Buying a home for the first time, or first time in a long time after maybe renting for awhile, is exciting at any age. Your Buyer Agent is with you to make sure your decision is the right one for your circumstances.
The housing market is a roller coaster right now. Rising interest rates in the spring of 2022 have created a downturn in home buyers who might have qualified for a mortgage before, and this in turn has slammed the brakes on the craze of 2020-2021 homebuying behavior which included craziness such as offer SIGNIFICANTLY over list price, NO inspections, NO financing contingencies, NO home sale contingencies, and even not even SEEING the house in person you were buying?!
Lenders raised caution by raising the minimum credit score and requiring more down payments to decrease their risk of defaulting borrowers, so along with the rising interest rates, the housing market, though strong in some places, has crawled to it’s knees.
With less access to low interest mortgages and fewer houses to choose from, buying a home in 2022 can seem like more of a feat than in years past.
This is meant to be guide toward optimizing your buying position and show you how to buy a house and enjoy the benefits of homeownership in the current Texas real estate market.
- Evaluate Your Financial Situation
Before checking out the home listings, take a detailed look at your balance sheet to determine if you’re ready for homeownership. In the likely event that you take out a mortgage to buy a home, it’s important to understand how your financial situation impacts your buying options.
Determining how much house you can afford is a little more complicated than finding a monthly mortgage payment equal to your rent. Read this to get an idea of whether your budget is ready to include a mortgage and how big of one you can afford to take on.
How Much Can You Afford to Spend on Housing Each Month?
Determine how much of your budget you can or want to devote to housing costs every month. Keep in mind that homeownership costs are more than just the principal and interest on your mortgage.
Owning a home requires additional costs you didn’t have to pay while you were renting, including:
- Property taxes
- Homeowner’s insurance
- Repairs
- HOA fees
I can offer you a preliminary statement of what your mortgage may cost in these areas.
The 28/36 Rule
When deciding whether to approve a mortgage, lenders typically follow the 28/36 rule:
- Total housing costs shouldn’t exceed 28% of your gross monthly income
- Total monthly debt payments shouldn’t be more than 36% of your gross monthly income
Another metric that lenders use is to determine if you can afford mortgage payments is what your debt-to-income ratio [DTI] would be after taking on a mortgage.
This is a general way lenders to see your overall financial health and make sure your finances are not overextended. Having a higher DTI translates to a low chance of approval (unless you have a high credit score, in which case some lenders may be r-mortgage DTI under 36%, a VA loan under 41%, and an FHA loan under 43%.
To optimize your chances at pre-approval, it’s best to keep DTI under 36%. However, many lenders will go above that depending on just how good your credit score has been.
When figuring out how much you pay each month in debt, remember to include:
- Minimum credit card payments
- Student loans
- Auto loans
- Alimony / Child support
- Personal loans
- Mortgage payment estimate
Your DTI will impact what type of mortgage you can apply for. Most conventional loans require an after mortgage DTI under 36%, a VA loan under 41%, and an FHA loan under 43%.
Download a full copy of my Home Buyers Guide here
Down Payment
Lenders won’t allow you to borrow 100% of the money you need to buy a home; they expect you to bring some cash to the table. The portion of the money you pay for your home out of pocket is known as the down payment. A down payment ensures that you have some skin in the game; this protects the lender in case you default on the loan and they need to resell the asset.
For example, if you put $20,000 down to buy a house, you have 20,000 reasons not to default on your mortgage.For conventional loans, down payments are around 3%-20% of the purchase price. The 20% option often allows you to avoid something called PMI-Private Mortgage Insurance – Which a lender charges when your loan balance is under 20% of appraised value. Another way to protect their investment in your ability to re-pay the loan.
VA and FHA loans have lower down payment amounts because they use other means to offset the lender’s risk [VA Funding Fee and PMI].
What’s PMI?
PMI, is a type of mortgage insurance you might be required to pay for if you have a conventional loan. Like other kinds of mortgage insurance, PMI protects the lender—not you—if you stop making payments on your loan.
The average cost of PMI for a conventional home loan ranges from 0.58% to 1.86% of the original loan amount per year, according to Genworth Mortgage Insurance, Ginnie Mae and the Urban Institute.
This calculator estimates how much you’ll pay for PMI,
which can help you determine how much home you can afford.
Closing Costs
Closing costs are all the charges associated with buying a house beyond the actual price.
They include things like:
- Title searches
- Title insurance
- Loan origination fees
- Document recording
- Escrow fees
- Appraisal fees
- Inspections
- Property taxes
- And more…
You can expect closing costs to be roughly 3-5% of the purchase price of the home.
Typically, the Buyer pays for closing costs, but sometimes sellers may pay for some or all of closing costs as a concession.
