary test if you want to get approved for a loan.
There are different types of credit scores, and I don’t want to get too far into those weeds right now. Most lenders will check your FICO credit score, which is a three-digit number between 300 and 850. The exact credit requirement will vary from one lender to the next. So I can’t say exactly what you would need to buy a home.
Generally speaking, you will probably need a credit score of 640 or higher to buy a home. Let me restate that. You would probably need a score in this range to qualify for a mortgage loan. If you can afford to pay cash for a house, your credit score is largely irrelevant. You wouldn’t need a mortgage loan in that scenario. But most home buyers do need to use a mortgage loan, so the credit score becomes very important.
In order to qualify for the best interest rates available, you would need a score even higher than the minimum stated above. You would probably need a score north of 740 to qualify for the lender’s best rates. But you don’t need a score that high just to buy a home. Like I said, you could probably qualify with a FICO number in the low 600s or above.
“So I need a budget and a decent credit score. Is there anything else I need to buy a home?”
3. You Need Money for a Down Payment
This is something you mentioned when asking your question. So it’s probably the one item on this list you are most familiar with. For most types of mortgage loans, you will need to make a down payment of some kind. The VA and USDA loan programs offer 100% financing (which means no down payment is necessary). But for a traditional mortgage loan, you will need to make a down payment when you buy a home.
The size of the down payment will vary in relation to the amount of money you are borrowing. With an FHA loan, you could qualify for the 3.5% down-payment program. This means you would be expected to pay 3.5% of the loan amount when you buy a home in this matter.
For a conventional mortgage loan (which is not backed or insured by the government in any way), you will probably need to make an even bigger down payment when you buy a home. Some lenders will require at least 5% down, while others will require as much as 10% — or even more. Remember that this is money you have to pay in advance, on closing day.
And speaking of closing, that brings us to another item you will need to buy a home. You will need enough money to cover your closing costs…
4. You Also Need Money for Your Closing Costs
There are quite a few expenses that go along with the home-buying process. This is especially true when you use a mortgage loan toward the purchase price. You will pay a fee for mortgage origination and underwriting, the home appraisal, the credit check, and many other expenses. Collectively, these are referred to as closing costs because you pay them on closing day. This is something else you need to buy a home. You will need to save up enough money to cover all of these costs.
There is a lot of variance when it comes to closing costs. So I can’t tell you exactly what you will need to pay on closing day. To get a rough idea, you could use the 3% rule. Your closing costs might come to around 3% of the loan amount. Of course, the lender is going to give you an estimated amount when you apply for the loan. So this will take some of the mystery out of it.
[See also: How much are closing costs for home buyers?]
“So I need a budget, a decent credit score, and enough money for my down payment and closing costs. Is there anything else I need to buy a home?”
5. You Need to Understand Your Local Real Estate Market
Is now a good time for you to buy a home? What’s the state of your local housing market? Have home prices been moving up or down over the last few months? And what kind of predictions are being made for the near future of your real estate market? You should be able to answer all of these questions before you make a decision to buy a house.
This kind of research is fairly easy to do. Still, I’m always surprised by the number of first-time buyers who neglect it. Buying a home without understanding the local real estate market is like investing in a company you know nothing about. I recommend that you spend a few days researching the housing conditions in your area, in order to get a feel for where the market might be headed.
Ideally, you want to buy a home in a market where the home prices are stable and gradually rising. That’s not always possible in the current economy. So at a minimum, you want to make sure your market is not declining. If home prices have been declining for the last several months, it’s reasonable to expect them to continue falling for the near future. This would be a bad time to buy a home. But if prices of been stable for a while, and most economists are predicting appreciation over the coming months, it might be a good time to buy a house.
[See also: Is now a good time to buy a home?]
Local market research is another critical item you need to buy a home. You are not required to do this kind of research. But it certainly makes a lot of sense to do so.
“Wow, my list is growing. So I need a budget, good credit, enough cash for my down payment and closing costs, and a solid understanding of my local housing market. What else do I need to buy a home?”
6. You Need to Understand Your Mortgage Options
Before you buy a home, you need to spend some time thinking about your long-term plans. How long do you think you’ll be in this house? Are you fairly certain it’s going to be a long-term stay, like more than a few years? If so, you might be better off using a fixed-rate mortgage loan. This is a home loan that keeps the same interest rate over the entire life of the loan, regardless of how the broader economy changes. It gives you the most predictability over a long period of time.
If you’re pretty sure you will only be in the home for a few years, you might want to consider using an adjustable-rate mortgage loan. Also referred to as an ARM, this type of loan has an interest rate that adjusts periodically at predetermined intervals. Most of the ARM loans in use today start off with a fixed rate for a certain period of time. After that initial period, the interest rate will begin to adjust at a certain interval. For example, consider the 5/1 adjustable mortgage. This is a loan that starts off with a fixed rate of interest for the first five years, after which the rate will adjust every year.
You should also consider the FHA loan program. It’s a popular topic among first-time home buyers, so you’ve probably heard of it before. The biggest advantage of using this program is that you can make a smaller down payment on the loan. We talked about this earlier, when discussing the type of down payment you will need to buy a home.
It’s also a bit easier to qualify for an FHA loan, when compared to conventional mortgage. But I don’t want to get into the pros and cons of the FHA program right now. The point is that you need to understand your loan options when you buy a home. You need to research the key differences between ARM and FRM loans. You should consider the advantages and disadvantages of the FHA program as well.
7. Do You Need a Real Estate Agent to Buy a Home?
You are not legally required to use a real estate agent when buying a home. However, since this is your first time going through the process, I would strongly recommend using an agent.
There’s a lot of room for error when buying your first house. A good agent will help you navigate the process more smoothly, by avoiding some of the common mistakes first-time buyers make. For example, your agent will help you perform a “sanity check” on the seller’s asking price. Is the home worth as much as the seller is asking for, or is it totally overpriced? A real estate agent will look at comparable sales data in the area to help you answer these questions.
This article answers the question: What do I need to buy a home in 2012? Please note that this list is not all-inclusive. It doesn’t cover every single thing that’s needed to buy a house. But it does address some of the most important factors you will encounter along the way. If you would like to learn more about this subject, you can use the search box located at the top of this website. We have hundreds of articles that cater to first-time buyers. So you’re bound to find some useful information.
Brandon Cornett
Brandon Cornett is a veteran real estate market analyst, reporter, and creator of the Home Buying Institute. He has been covering the U.S. real estate market for more than 15 years. About the author