For most of us, buying a home is the biggest purchase of our lives and the process is far from simple. Buying a home requires a lot of time and effort. It is an exciting time, but may also be very stressful. Whether this is your first purchase or you are an experienced buyer, this decision must be made carefully.
Why do you want to buy? Are you tired of paying rent? Have you decided to pay your own mortgage and not your landlord’s? Have you outgrown your current home? Are you looking for an investment portfolio? Are you looking for a rental property? Would you like a larger yard? Would you rather live in a different area? Do you want to shorten your commute? Having a clear sense of your reasons for buying will help you choose the right property.
Has your income grown?
Property ownership is an excellent investment; whether you are looking for your dream home, a rental property, or to expand your investment portfolio. Owning real estate is one of the least risky ways to build equity or to obtain a greater return on your initial investment.
Here are 14 steps to help make the home buying process more manageable and help you make the best decisions possible. This is what to expect along the way.
Step 1: Check Your Credit Score & Determine How Much You Can Afford
Start by checking your credit score. The higher your score, the better the interest rate on your mortgage will be. Good credit can mean significantly lower monthly payments, so if your score is not great, consider delaying this big purchase until you’ve built up your credit. Lenders generally recommend that people look for homes that cost no more than two to four times their annual household income.
Technically, there are programs where you don’t always have to put money down when financing a home today, but if you can’t afford to put at least 10% down, you may want to reconsider buying. It’s recommended to have a minimum of 20% for your down payment in order to avoid having to buy private mortgage insurance and another 3% for closing costs. On top of that there are other variables to consider such as any home improvements, maintenance, renovations, furniture, and other various costs that may pop up. Being a homeowner often comes with surprises, like a burst pipe in the middle of the night that needs to be fixed right away. You need to be financially ready for these surprises, which means you shouldn’t deplete your emergency fund for expenses like furniture or remodeling.
As for monthly payments, personal finance experts say a good rule of thumb is to make sure make sure the total monthly payment doesn’t consume more than 30% of your take-home pay but if you have other high costs, such as private school tuition, it can be wise to pare down this percentage even more.
Even if you can afford the monthly payment, remember the hidden costs. Buying a home means property taxes, insurance, and maintenance fees that can add hundreds of dollars per month. Factor in theses costs to help you decide whether renting or buying makes the most sense for you.
Gather all your important financial documents. You will need them.
- Financial statements
- Bank accounts
- Credit cards
- Auto loans
- Recent pay stubs
- Tax returns for two years
- Copies of leases for investment properties
- 401K statements, life insurance, stocks, bonds, and mutual account information.
Your credit score will have a huge impact on what type of property you can buy, and at what price. It is first recommended to check your credit rating with an experienced lending institution so that we can determine what you can afford. The lender will research your credit ratings from the three credit reporting agencies Equifax, Experian and Trans Union. We will be happy to recommend experienced, knowledgeable lenders in the residential, construction, and commercial and investment real estate fields.
Be Careful With Your Finances.
Now is not a good time to make sudden career changes or large purchases. You want to approach your property purchase from a position of financial stability.
Step 2: Research Mortgage’s, Lenders, and Get Pre-Qualified
Now that you’ve nailed down your numbers, it’s time to start shopping for a mortgage lender with a reputation for good customer service and timely closings. You’ll likely have a lot of questions—like how long the process will take and what the qualifying guidelines are. I recommend speaking to 3-4 lenders, each one may be able to offer different programs, options, and benefits to using them. Then choose a mortgage and lender that makes the most sense for you. Someone who understands your needs, answers all your questions, and is easy to work with.
Your lender will ask you to provide some financial information such as your income and the amount of savings and investments you have. They will review this information and tell you how much they can lend you. This will tell you the price range of the homes you should be looking at. They will give you a pre-qualification letter to use for your home search which demonstrates to you, your realtor, and to sellers how much you can afford and that you are serious about buying. A Seller will most likely not accept an offer for purchase with one.
Next up on your to-do list: Apply for a pre-approval, the process in which a lender reviews your financial information—like your credit report, W2s and bank statements—and commits to giving you a mortgage for a specified interest rate. It’s a good idea to consider doing this now because it can prove to a seller that you’re a qualified buyer, and once an offer is made, the bank will just have to appraise the home—not the property and your finances.
Step 3: Find The Right Real Estate Agent
Real estate agents are important partners when you’re buying or selling a home. There are several potential benefits to working with one. First of all, an agent can provide you with helpful information on homes and neighborhoods that isn’t easily accessible to the public. Their knowledge of the home buying process, negotiating skills, and familiarity with the area you want to live in can be extremely valuable. They can provide access to more home options than you’ll likely find yourself, as well as set up viewing appointments. Since home-buying can be an emotional process, an agent can also act as a mediator between you and the seller. And best of all, it doesn’t cost you anything to use an agent – they are paid by the seller of the house.
