Requirements to buy a house: what do I need?
Fact-checked with HomeInsurance.com
Buying a house is one of the best investments you can make. But like any major investment, buying a home takes careful planning, budgeting and research to prepare. If you’re thinking about purchasing a home for the very first time, you’re probably wondering what you need in order to start the process. In this article, we’ll explain exactly what’s required for purchasing a house, and how homeowners insurance plays a role.
What are the requirements to buy a house?
If you’re in the market for a new home—congratulations! Investing in a home is an exciting experience, especially if you’ve been anticipating it for a long time. But before you start browsing the real estate market and get your heart set on a dream home, you should understand the basic requirements for purchasing a property.
The requirements for home buying are pretty universal, but there are some circumstances that require additional considerations. For example, if you’re buying a home in a gated community, the homeowners association (HOA) may have specific requirements. Or, if you’re looking at an older home, there may be certain inspection requirements before you can close.
Here are top considerations to think about before buying a home:
First and foremost, you need to have a solid budget before buying a home. Not only does that include a price range for the property itself, but it should also include recurring costs. For instance, the average homeowner spends $2,375 per year on property taxes, and $1,211 per year on homeowners insurance.
Don’t forget to include one-time costs, like realtor fees and inspection costs. If you’re planning on buying a fixer upper, your budget should also include an estimated spend for renovations. When you’re creating a budget, it’s always better to overestimate rather than to underestimate.
A down payment
Next, you’ll need to figure out what down payment you can afford. Traditional down payments range from 5%-20% of the home’s total value. You can typically choose a down payment based on what you can afford, although some lenders require a minimum amount. If you can afford a down payment of 20% or more, you’ll be rewarded with lower mortgage payments and a lower interest rate.
There are also certain lifestyle factors that can impact your down payment requirements. For example, people with poor credit scores usually have to make a minimum down payment. On the other hand, military service members and veterans sometimes have no down payment requirement at all.
An affordable interest rate
If you’re planning on getting a home loan, make sure you’re looking for an affordable interest rate. Most mortgages have a fixed rate, meaning the rate doesn’t change for the duration of your loan term. When you sign the loan, you can choose your interest rate and have certainty that the rate will always be the same.
However, if you get an adjustable rate mortgage, your interest rate can change—sometimes frequently. The interest rate might start off really cheap, but by the fourth or fifth year of your loan, it could be significantly higher (and out of your budget).
A minimum acceptable credit score
Most mortgage lenders will only approve your loan if you have a minimum credit score. So before you submit an application, it’s a good idea to check your credit score to avoid any surprises. People with higher credit scores pay a lower interest rate, and usually have lower monthly mortgage payments.
If you don’t have a stellar credit score, an FHA loan might be a good option. The minimum required credit score is 580. Just keep in mind that an FHA loan has more upfront fees, so it won’t necessarily be the best option financially.
Your DTI ratio
Your debt to income (DTI) ratio is the difference between your total monthly expenses, such as a car loan or credit card debt, and the amount of income you bring in. When you apply for a mortgage, the lender will look at your DTI to make sure you’ll be able to afford the monthly payments. The lower your DTI score is, the better.
The DTI requirements are different for every type of loan. To get approved for an FHA loan, your DTI can be no higher than 31%. With conventional loans, the minimum DTI is slightly higher.
Money for closing costs
Many homeowners forget to account for closing costs in their budget, but those final expenses can add up fast. Title insurance, appraisals, inspections and legal fees are examples of common closing costs. According to Bank of America, average closing costs are usually 3%-5% of your loan value.
Sellers are also responsible for certain closing costs, like realtor fees, transfer taxes, escrow fees, HOA fees, prorated property taxes and more. Generally speaking, sellers pay higher closing fees than buyers.
When you apply for a loan, your lending company will ask for certain financial documentation. Be prepared to provide proof of income in the form of pay stubs, W2s, 1099 forms or recent tax returns. You might also need to show proof of your financial assets, like a 401K or retirement fund, and bank accounts.
When the loan company underwrites your mortgage, it will take your financial situation into account to determine how much money you should get approved for. Essentially, the mortgage company wants to make sure you can afford to repay your loan, and aren’t at risk of declaring personal bankruptcy.
Home insurance (if you’re using a lender)
Home insurance isn’t legally required, but if you’re getting a mortgage, your lender will typically require you to purchase a policy. However, home insurance is always recommended, as it protects the physical structure of your home, your personal belongings and your liabilities as a homeowner. Mortgage lenders require homeowners insurance because it means you’re less likely to default on your loan payments after a major loss.
If your lender requires homeowners insurance, start shopping for a policy right after you sign the contract. Most lending companies want homeowners to show proof of insurance before closing, which gives you about a month to shop around and buy coverage.
Is home insurance required?
There are some circumstances in which homeowners insurance is not always required. For example, if you’re paying cash for a house, or are borrowing money from a family member to pay it off, you don’t need to purchase a home insurance policy. But even if it’s not required, buying home insurance is a recommended investment.
Without home insurance, you have to pay to repair or rebuild your home if something happens. That includes replacing all the belongings inside. Depending on the loss and your personal financial situation, a large loss could put you in serious debt. Insurance is beneficial because it helps cover those unexpected costs.
- Buying a home is a complex process, and being prepared is essential.
- Make sure your budget is accurate, and factor in every cost—big and small.
- Take your time to find a good lender, and make sure you know their requirements.
Purchasing a new home can be stressful—especially if you’re not prepared. Before you start shopping for houses, make sure you know what’s required and what costs to expect. When you’re creating a budget, be generous with your estimated spending for things like homeowners insurance and closing costs.
Most homebuyers are eager to move into a new place, but rushing the process can lead to cut corners and cause overspending. Take it one step at a time, and be thoughtful about things like finding a reputable lending company, choosing an affordable interest rate and shopping around for a cheap home insurance policy.