Buying your own home is not only the biggest purchase you’ll likely ever make during your life – it is a pivotal and life-changing step in the adult lives of every American.
Planning for your future, establishing roots, perhaps contemplating marriage, and even starting a family? It is all part of this one single financial transaction. For most people, a very expensive and life-changing transaction, at that.
Yes, it’s a massive financial commitment – to sign yourself up to years and years of prompt monthly mortgage payments. Yet it’s an exciting time, too, especially for the first-time buyer.
With so much riding on your decision – “Is this the right house? Will I be happy here?” – it’s important to make sure everything goes through as it should. From your choice of house, right through to the day you close on your home – you want to get it right.
Better Off Home Buyers are here to help you. With that in mind, we’ve prepared this short yet complete guide for you on what you need to purchase a new house – a new home – in 2023.
Whether you are a first-time buyer, full of questions, who isn’t sure how everything works exactly, or a retiree who hasn’t done this kind of thing in ages, or someone, somewhere in between – our guide to “Buying Your Own Home: U.S. House Purchase in 2023” has something for you.
Before You Buy Your New Home: 2023
Because this is such an important decision, especially when you consider the long-term financial commitment you will be making, remember to simply take your time during the entire process – and remember to regularly consider your aims and your options as you proceed.
1. Your Homeownership Aims in 2023
Firstly, consider your own reasons for homeownership – what are you looking for, what do you want, and what do you need.
Many people consider buying their own house just to change their monthly rent payments into the investment of mortgage payments. Other people would prefer the independence homeownership offers them, and having their home exactly the way they want it.
Take a look at the following points to assist your in focusing in on your own homeownership aims:
- Type of Home: You have several options when purchasing a residential property – traditional single-family home, townhouse, condominium, or a multi-family building with two to four units
- Location: Consider critical factors such as the proximity to your work, public transportation, schools, and local amenities
- Property Taxes: Research the property taxes in the area where you intend to look, and factor them into your budget
- Insurance: Research and understand what types of insurance are required and recommended for the type of property you are looking for
- Future Plans: Consider what type of property will fit your future needs, such as additional room for a growing family or plans to work from home
- Legal Paperwork: Now would be a good time to familiarize yourself with all the legal paperwork involved in purchasing a house (you may want to consider hiring a real estate attorney to review your paperwork once you get started in earnest)
2. Calculate Your 2023 Budget
Our list of “wants” always has to take a backseat when it comes to our list of “needs.” Before you begin looking, think about what you need from the house – preferable location, number of bedrooms, backyard, garage, type of neighborhood, and so on.
This provides you with your baseline to calculate your budget. There is no point tying yourself into 25 or 30 years of really frugal living, or buying a home you simply cannot afford.
And if you are able to accommodate a few of your “wants” along the way, all well and good.
3. Your Mortgage & Financing in 2023
Before you start actively looking for a property, it’s important to get an idea of the size of mortgage you qualify for. For example, you may think you can afford a place at $300,000, but the mortgage lender may think you’re only good for around $200,000.
In recent months, mortgage rates have been far more changeable than normal. During 2022, following several years of a buoyant house market with equity improvements for the majority of homeowners, predictions for 2023 looked a little bleak.
Subsequently, mortgage rates – following Fed interest rate rises – rose, too. However, fortunately for you and other potential homebuyers, rates are far more settled now, and there are some good rates now available again.
You can see the latest best rates in our “2023 Home Buying Mortgage & Finance” section later in this article.
Lastly, you should be aware that all lenders will consider how much other debt you have and other regular outgoings, your monthly income, and how long you’ve been at your current place of employment.
4. Choosing a Real Estate Agent
The majority of homebuyers choose a real estate agent in the area they are looking in to assist them. They will help you locate homes that meet your needs, and are in your price range.
How Do I Choose a Real Estate Agent?
When choosing a real estate agent:
- You want to know about their experience and reputation
- You want to find an agent who has a good understanding of the local real estate market, and has a track record of successfully closing deals
- You should look for an agent who is easy to communicate with and responsive to your needs, and
- You may want to check their credentials and if they are licensed
During The Homebuying Process: 2023
1. Your New Home Search
Make sure to take advantage of all available options for finding current homes for sale, such as:
- Using your real estate agent
- Searching for listings online
- Ask friends, family, and business contacts, and even
- Driving around the neighborhood of your choice
If you’re on a budget, perhaps a first-time buyer, why not look for homes with potential? Like those marketed as “starter homes”? Or one that really needs modernizing? If the price reflects its shortcomings, it could be the kind of investment you’re looking for.
Obviously, it has to tick all your other boxes, too. So if the home otherwise meets your needs (in terms of the things that you cannot change), such as location and size, don’t let its surface appearance put you off.
First-time homebuyers should try to look for a house they can add value to, as this ensures a decent return in equity when they take their next step up the property ladder.
