The Important Steps to Owning a Home and Building Wealth
The most effective way for African Americans to build wealth is through homeownership. But so many families ask, where do you start when you want to buy a home?
The National Association of Real Estate Brokers (NAREB) broadly provides this information so more Black families can enjoy the benefits of homeownership and create intergenerational wealth. The journey of becoming a homeowner, especially for the first time, can be both exhilarating and daunting. It's crucial to approach this process with a well-structured plan.
Here are a few essential steps every first-time homebuyer should consider:
Prepare for Buying Home: Before looking at potential homes, it's essential to have a clear picture of your financial health. This includes reviewing your credit score, understanding your income, and identifying your budget for buying a home. Here are some tips:
- A good credit score for purchasing a home typically falls within the range of 620 to 850. This range represents the FICO credit score system, which lenders commonly use to assess an individual's creditworthiness. Scores above 720 are considered excellent and may enable borrowers to access the best interest rates and loan terms. However, individuals with scores at the lower end of this spectrum can still qualify for a mortgage, though they might face higher interest rates. It's important to note that while your credit score is a crucial factor, lenders will also consider other aspects of your financial situation, including your debt-to-income ratio, employment history, and the size of your down payment.
- Improving your credit score will help you secure a mortgage and potentially save thousands of dollars in interest over the life of your loan. To maintain or improve your credit score, make sure to pay all bills on time, keep credit card balances low, and avoid unnecessarily opening new lines of credit. It's also important to regularly check your credit report for errors and dispute any inaccuracies that could negatively impact your score.
-Ultimately, having a good credit score can open up opportunities for homeownership and save you money in the long run. So, whether you're currently in the market for a home or just planning for the future, taking steps to improve your credit score is a smart financial move. Remember, your credit score is just one piece of the puzzle when it comes to getting approved for a mortgage. Still, it's an important one that can significantly impact your borrowing power and the overall cost of homeownership.
Hire a Real Estate Professional: A knowledgeable real estate agent, such as a Realtist from the NAREB, can offer invaluable assistance in navigating the home-buying process. They can help you find homes that match your criteria, advise on the offer process, and negotiate with sellers.
Securing A Mortgage Pre-Approval: A pre-approval from a lender gives you the advantage of knowing exactly how much you can afford. It also demonstrates to sellers that you are a serious and capable buyer. Here are the steps to getting pre-approval. Before approaching a lender for pre-approval, knowing how much you can afford is important. Consider factors such as your income, expenses, and credit score and:
-Lenders will require certain documents to verify your financial information, such as pay stubs, tax returns, and bank statements. Make sure to have these ready for the pre-approval process. Research lenders: Shop around and compare different lenders to find one that offers competitive rates and terms that suit your needs.
Fill out an application with your chosen lender and provide all necessary documents to begin pre-approval.
- The lender will review your application and documents and determine if you qualify for a mortgage pre-approval.
- If approved, the lender will provide a pre-approval letter stating the amount you can borrow.
- Keep in mind that a pre-approval is not a mortgage guarantee, but it puts you in a stronger position when making offers on homes. With your pre-approval in hand, you can shop for homes within your budget, showing sellers that you are a serious and prepared buyer. Remember, the pre-approval is typically valid for a certain period, usually 60 to 90 days, so it’s important to start your home search soon after receiving it. Finally, maintain your financial stability during this period by avoiding new debt or making significant purchases, as these can affect your mortgage qualification.
Determine Your Preferences and Needs: Find the right neighborhood, considering general safety and desirability, condition of other homes in the area, quality of local schools, distance from your job, availability of public transportation, recreational activities, shopping, and places of worship. Also consider features needed for the house: the current and future size of the household, living needs and interests, proximity to work, schools, shopping, and recreation. Visit schools and daycare centers, and observe other homes on the same street.
Shop for your new Home: Seeing a variety of homes in person gives a better understanding of what is available in your price range and what features you value most.
Make an Offer on a Home: Once you've found a home that meets your needs and fits within your budget, your agent will assist you in making a competitive offer based on current market conditions. You will offer a price. You and your real estate professional will determine the amount of earnest money, legal names of buyers and sellers, address and legal description of the house, provision for home inspection, proposed closing date, list of items the seller is leaving, breakdown of fees and who pays them, and possible time limit for seller acceptance.
Apply for Your Mortgage: Explore all the loan options. It’s essential to understand the different types of mortgage loans available to you. These may include fixed-rate mortgages, adjustable-rate mortgages (ARMs), FHA loans, VA loans, and others. Each type has its pros and cons, depending on your financial situation and how long you plan. Even with your pre-approval, you'll need to provide additional documentation, including:
- Proof of income, with the most current month of computer-generated paystubs with YTD income information.
- Two years of W-2s and/or tax returns.
- Source of funds, with one to two months of complete bank statements.
Documentation of any large deposits, gifts, and liquidation of any assets.
-The more accurate and detailed information provided, the better the process. For example, have paystubs and tax returns to provide income, including child support, alimony, and all obligations.
Schedule a Home Inspection and Appraisal: Lenders will usually require a home inspection and an appraisal to ensure the property's value matches the purchase price and loan amount. The lender will likely arrange the inspection, appraisal, and a final walk-through inspection.
Close on Your Home: If all goes well with the inspection, appraisal, and final mortgage approval, you'll close on your home. Obtain a cashier’s check for the amount due. Call the utility companies. Welcome Home!!!
Maintain Your Mortgage: After closing, remember to budget for monthly mortgage payments, property taxes, homeowners’ insurance, and any homeowner association (HOA) fees. Staying on top of these expenses is crucial to maintaining your home and building equity over time.
This NAREB Building Black Wealth Blog was written by Sheryl Merritt, MBA, CEO/Broker, New Legacy Realty.
