At SeattleRentals.com, we know that some of you will decide to leave the rental market and dive into buying your first home. Even though we're sad to see you go, we're here to help make that transition as easy as possible for you.
1) Getting Started:Are You Ready to Purchase a Home?
You'll need to ask yourself the following questions to determine if you're ready to purchase a new house or condo in the Seattle area:
Do I have a steady source of reliable income? If you've been employed on a regular basis for the last 2-3 years and have confidence in the stability of your job, then you're probably a good candidate for a loan.
Do I have a good record of paying my bills? A good credit history is important, but bad credit doesn't exclude you completely from buying. There are federal mortgage programs that might be a good option if you have quite a few dings on your credit history.
Do I have only a few outstanding long-term debts? You'll need to factor car payments, credit card debt, student loans, and other long-term debts that you must pay off on a monthly basis into how much you can afford. These things will effect how big of a loan you'll be eligible for.
Do I have the ability to pay a mortgage each month, plus other costs? Keep in mind you'll be paying a mortgage each month, but also other costs that come with buying a home, including utilities, homeowner or condo association dues and property taxes.
Do I have money saved up for a down payment & other expenses? There is a large chunk of change that's needed up front to buy a place. See Gathering Funds below for a breakdown of the costs associated with buying a home.
2) Gathering Funds:How Much Money Do You Need?
The amount of money you need to have on hand to buy a property depends on the cost of the house and the type of mortgage you get, but generally there are three costs that you'll need to cover:
Earnest money: the deposit you'll put down when you give your offer
Down payment: a percentage of the home price that you pay when you settle
Closing costs: the costs for processing the paperwork involved with buying
When you make an offer, your earnest money will be held in what's called an escrow account. If your offer's accepted, then your earnest money goes towards your down payment or your closing costs. If it's not accepted, then you get your earnest money back. If you change your mind and decide not to buy the property, the seller can keep your earnest money. Typically earnest money ranges between $1000 - $5000.
In the past, the standard down payment was 20% of the cost of the home. Now there are lots of loan options out there requiring less money up front. But remember - the more money you can put in as your down payment, then the lower your monthly mortgage payments will be.
When you settle, you'll pay your closing costs, which are usually between 3-4% of the price of the home. The closings costs cover the fees associated with the buying process.
3) Wish Lists:What Should You Buy?
Before you start looking at places, you should make a list of all the things you're interested in for your new home. List off your must-haves (how many bedrooms, what type of property, etc) and your hope-fors (locations, what type of amenities, etc.) These will help you sort out your necessities from the things you may be able to give up if you come across an otherwise perfect home.
Once you've made these lists, you're ready to get a real estate agent. We'll help pair you with the right agent for the neighborhood you're looking in.
4) Making a Choice:What Type of Mortgage Should I Get?
It's often recommended in a fast-moving housing market that before you start searching for a place to live, you should get pre-approved for a loan. This is the best way to get an idea of how much home you can afford and what the monthly payments will be. The process involves pulling a credit report and examining documentation such as:
the last 30 days' worth of pay stubs
your W2s for the last two years
the last two most recent bank statements
your most recent 401k, IRA, mutual funds, or stocks/bonds statements
your last two years' tax returns and business license for self-employed borrowers.
Your loan officer will analyze your financial situation and issue a certificate with a dollar figure that you can present to your real estate agent or directly to the seller with your offer. This certificate is usually good for 90 days.
What makes up your loan? Loans can be broken down into four parts:
Principal: the amount you borrowed that you will be repaying
Interest: what you pay your lender for the privilege of borrowing the money
Homeowners Insurance: protection against loss from fire, theft, etc. required by most lenders
Property taxes: the taxes that your city/county assesses for your property
These are the things that your mortgage is paying. There are lots of different types of mortgages, including Fixed-Rate mortgages (where your interest is locked in for the duration of the mortgage), Adjustable Rate Mortgages (where the rate is tied to a financial index, and it will fluctuate up and/or down throughout the term of your mortgage) and various government mortgage programs.
Your real estate agent will help you sift through all the choices and find a mortgage broker and a loan that are the best fit for you.