Get Pre-Approved for a Mortgage
Pre-approval means that a lender has reviewed your income, expenses, and credit report and has conditionally agreed to loan you a set amount of money for the mortgage.
This enables you to look for a home at or below that price level with confidence that you’ll be able to fund the deal if you put an offer in.
This also makes you much more appealing to the seller, since he or she knows you are willing and able to pay for the home.
Talking to lenders will give you a feel for the types of mortgages you may be able to qualify for. Ask about terms, interest rates, credit score requirements, and DTI. Speak with multiple mortgage lenders to find the best type of mortgage for your situation and the best interest rate.
Once you’re pre-approved for a mortgage, it’s imperative that your financial situation doesn’t change. If your credit drops or you deplete your cash reserves by making a large purchase, that can derail the process and potentially keep you from closing on your house.
Compare Interest Rates
Most mortgages are written for 15, 20, or 30 years. The length of the mortgage affects the size of your monthly payment, as well as the total interest you’ll pay over the life of the loan.
You’ll pay a higher monthly payment with a 15-year mortgage, but you’ll save quite a bit in interest. Also, you’ll likely land a better interest rate on a shorter-term loan, since that’s less risk to the lender.
Conversely, a 30-year mortgage will require a smaller monthly payment but will cost you thousands in interest long term
Find a Trustworthy Real Estate Buyer’s Agent in Texas
Your real estate agent will be your main ally throughout the home buying process, so it’s essential to have someone on your team that you trust. Aside from finding and showing you houses, Realtors can also:
- Show you what to look for when buying a house
- Help you negotiate to get a great deal
- Provide info on market conditions
- Review comps to see if a house is worth the asking price
- Help prepare offer and counteroffers
Submit an Offer
This is where it really pays to have the experience of a real estate agent on your side. Your Realtor can give you tailored, expert advice on how much to offer for a particular home.
An offer includes more than just the proposed home’s selling price. “Terms” such as how soon you need to be in the house, and “contingencies” such as whether you need to sell an existing house first all play a part in the offer. Sometimes a higher price isn’t your best option for getting a seller to accept your offer. You can write in different terms — like no contingencies or a quicker closing date— to create a deal that works for you and the seller.
Seller Concessions
- Pros: Closing costs included in mortgage for the buyer, higher sale price for the seller
- Cons: Higher sales tax/agent fees for buyer and/or seller
Repair Credits
- Pros: Control over repairs for the buyer, no risk of repairs going over budget for the seller
- Cons: Repair credit may not cover the actual price of repairs for the buyer
Get a Home Inspection & Appraisal
When buying a home, the last thing you want is an unpleasant surprise like termites, flood damage, an out-of-date electrical system, or other liabilities lurking behind the drywall.
The best way to avoid these problems (during the home buying process and after you sign on the dotted line) is to get an inspection and an appraisal.
Creating a contingency clause for these two items in your offer gives you the option to return to the negotiating table if any issues come up. This is especially true if you’re buying a fixer-upper house and don’t want any major issues ruining your plans.
Inspections
Inspections give you peace of mind about the condition of the property. You should always hire a licensed inspector and make sure they check out each part of the property.
The inspector should pay close attention to the following areas, as these things may need to be repaired for you to qualify for certain types of mortgages:
- Roof
- Foundation
- Electrical system
- HVAC system
- Plumbing
If the home has a septic system, it’s also a good idea to pay for a septic inspection that scopes out the system with cameras to look for any potential issues.
Radon Testing: While it’s not required by law, we strongly recommend that homes are tested for radon—a colorless, odorless gas that can cause lung cancer. If the seller hasn’t had the house’s radon levels tested recently, consider having it tested before closing on the home.
Termite Inspection: If you’re applying for a VA or FHA loan, you’ll most likely be required to have a termite and pest inspection in Texas.
The Appraisal
Required by the Lender to ensure that the home is worth what you’ve agreed to pay for it for the loan value at minimum. An appraiser verifies that the contract price is fair for the buyer, seller, and lender.
Here’s a broad overview of the appraisal process:
- A licensed appraiser comes to the home and does a walk-through.
- They will note the appearance, amenities, and condition of the property.
- The appraiser looks at what comps (homes of similar square footage and condition) in the neighborhood recently sold for.
- The appraiser prints out a long report of their observations, and value of the home in their opinion
Get a Home Inspection and Appraisal
Inspections and appraisals give you and your lender peace of mind about the purchase, but be prepared for more negotiating if anything unexpected comes up.
Final Walkthrough and Closing
Take the time to check the entire house closely to assure repairs were made and items that were supposed to be there are, along with overall condition the home has been left in. Once you officially close on the house, you’re a homeowner!
NOTE: Texas law requires ALL real estate licensees to give all consumers who initiate real estate transactions the following information about real estate services:
