It's best to have a score of 670 or higher. Having fair credit doesn't mean you won’t get a mortgage, but it makes it less likely. Plus, the better your credit is, the lower the interest rate you will pay.
Fixing your credit takes time, but there are a few things you can do in the short term. The first is simply making sure that your credit report is accurate. Get a copy (many banks and credit cards offer access) and look for errors. It’s rare, but you may have a debt or account that wasn’t yours and you can get it removed.
Aside from that, most of your credit score is based on your long-term use of credit. If you missed payments or don’t have accounts that have been open for a long time, the only cure is waiting.
The one exception is your credit utilization ratio, which accounts for about 30% of your score. Ideally, your utilization will be below 30%.
You can improve your credit utilization ratio in two ways. The first is by paying off your bills. A second way to improve that number is to open a new credit card account. That will raise your available credit and lower your credit utilization rate.
It's easy to make missteps here and you may want to work with a financial adviser to see what the right move is. Your mortgage lender or broker may also be able to advise you as to the right course of action.
Remember that there may be alternative options that will help you get the right mortgage for your situation. The best mortgage lenders will tell you about HUD programs, VA loans, FHA mortgages, and other loan options.
Make sure to compare mortgages rates, too. Some lenders offer different rates, especially if you're right on the line between two levels of creditworthiness. Getting a competitive interest rate can save you tens of thousands of dollars over the course of your mortgage.
Step 4: Find a real estate agent
Buying a home is generally not a journey you take on your own. In most cases, you'll have a real estate agent who helps you along the way. There are a few different kinds of real estate agents:
- Buyer’s agent: Only represents buyers.
- Seller’s agent: Only represents sellers.
- Dual-focused agent: Most real estate agents help their clients both buy and sell.
Dual-focused agents may show you properties that they represent on the sell side. That’s fine, as long as you see other options and know that your agent would benefit doubly from selling you a home he or she represents.
Real estate agents work on commission. That commission, which is generally 2% to 3% for each side of the transaction, gets paid by the seller. As a buyer, you won’t pay any fees directly to your real estate agent.
Good agents listen to what you want and help you find homes that meet your budget and other needs. A smart agent should also be able to tell you when your wants don’t match your budget or point out potential problems -- like how that beautiful home is cheap because it’s in a high-crime neighborhood with bad schools.
Find an agent who puts your needs first. Most agents should also be able to help you with closing the sale after you find a home. Many have relationships with mortgage brokers and home inspectors. (Remember that your agent may be getting a kickback from any service he or she recommends.)
There are several ways to find a good real estate agent to work with. Many people work with someone who has been suggested by family or friends. In other cases, people look for online reviews. It’s also fine to make appointments with multiple agents to see which one you feel the most comfortable with.
Step 5: Find a home
This sounds easy, but it can be the hardest part of the homebuying process. To find a home, you need to know what you want, how flexible you are, and where you’re not willing to bend. Some factors you have to think about when finding a home to buy include the following:
- How many bedrooms do you want?
- How many bathrooms do you want?
- Where do you want to live?
- What type of home (single-family, condo, multifamily, etc.) are you looking for?
- Are schools a factor?
- Do you want to be in a walkable neighborhood?
- Is there anything else you need (garage, backyard, pool, etc.)?
The more wiggle room you have, the better. If, for example, you want three bedrooms, but can live with two, there are more homes you'll be able to see.
It’s important to really think about which things you don’t want to compromise on. If you find the perfect home, but it’s a terrible commute, you may have to pass and take something a little less perfect in a better location.
Take time to shop around. It might take some time to find a home that you love in your price range, but will happen.
Step 6: Make an offer
Once you find a home that you like and can afford, it’s time to make an offer. Houses have what’s called an "asking price." That’s the amount the current owners are asking for the home. That price is just a guideline. Homes can sell for more than their asking price or less.
When you find a house you want, you make an offer. This is a formal document where you name a price, agree to a small "good faith" deposit (usually a few thousand dollars or less), and lay out the terms of the deal. Your real estate agent will write the offer, which includes contingencies on financing. That means there will be language that lets you out of the deal if you can’t get approved for a mortgage. In addition, an offer may cover what happens if you can’t sell your current home.
An offer letter is a starting point. The seller can accept the deal or counter with a higher price. At that point, you can stay firm, accept the higher price, or meet them in the middle.
When it comes to price, your real estate agent should help you determine what’s fair. To do that, he or she should consider (and share with you) a number of factors:
- Comps: What are similar houses selling for in the area?
- Competition: How quickly are homes selling and are they going for over the asking price?