2. 2023 Home Buying Mortgage & Finance
In the table below, you will find the the current conventional mortgage requirements (with the new loan limits for 2023), along with all the basic requirements for a successful mortgage application:
|2023 Conventional Mortgage Requirements|
|Credit Score||620||580 – with 3.5% down500 – with 10% down||No minimum620 is the lenders’ standard score||No minimum640 is the lenders’ standard score|
|Mortgage Insurance (or Similar Fee)||PMI4 0.14% to 2.33%||UFMIP5 |
0.45% to 1.05%
|0.5% to 3.6% VA funding fee||Upfront guarantee fee 1%Annual guarantee fee 0.35%|
|Debt-to-Income (DTI) Ratio7||45% back-end maximum8||43% back-end maximum||41% back-end ratio9||41% back-end ratio|
|Loan Limits for Single-Family Homes in Low-Cost Areas||$726,200||$472,030||Not applicable||Not applicable|
|Glossary & Abbreviations|
|1 Federal Housing Administration (FHA)|
2 Veterans Affairs (VA)
3 United States Department of Agriculture (USDA)
4 Private Mortgage Insurance (PMI)
|5 Upfront Mortgage Insurance Premium (UFMIP)|
6 Mortgage Insurance Premium (MIP)
7Debt-to-Income (DTI) Ratio: The Debt-to-Income (DTI) Ratio is the percentage of your gross monthly income that is used to pay your monthly debt and determines your borrowing risk
8 Back-End Maximum: The Back-End Maximum is a measure that signifies the portion of monthly income used to settle debts, and is used to assess the borrower’s risk
9 Back-End Ratio: The Back-End Ratio is a measure that signifies the portion of monthly income used to settle debts, and is used to assess the borrower’s risk
Source: CNBC Business & Finance News Media
Which Mortgage is Best For Me?
Here’s a brief guide as to which program may be the best fit for your specific finances:
- Apply for a conventional loan if:
- Your credit score is high
- You have the 20% down payment
- You are eligible for the HomeReady or Home Possible loan programs, so you only need to make a 3% down payment
- Apply for a FHA loan if:
- Your credit score is between 500-619
- You have the 3.5% down payment and a credit score of 580 or more
- You want to buy a 2- to 4-unit home with a 3.5% down payment
- Apply for a VA loan if:
- You are an eligible military borrower
- You are unable to make a down payment
- You want to avoid paying mortgage insurance
- Apply for a USDA loan if:
- Your potential new home is in a USDA-designated rural neighborhood
- You are unable to make a down payment
- Your income is considered low to moderate
Essential Mortgage Documents
You will have a better mortgage application experience if you are prepared. These documents are considered to be essential in the application process:
- Pay stubs: the last 30 days
- W-2s: the last 2 years
- Bank statements: the last 60 days
- Federal tax returns: the last two years
- Proof of homeowners insurance
- 1099 forms (if you’re self-employed or commissioned)
- Documented dividends, stock earnings and other sources of income
- Proof of bonus income
- Pension statements
- Securities documents, such as stocks, bonds and life insurance policies
- Social Security or disability income award letters, if applicable
- Specific forms required by FHA, VA or USDA-approved lenders
- Gift letter (if any portion of your down payment is coming from a donor gift)
- A fully signed purchase agreement
|In order to successfully qualify for a mortgage, you need to have: A good credit score, A history of paying all your bills on time, and A maximum debt-to-income (DTI) ratio of no more than 43%.|
3. Your Offer on a New Home
Your real estate agent will help you calculate your best initial offer once you find a house that meets your criteria. Your agent will then present the offer to the seller’s agent; the seller will either accept your initial offer or issue a counteroffer.
You can then accept, or continue to go back and forth until you either reach a deal to buy the house or you decide to call it quits.
If you reach an agreement with the seller, you’ll make a good-faith deposit, and the process then transitions into escrow.
What is “Escrow”?
Escrow is the short period of time (usually around 30 days) where the seller takes the house off the market with the contractual expectation that you will buy the house – provided no serious problems are found during the home inspection.
4. The Home Inspection
Although the house you wish to buy can appear to be without any defects or problems, you are normally required by your mortgage lender to have a professional home inspection carried out.
If the inspection reveals serious defects that the seller did not disclose, you are normally able to rescind your offer, and get your deposit back. Negotiating to have the seller make the repairs or discount the selling price are other options if you find yourself in this situation.
5. The “Closing”
“Closing” involves all the legal stuff, such as signing paperwork, and paying for all the necessary closing costs, like the title search, title insurance, appraisal fees, and attorney fees.
The Legal Stuff:
When you “close” on your house purchase, these legal aspects will need to be addressed:
- Transfer of Ownership: The legal ownership of the property is transferred from the seller to the buyer. This is done by executing a document called a “deed” which is usually prepared by the escrow or title company, and recorded with the local government office.
- Payment of Closing Costs & Fees: The buyer will pay the closing costs, which typically include things like title insurance, appraisal fees, and attorney fees.
- Mortgage Loan Disbursement: If the buyer is obtaining a mortgage loan, the lender will disburse the funds to the escrow or title company to pay the seller.
- Title Search & Title Insurance: A title search is conducted to ensure that the property is free of any liens or other encumbrances. A title insurance policy is issued to protect the buyer from any future issues with the title to the property.
- Recording the Documents: The deed and any other closing documents will be recorded with the local government office, usually the county recorder’s office, to make the transfer of ownership official.
- Handover of Keys: Once all the legal and financial aspects are completed, the seller will hand over the keys to the buyer, and the transaction is considered closed.
The actual “closing” process and the documents associated with it can vary depending on the state or county. It’s always best to consult with a real estate attorney to understand all the specific requirements in your area.
Better Off Home Buyers: Home Purchase Solutions
This 2023 guide from Better Off Home Buyers should help put you on the path toward filling in any gaps in your home buying knowledge.
Remember – the more you educate yourself about the process beforehand, the less stressful it will be. You’ll also be more likely to get the house you want – for a price you can afford.
If you want to know more about how we provide solutions for home buyers and home sellers, contact us today.