Steps to Buying a Home
Buying a home can be a confusing process with all its special rules and terms. My wife and I just purchased our first house and learned all the ins and outs and I want to share them here. Depending on where you live, your process might differ a little from the steps below, so be sure to work with your real estate agent to navigate the specifics steps of your market.
1. Save for a down payment
Before you buy a house, you should have some sort of down payment saved up. While there are ways to purchase a house without a down payment, I highly recommend having at least 10% of the purchase price ready.
To figure out the price range of houses you should be looking at, start with the total monthly payment that you want to make for housing. From there, subtract ball park estimates for utilities, tax, and insurance to get your monthly mortgage payment. With that, you can use online calculators to get an idea of how much house you can afford.
But why 10%? Most lenders will require a minimum 3% down payment. With that, you may get approved but you’ll get the worst possible rate so it’s better to have more to put towards your down payment in order to get a better interest rate.
When purchasing your house, your down payment isn’t going to be your only cost. You’ll have to pay upfront for insurance, taxes, title processing, and various other things that are generally referred to as closing costs. These costs usually come out to be about 3% of the purchase price. If you have the 3% minimum for your down payment, you’ll likely need an additional 3% on top of that for closing costs. And on top of that, you’ll need more funds for moving and possible minor repairs when you move in. Having 10% of the purchase price saved should give you enough to cover those costs.
2. Check your credit
It’s a good idea to check your credit score before really starting to shop for a house. Your credit score (aka FICO score) is a number used by the financial industry to rate your risk of defaulting on a loan based on your historical behavior and current debts. There are 5 main factors that affect your score:
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- Credit mix in use (10%)
- New credit (10%)
Your credit score will be anywhere between 300 (worst) and 850 (perfect). Even though 850 is a perfect credit score, a score of 740 or higher will likely get you the best possible rate. Generally, a credit score of at least 660 is needed to be approved for a mortgage loan. But you may qualify for government-sponsored loan programs such as Federal Housing Administration (FHA) or Veteran Affairs (VA) loans that have lower credit score requirements.
Many banks and credit card companies offer a free peek at your credit score through your online account. If not, you can get your full credit report for free once a year at AnnualCreditReport.com (yes, it’s legit).
If your credit score is on the lower end of the spectrum, consider taking steps to improve your score. You won’t be able to improve it overnight, but if you work on paying down your debts, making payments on time, and avoid opening new lines of credit, your credit score should improve in a few months.
3. Pick your loan
Before actually looking at houses, you’ll need to determine some more details about your financing. You’ll have to determine what kind of loan you will get. There are generally two main factors when choosing a loan.
First, you’ll choose between a fixed-rate or Adjustable-Rate Mortgage (ARM). Fixed rate loans have rates that are constant throughout the entire life of the loan, making payments predictable and possibly locking in a low interest rate. ARMs usually have lower initial rates but the rate is only guaranteed for a set period of time, after which the rate is re-evaluated to match market conditions. ARMs are described using the rate lock-in period and how often the rate is re-evaluated after it expires. For example, a 5/1 ARM has the initial rate locked for the first 5 years. After that, the rate of the loan will change every 1 year to match market conditions which could be higher or lower.
The second aspect you’ll have to decide is the length of the loan. Mortgages typically last either 15 or 30 years. 15 year loans will have better rates, but the lower monthly payment from a 30 year loan may actually give you more money in the long run.
Determine which type of loan will work for you based on your current finances and how long you plan to stay in the house.
4. Pick your lender
Once you have your down payment, an idea of your credit score, and know what type of loan you’d like, you can start talking to mortgage lenders to see how much you can be approved for and get a better estimate of your mortgage payment. It’s important to shop around and talk to different lenders in order to get the best possible rate. When talking to the different lenders, be sure to ask about not only the rate for the loan but any fees associated with it. The main fees to ask about are points (cash paid upfront to reduce your loan rate) and origination fees (cost of doing business with the lender).
After you’ve talked to a few lenders and decided on the best one for you, ask for a pre-approval letter. This letter puts you in a better position later on in the home buying process when you’re making an offer and ensures you’re only looking at homes you can afford.
5. Pick your realtor
There are a lot of moving parts to the home buying process so it’s helpful to have an expert with you who’s been through the process before. That’s where your realtor comes in.
You’ll want to find someone who you feel comfortable working with as you may be working with this person for a few months. A good realtor will listen to your needs and work on your behalf to find you the best possible home at the best price. They’ll also help guide you through all the required paperwork and coordinate between the different parties involved.
To find a realtor who will work for you, start by talking to trusted friends and family who have purchased homes. This is one area where it’s best to find a referral. You can also search online for reputable realtors in your area. You may have heard of Zillow for finding homes, but Zillow also allows people to post realtor reviews. Use online reviews and personal anecdotes to decide on your realtor.
6. Shop for houses!
Here comes the fun part. Start looking for your home!
You probably already have an idea of what you want your home to look like. But you’ll want to separate what you’re looking for into two categories: “must haves” and “nice to haves.” Once you do this, you can work with your realtor to determine what’s realistic within your price range in your specific market.
Your realtor is going to send you possible listings from their searches but you should also feel comfortable looking on your own. When looking at homes, you’ll want to consider not only the features in the home but also the area where the home is located. Take a look at where the closest grocery store or park is, or whether or not the home is part of a HOA/POA. Make sure to visit the neighborhood at different times of the day to get a better sense of what living in the neighborhood would actually be like. Trulia and Zillow are great websites for checking out home listings along with the Multiple Listing Service (MLS) your realtor uses since they provide additional information such as school zones and crime rates.Taking all of this into account will help you find the right home for you.