- How long the home has been on the market: If a house has languished on the market, it may not sell for the listing price.
Your agent should help you make an offer that has a chance of being accepted. He or she can tell you if it makes sense to offer the listing price, go above it, or offer less. Keep in mind that your agent can only help. You have to be comfortable with what you offer and there’s no guarantee that the seller will accept.
It’s possible in a multi-offer situation to lose out even when you're the highest bidder. A seller may accept an offer that’s all cash or one that offers a faster closing.
The process can be frustrating because you have no control over what the seller does. But it's part of homebuying.
Step 7: Close on your new home
Closing involves a few steps. You have to get a formal commitment from a mortgage lender and take steps to make sure the home fully checks out. Both happen simultaneously and are partly dependent upon each other.
To close your mortgage, you need to decide which lender you plan to work with or if you'll use a broker. A broker will find you the best offer from multiple lenders. This can make sense if you're very well qualified or if you have a challenging loan that not every bank would be interested in.
When you put in a formal mortgage application, you'll need a lot of documents. These include, but aren't limited to:
- last month's pay stubs,
- two years of bank account statements,
- two years of tax returns,
- verification showing where your down payment is coming from, and
- records of any other financial holdings.
If part (or all) of your down payment is a gift from a family member, you'll need papers confirming that the money is a gift and not a loan. The lender will also likely verify employment, including past jobs if you haven't been at your current company for at least two years.
Don’t do anything that will impact your credit score during this process. Don’t take on any new debt or open a new account. Getting a car loan, for example, would change your financial picture, and your bank will notice. Wait until after the closing before doing anything that might impact your credit score or overall financial picture.
While you’re putting your finances together for the mortgage lender, you'll also have a few things done at the home you plan to buy. The first is usually an appraisal. That’s when a trained appraiser comes to look at the home to set a value for it.
Remember that the purchase price isn't the home’s value or tax assessment. The appraiser will look at your possible home in relation to what similar homes in the area have sold for. Ideally, he or she will deliver an appraised value that’s equal to or higher than the purchase price.
When an appraisal comes short of the purchase price, the lender may offer you a loan for the appraised value of the property. If that happens, you can try to negotiate a lower price, cover the difference yourself, or try to split the difference with the seller.
After the appraisal comes a home inspection. You hire a licensed inspector to look at the home and see if anything is wrong with it. As the buyer, you have every right to accompany the inspector and check things out for yourself. Do things like use the bathroom and turn on the stove to make sure there are no problems. While you’re doing that, the inspector should be looking for issues that you may not see, like roof problems or water damage.
If the inspector finds major problems, that can be a dealbreaker. Generally, you go back to the seller and ask for repairs or a change in the price so you can make the fixes later. This is a negotiation and, like any negotiation, it can result in the deal falling apart. You have to decide where your breaking point is and when you're willing to walk away.
If the inspection goes well and your mortgage commitment comes through, there are two remaining steps: a final walkthrough and the actual closing. Typically, a final walkthrough takes place after the current owners have moved out. You take a walk through the home (usually with your real estate agent) to look for last-minute problems.
Maybe a doorway was damaged when the previous owners moved furniture out or a bookcase was hiding an unfinished wall. If you find something, you can demand it be repaired (which would delay your closing) or ask for the price to be lowered accordingly.
Assuming you can jump over these hurdles, it’s time for the actual closing. These vary by state. In some states, you need to pay an attorney to represent you. In others, that’s not required and your real estate agent handles everything.
Expect a few hours where you have to sign a lot of things. You'll get a final closing statement, which may look different from the estimate you received. Ask questions and go as slow as you need to. Mistakes aren't unheard of and, since you’re making one of the biggest purchases of your life, it’s more than acceptable to take your time.
If everything goes well, you'll finish signing, your mortgage lender will transfer the funds to the seller’s account, you'll hand over a certified or cashier’s check for the down payment, and you'll be the proud owner of a new home. Once that occurs, you can move in and begin enjoying all the work it took to get to this point.
Homebuying is complicated, but worth the effort
When you read through all the steps involved in buying a home, it seems daunting and maybe not worth the effort. The reality is that, while the process can be difficult, it’s worth it if you find the right home. Don’t focus on how much you have to do to complete the buying process. Take every step in order and slowly check things off your list.
Remember that at the end of this journey you'll own a home -- that’s a major accomplishment. Yes, the road may be difficult, but it's worth the effort.
Many homebuyers will hit bumps in the road. That may slow things down or even keep you from buying a home you like. Be patient. And if you need it, find someone who can help. There are housing counseling services available for first-time and experienced buyers. They can be a big help.