Start to Finish: The Home Buying Process
Every home buying experience is different. Each has its own twists and turns. But there are general guidelines as to how the home buying process works. Keep these in mind before you buy a home.
Deciding to Be a Homeowner
Owning a home at some point in your life is a good decision. Mortgage payments help to increase the equity in your house, as opposed to rent checks. Plus, rent usually increases with inflation, while mortgage payments are generally more stable. But owning a home is also a long term decision, so there are several things you have to carefully consider in deciding whether you’re prepared to take the plunge.
There are lots of costs associated with buying a home. One of the first considerations to keep in mind are the physical aspects of the house you aspire to own. Maybe you already have a rough idea of the size of house you’ll need. With that in mind, decide how many bedrooms, bathrooms and other features you want. This will give you an idea of how much your house will cost, both in total price and monthly payment (including homeowners insurance). Don’t forget to factor in the money you’ll need for a down payment, closing costs, fees (such as fees for an attorney, appraisal, inspection, etc.), as well as the amount you’ll need to cover the costs of remodeling or purchasing furniture. You can use our mortgage calculators to help you with your planning.
Also, as a homeowner, you’ll have to pay things like real estate taxes, school taxes and other taxes that will affect your monthly payments. Plus, you’ll need to budget for HOA fees, unexpected repair costs, lawn care, snow removal, pest control and a potential host of other things that pop up from time to time. So in your budgeting, you need to consider your current income against these costs and a mortgage payment. Use our budget calculator to help you with this.
What’s your lifestyle?
A home isn’t just a house. It’s also a location and a lifestyle. You don’t want to make a decision that you’ll come to regret later. Another consideration to have in mind is how long you plan to be in the home or the area. If you have a more transient lifestyle, then you may want to postpone buying a home until you’re ready. Also, how ready are you for the responsibility of owning a home? Remember, you’re the one who will have to be in charge of its upkeep financially and otherwise. Ask yourself if you are willing to take this on.
Buy a house because it’s the right decision for you at this point in your life. It’s easy to get pressured into buying because it’s the next step in being “grown” or because the market is right. But owning a home is a big commitment. Make sure you’re doing it because you really want to and it’s the right time. Don’t let other people make the decision for you.
When you’ve decided that you want and are ready to buy a home, you need to get approval from a lender to get a loan. But before you can do that, you have to have an idea of how much you can afford. Your credit will also be a major factor in the loan process.
A good credit score makes you less of a risk to creditors, so you should always check your credit before applying for a mortgage of any kind. Knowing how you will look to a lender is key. If you have negative marks on your credit, do the work to repair them before you apply. By law, you’re allowed to receive one free copy of your credit report per year. You can do this by visiting any one of the credit reporting agencies or a service like annualcreditreport.com. Scores range from approximately 300 to 850; generally, the higher your score, the better you’ll qualify for a loan.
A pre-approval means a lender has approved you for a loan at a specified amount based on your income, assets, debt, and credit. It’s the first step to take before shopping for a home. Your lender will provide a letter of pre-approval, verifying the loan amount you’ve been approved to borrow. Most sellers will require pre-approval to validate the sales contract on a home. Pre-approvals can usually be completed within one to two business days of receiving all requested documentation.
A home is more than just a collection of rooms. Several similar properties may represent totally different designs, commuting distances, lot sizes, tax costs and dimensions—inside and out. It’s important to have in mind the things you want in a home before you start looking. Consider price, location, size, amenities, and type. Also think several years down the road. If you think you’ll need a larger home, or a larger yard or to be closer to school for the kids, maybe now is the time to consider all of that instead of having to move again in a few years.
Where to look
Once you know what you want, start looking. It’s important to target your search with basic criteria like location, proximity to schools and work, and other features. Once you have an idea of what you want, contact a local Realtor who can suggest properties. Be sure to do the research and obtain the services of an experienced Realtor who knows the area well. They may also have developed solid relationships with lenders that may prove useful.You can also check area real estate listings online and select several houses to visit.
Making an Offer
Once your loan has been pre-approved and you’ve found a home, you need to make an offer to the seller, and if accepted, secure a contract to purchase the property. Usually there’s a bit of haggling involved between the buyer and seller, so sellers may price their homes a bit higher. As a general rule, it’s good to start about five percent below the asking price. Once you’ve made an offer, it doesn’t necessarily mean it’s final. The seller can make a counter offer and you can counter again. Once you’ve agreed on a price, you’ll make an earnest money deposit, which is money that goes in escrow as a sign of good faith that you intend to purchase the property.
Inspection and Appraisal
A home inspection safeguards you against unforeseen problems that could pop up down the road. A typical home inspection includes testing electrical and plumbing systems and appliances, and evaluating the home’s roof and exterior structure and foundation.
A similar but separate process is the appraisal. An appraiser will determine how much the house is really worth by comparing it to other similar homes on a number of features like lot size, square footage, etc. Your lender will order an appraisal of the home you intend to buy. You don’t have to be present. Your Realtor or the seller can let the appraiser into the home. The lender normally sends a copy of the appraisal to the buyer.
Closing on a home means that the sale is complete, and all the terms and conditions of the purchase agreement have been met. At this point, the seller gives the buyer title to the property. There are fees and expenses associated with closing. On average, they range from three percent to five percent of the total loan amount. For example, for a loan of $300,000, closing costs might run in the $12,000 range. Closing costs can sometimes be rolled into the financing or even paid by the seller. Every situation is different. Check with your Realtor for your options.
To get a detailed checklist of all the things you need to do and documents you’ll need to have during the home buying process, check out our To-Do Lists.