Buying a Home In 2022 – A Complete Guide

By Alvaro Moreira
13 min read

Buying a Home In 2022 – A Complete Guide

Preparation is essential when you are looking to purchase a home in the current housing market. While buying a home is a significant accomplishment, the market is extremely competitive. This is only more true when you are dealing with the lower-cost and affordable housing market. So, you may be wondering – how do you get ahead in a market full of buyers?

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The only answer is to be prepared. The sooner you get started prepping to buy a home, the better chances you have of staving off the competition. However, even if you’re in the middle of house hunting at this moment, this guide can be a major resource that you can use to improve your results.

How to Prep to Buy a Home in the Early Stages

Those who are buying a home for the first time typically have a major advantage not available to second-time buyers. You typically have a lot more time to get ahead of your credit rating, debt, and your accumulated savings. This means you can afford a larger home and get a lower rate on your mortgage when you are ready. 

Here are some of the major steps to take when you are looking to get started with buying a new house:

buying a home

1. Look at Your Credit

The very first thing you need to do when you are looking to purchase a home is to check your credit. You should be checking your credit from time to time as it is. You can do this easily by going to each credit agency and pulling the reports. You’ll want to do the same thing for TransUnion, Experian, and Equifax. These are the three major credit bureaus that dictate your credit score. 

Your credit score matters because it’s what lenders use to determine your creditworthiness. It will ultimately determine whether or not you are eligible to take out a mortgage and what rate you get. You will only get a low rate if your score is high enough. If you have a low score, you may not be approved or you will have to pay a much higher rate. The majority of mortgage programs will require you to have a minimum score that sits between 580 and 620.

You want to try to check your credit history a good 6 to 12 months before ever thinking about applying for a loan. This can give you plenty of time to increase your score if it’s too low. You also want to be checking your credit history to ensure everything is accurate. There are instances where you may have inaccuracies on your reports that are driving your score down. You want to dispute anything that isn’t credible in your reports. This can help to ensure your credit rating isn’t getting lower because of a clerical error. 

To access your credit history, you can either contact the various bureaus separately or you can pull them all for free from AnnualCreditReport.com You can get (1) free copy from each agency annually.

2. Figure Out Your Debt to Income Ratio

Whenever you are preparing to buy a home, you want to figure out your Debt-Income ratio. This ratio is a percent of your monthly gross income that can go towards repaying your debt. A mortgage lender would use this ratio to figure out whether or not you can afford the mortgage repayment. A lot of times, a mortgage lender will want your ratio to sit under 36% to 43%. While it can vary based on the mortgage program, this is typically a good rule of thumb.

For instance:

If you are bringing in a gross monthly income of $4,000, you wouldn’t want your mortgage payments to go over $1,720. At that amount, your debt-to-income ratio would sit at 43 percent. While you will find some mortgage lenders will allow for a higher DTI than that, it’s only going to be the case if you have a high enough credit score or a lot of cash on hand.

To improve your ratio, you would want to pay off as much debt as you possibly can beforehand. Do this before applying for any mortgage. This means paying off existing loans you have outstanding. While you don’t necessarily need to be completely debt-free just to apply for and get approved for a mortgage, the less debt you have, the better your chances. It also helps you increase your purchasing power.

3. Save Up for Your Down Payment

You will find that the majority of mortgage lenders will require you to make some sort of down payment. You will find the range required to vary. However, you can typically expect it to be around 3 to 5 percent for a conventional loan. For an FHA loan, it’s usually around a 3.5 percent minimum. 

Therefore, if you are planning to purchase a home for $200,000 and it’s your first, you’re likely going to require a good $6,000 to $10,000 for your down payment. You won’t require a down payment if you qualify for a VA or a USDA loan. It’s also important to keep in mind that if you end up buying your home with less than a 20 percent down payment, you’re likely going to have to account for paying for private mortgage insurance (PMI). This will add more to your monthly installments. This is true if you are applying for an FHA loan which requires an upfront insurance fee to be paid monthly.

The private mortgage insurance that you take out can help to protect your lender if you ever default on your loan. If you cannot save enough for a down payment, you could potentially use gifted funds or even down payment assistance to get it. You would be responsible for paying off the closing costs that come with your home purchase. These costs typically amount to 2-5% of the total loan amount. For a $200,000 home, that would equate to around $4,000 to $10,000.