Now for the fun part: house hunting! Browsing online for available homes is a good place to start, and can help confirm whether your budget and house must-haves are reasonable in light of what’s for sale.
Step 4: Shop For Your Home
Start off by determining your general needs. It’s the rare lucky person who finds the perfect home within their budget, so before you go house hunting, brainstorm a list of what you absolutely must have in a home and which features are simply nice extras.
Examples of must-haves might include the number of bedrooms and bathrooms, location, proximity to work and other places you frequent, and access to your preferred school districts. You might also have a strong preference on the amount of outdoor space a house offers, and whether it’s move-in ready. Things that shouldn’t be on your must-have list? The way a house is decorated or painted, granite counter tops, type of flooring, appliances, well-manicured landscaping, or anything else you can easily fix or install yourself. Keep this in mind when shopping. Then start touring homes in your price range. Take as much time as you need to find the right home. Expect to miss out on a few homes before you find the one. While you may find your dream home within weeks, it also could take up to six months or more — prepare for a lengthy and exhausting process.
Step 5: Put In An Offer You’re Comfortable With
So you’ve fallen in love with a property that meets all of your needs and some of your wants and it’s within your price range. Let’s make an offer! But here’s where it can get tricky: You don’t want to low-ball your offer and risk losing the home to another buyer or insult the seller but you also don’t want to pay more than is necessary. So how do you land on the ideal number? While there are no hard-and-fast rules, a few factors can help inform your decision. First, look at other home sales in the area, the comparables. Is the house you want priced reasonably in comparison? Did other homes sell for less or more than the asking price? If they sold for an amount that’s comparable to your seller’s list price, that’s a good indication you should be offering a number close to asking. Next, what’s the market like in the neighborhood? Consider how long the home has been on the market, and how incentivized the homeowner is to sell. Discuss your comfort zone with your agent and work together. Keep in mind an offer price and the ideal price to top off negotiations for a purchase price. The seller may accept or you may go back and forth several times negotiating price and other terms. Once you and the seller have reached an agreement and all parties have signed. The house will go into escrow, which is the period of time it takes to complete all of the remaining steps in the home buying process.
Step 6: Escrow
The seller accepted your offer, congrats! Now you enter escrow and there’s a lot that’s going to happen. First review the contract thoroughly and make sure you understand every single clause. Discuss the contract and the next steps with your real estate agent. This is when you write your deposit check to the title company who will hold escrow.
Step 7: The Home Inspection
Things are moving fast now. This is typically the first 10 day period of the contract. You assess in detail every aspect of the home and decide whether to move forward and purchase or that this is not the home for you and you continue your home search. If you cancel during this time period you are protected and your deposit will be returned. The money you have spent on inspections, on the other hand is non refundable. After this 10 day period is up, you are locked into this contract to close. Make sure to choose a reliable and trusted Home Inspector. They will be inspecting nearly every aspect of the home. Inspections can run anywhere from $300 to $500 and up if you have special home conditions such as septic to inspect.
Step 8: Make Loan Application
As soon as you go under escrow, be sure to inform your lender and start the application process. They will need details of your finances and the home. Now is when they assess your finances in detail and will ask for lots of paperwork and documentation over the next couple of weeks.
Step 9: Research And Obtain Homeowner’s Insurance
Your lender will require the name of the agency providing you with home insurance. You should shop around for a quote and call several agencies as home insurance rates can vary.
Step 10: The Home Appraisal
Lenders will arrange for an appraiser to provide an independent estimate of the value of the house you are buying. The appraiser is a member of a third party company and is not directly associated with the lender. The appraisal will let all the parties involved know that you are paying a fair price for the home.
Step 11: Coordinate the Paperwork
As you can imagine, there is a lot of paperwork involved in buying a house. Your lender will arrange for a title company to handle all of the paperwork and make sure that the seller is the rightful owner of the house you are buying. The survey, and title search is done at this stage.
Step 12: Make A List Of Moving/ Move In Duties
Start checking off your list the things you need to do to move out of your current home and into your new one. This will include cleaning, packing, movers, utility disconnect and set up or transfer, scheduling time off work if needed for the move, etc.
Step 13: Prepare To Close And The Walk-Through
The week before closing, the title company will send you the final paperwork to review. This will cover all your costs associated with the purchase. Review this carefully to make sure you understand it. They will let you know your final cost to close and the wire instructions for the bank. Make sure all that is in order and schedule your final walk-through to confirm that the home is in the condition you agreed and nothing has changed.
Step 14: Close the Sale
On closing day, bring your photo I.D., as well as any paperwork you received throughout the home-buying process, including insurance and home inspection certificates. At closing, you’ll be putting your John Hancock on several items. These will be reviewed and explained at the closing table. Don’t be shy and be sure to ask any questions you have on anything you might not understand.
Once you’ve signed the paperwork, you should be handed the keys… and you’ll officially become a homeowner!