When you go through the mortgage application process, the lender will typically request copies of any bank statements you have. They will do this to assess whether or not you have sufficient cash on hand to pay off both your down payment and the respective closing costs.

If you do not currently have enough cash, some mortgage lenders and programs will allow you to use gifted funds to cover some of (or all) the expenses.

You also have the opportunity to leverage various down payment assistance programs that are available in different states. This will provide you with loans or grants to any potential home buyers that qualify. It’s meant to help with down payments. Therefore, if you find that you need assistance with some of the costs associated with buying a home, a DPA could be a good option to consider.

4. Figure Out Your Budget

Before getting started and meeting with a lender, you are going to want to do some calculations. You need to figure out how much you can afford. You can use an online mortgage calculator to do this. That way, you know what kinds of houses you should be looking at. This will give you an estimated purchase price that you can afford. Once you know this number, you can start to estimate how much you need to save up to make a down payment. 

For instance, if your calculations say that you can afford a home that is a quarter of a million dollars, you would want to save at least $12,500 for your respective downpayment. However, don’t forget about the closing costs which should be an additional $5,000 to $7,500. 

Estimated Purchase Price: $250,000

A total of 5% downpayment: $12,500 

Closing costs: approx ~ $7,500

Save This: $20,000

You will find that different mortgage calculators will produce varying results. You want to try to take an average of them to ensure you are accounting for everything. Some will estimate based on the home price, down payment amount, and more. Whereas, others will estimate based on the information you provide about your income and any debt you have. However, this is only an estimate. You need to figure out how much you could realistically afford by contacting a mortgage lender. 

These are some of the first steps that everyone should be taking when it comes to buying a home. This is especially true if it’s your first time. However, even if you do find a home that you want to get, you need to prepare yourself for it. Even a little bit of preparation can go a long way towards ensuring that you get the financing you need and that you are ready and capable of making a competitive offer on it.

Here are Some Things to Do: 

1. Research Different Loan Programs

You need to be doing your due diligence when you are looking for home loan solutions. It’s best to do your research before meeting with any loan officers. This can give you a lot of information that you can use in discussions. Once you’ve decided that you are ready, it’s time to go through the process. Keep in mind that this process can go very fast.

You are likely going to have a difficult time digesting all of the information being thrown at you. That’s why you want to ensure you are adequately prepared for it. You don’t want to settle for the first loan offer you get. If you do, you could find yourself paying a lot more than you should. You want to do your due diligence and weigh different loan programs against one another.

Take your time throughout the entire process. Educate yourself on your options. Look at different types of loans. Think about what you want from your mortgage.

Do you want:

  • The downpayment that is the lowest?
  • The lowest monthly mortgage payment?
  • To avoid private mortgage insurance?
  • To pay off your loan as quickly as possible?

These are the top things to consider when choosing. Luckily, they are all possible. However, a loan officer is only going to be in a position to help if you know what you want from it. 

That’s why knowledge is key. You need to know exactly what you want so you know what to look for. This can help you make the most well-informed decision possible.

2. Get Yourself Pre-Qualified and Pre-Approved

You need to get pre-qualified and pre-approved. This is one of the best ways to kickstart the entire process of buying a home. Both of these things may sound the same to you. However, they are different. 

Getting pre-qualified is typically the first step that you take. It’s the process of providing the lender with some basic information about your current financial situation. They will typically get this from you in an online form. This information is typically not verified. However, it is used to figure out whether or not you would qualify for any type of financing. The mortgage lender may decide to offer you a preliminary approval letter after you get qualified. However, it’s not going to provide the same type of confidence that a pre-approval letter would.

That’s why you may want to go ahead and get a pre-approval letter. Most would consider it a must. Having this letter in hand is the single best way to ensure that you are going to be able to land the home of your dreams. A lot of sellers and Realtors will only work with prospective home buyers that have obtained this letter.

Getting this letter means you’ve submitted an official mortgage application. It means you’ve submitted sufficient documentation that has been verified. Typically, this includes everything from tax returns to paycheck stubs to other financial statements. It also means you’ve gone through a credit check.

Because of these things, it’s the most important step you can take if you want to get serious about the home buying process. You need to do this before going out and house hunting. This will help you figure out how much of a home you can afford and it will help you work with sellers that would otherwise not even consider selling to you.

3. Find a Professional Agent

The entire process of buying a home can be tedious and confusing. This is especially true if it’s your first time. This is why you want to have a professional real estate agent on your side. They will be there to look out for your best interests and you can bounce any questions you have off them. You don’t want to rely solely on the seller’s agent.

After all, they have a conflict of interest. They are advising their client and not you. To find a good one, you can check online. Look for one that has a good reputation. You can get advice or personal referrals from people you know. This can give you the confidence you need to hire a good one. Try to do your due diligence to find a good one before starting the process. 

4. Pay An Earnest Money Deposit

You need to have liquid cash on hand that you can use to pay your earnest money deposit. As soon as you find a property, you will need to go ahead and submit this deposit with your official offer. This is money you send in “good faith” that confirms you as a serious prospective buyer. Usually, this deposit will be fairly insignificant in the grand scheme of things ranging from 1 to 2% of the total purchase price of the home. Thus, if you are buying a home for $200,000, it would sit around $500 to $1,000.

However, the seller isn’t simply pocketing this money. The funds are typically held in an escrow account that is added to your down payment or closing costs when the deal is final.

How to Prep for Buying a Home – FAQ

How Much Should I Save Before Buying A Home?
The majority of home buyers would want to save up at least 3 to 5 percent for the deposit. This is usually the average amount for a conventional loan. For FHA loans, you’ll need 3.5 percent. The loans that are Government backed wouldn’t require any down payment whatsoever. To put it as an example, if you are buying a home that is a total of $300,000, you should look to save a good $9,000 for your down payment.

How Long Does the Home Buying Process Take?
The entire process from start to finish will vary based on your situation. It’s also going to depend on the market conditions within your respective area and how much time you are willing to dedicate to house hunting. On average, you can expect it to take 30 to 45 days to close on a house once you are under contract. You can expect this process to take even longer when there is a lot of countering going on. However, it could take fewer than 30 days if both parties are motivated for a quick sale.

What Should You Look for as a First-Time Home Buyer?
Everyone’s process is going to be slightly different. However, for most first-timers, you are going to want to ensure you nail down a budget. You want to limit your search to homes that fit within your respective budget. You also want to spend a lot of time finding the best mortgage loan. Always try to take advantage of first-time home buying programs available to you and try to save up for a sufficient down payment.

What Should You Avoid When Buying a Home?
A lot of buyers end up making the costly mistake of only getting one quote. You need to get multiple quotes. You also want to ensure you are checking on your credit history and that you are researching different loan types. Always be realistic about the type of home you can afford to avoid getting yourself in trouble.

How to Prep Your Credit To Purchase a Home?
Prepping your credit is essential when you are looking to buy a home. This process involves looking at your reports and figuring out whether or not your history is accurate. If needed, try to pay off as much debt as possible. You can then request that the creditor deletes the history from your report. If you do have any debt that is accumulating high interest, try to pay that down first.

Will Going Mortgage Shopping Hurt My Credit Score?
A lot of experts will typically suggest that you get multiple mortgage quotes whenever you are house-shopping. This is a good way to ensure you find the best one for your situation. Getting multiple credit checks could negatively impact your score. However, when you do it in quick succession, it’s going to affect your credit much less. As long as you are getting it checked within a 2-week window, it’s not going to hurt your score. However, a good way to add further protection is by asking them to check it without requiring a hard check. It should give them enough information to make an informed decision.

The entire process can move very quickly. Because of this, you need to prepare yourself well in advance. You want to approach the decision with caution. It’s a major decision. It’s likely your biggest financial decision as a first-time buyer. Thus, you want to go through the process slowly and avoid rushing into things.

One of the worst-case scenarios is not doing your due diligence and finding yourself with a home that needs a lot of additional work. Not putting sufficient time into your research and preparation stage is costly. It’s also an easy way to get yourself in a position where you are spending much more than you should be with higher mortgage rates.

With a little bit of dedication and savvy, you can save thousands over your mortgage term and even afford a higher-priced home than you originally thought.