7. Make an offer
Once you’ve found a house that you like in your price range, work with your realtor to put in an offer to purchase the house. This is where your down payment and pre-approval letter come in. You may think your mortgage lender is the only one who cares about your down payment but sellers are also interested in what kind of financing you have. Sellers don’t want to waste time talking to buyers who aren’t serious or can’t obtain the financing needed to purchase. By having your pre-approval letter and down payment, you’re showing that you’re a serious buyer who is ready to make a purchase which makes your offer more attractive.
As part of your offer you’ll need to put down an EMD. Not to be confused with Emergency Department, an EMD is your Earnest Money Deposit. It’s essentially money that you put down to show that you’re a serious buyer. If you put in an offer and then back out for no explicable reason, the seller gets to keep your EMD. If your offer is accepted though, your EMD goes towards your closing costs.
You’ll likely go back and forth a few times with the seller before you settle on a final purchase price. Work with your realtor on making the best counter offers.
8. Find a title/escrow agent
Congratulations on finding a home! Now comes the paperwork and deadlines. Up until now, you were probably working at your own pace. Once you have an offer accepted and a contract signed though, you’ll likely need to adhere to strict timelines. Your realtor will help you prioritize specific next steps based on your contract.
As part of your final proceedings, you will need to have a title/escrow agent. The responsibility of the title/escrow agent is to perform a search to ensure that the individual selling the house has the legal right to do so and to carry out the legal transfer of ownership from the seller to the buyer. They are also responsible for handling the transfer of money between the various parties. If the agent isn’t specified by the seller, you’ll need to decide who will perform those duties for you.
As with mortgage lenders, you’ll want to search for the best price and service. Ask your realtor for recommendations as well as your mortgage lender. Also look online for reviews. You’ll have to find a title/escrow agent quickly after signing your contract in order to give them time to perform their search and prepare the necessary paperwork.
Once you have decided on an agent, they’ll provide you with a Closing Disclosure that outlines exactly how much you’ll need to pay in order to purchase the house. You will receive this a few days before your closing date. Work with your title/escrow agent on the best way to transfer the funds.
9. Get final loan estimate and approval
At this point, you need go back to your mortgage lender and get a formal approval. This is going to involve a lot of financial statements. Be prepared to provide information for the last 3 months including statements for all financial accounts and pay stubs. On top of that, you may need to provide previous tax returns.
Once you’ve submitted all the information, your mortgage lender should provide you with a Loan Estimate that outlines important details about your loan.
As with many things in your contract, there’s going to be a timeline associated with how quickly you need to get approval from your lender. Make sure to have all the necessary paperwork ready and answer questions from your mortgage lender as quickly as possible.
10. Get a home inspector report
Before purchasing your home, you’ll need to get the home inspected by a professional home inspector. The home inspector’s job is to examine the house on your behalf and make you aware of any and all defects. They will look for everything from making sure all the electrical outlets are functioning to making sure the house is structurally sound.
After they perform their inspection, they’ll generate a report with their findings. You can then use this report and negotiate to have certain items fixed before you purchase the house or possibly lower your purchase price to allow you to fix things after closing. Our home inspector found a leak in the roof before we purchased the house that we were able to get the seller to fix!
Again, this is a service you can shop for by asking friends, family, your realtor, and online services.
11. Shop for homeowner’s insurance
If you’ve been renting up until this point, you may or may not have had renters insurance. When purchasing a home though, your mortgage lender is almost certainly going to require that you get homeowner’s insurance. Homeowner’s insurance will cover your (or more likely the mortgage lender’s) investment in the home if it suffers any damage. Depending on your policy, it’ll cover damage from storms, accidents, and even lawsuits.
Search online for insurance companies that offer homeowner’s insurance. If you already have auto insurance, your auto insurance provider may also provide homeowner’s insurance. Often, if you purchase auto and homeowner’s insurance from the same company, you’ll get a discount.
12. Transfer utilities and pack
At this point, you’re in the home stretch. Your loan should be approved, your title search should be in process, and all the items from your home inspector report should be addressed. Take this time to start packing up your items and getting ready for your move into your new home! Get some free boxes from Craigslist and reserve your moving truck if needed.
Also make sure to transfer your utilities such as gas, electric, and internet to the new house. The last thing you want to find out is that you’re moving into a house with no lights or hot water. Most companies now allow you to request transfers online. If you can’t do it online, give them a call to set up the transfer on the correct date.
13. Final walk-through
Your final walk-through is going to happen anywhere from a few days to a few hours before closing. This is where you revisit the house, make sure all agreed upon repairs were made, and the house is still in substantially the same condition as when the contract was originally signed (i.e. walls weren’t taken down and pipes haven’t started leaking).
You might be tempted to skip this step as you’re busily packing and preparing to move but it’s imperative that you don’t. You may find that some of the repairs weren’t done the way you expected or some other issue arose while no one was in the house. This gives you the chance to identify any issues and get them fixed.
I suggest doing your walk-through at least 24 hours before you expect to sign. This way, if you find any issues that need to be resolved, the sellers have time to fix it before you have to sign on the dotted line.
14. Closing day
The day is finally here! It’s actually pretty uneventful. All the hard stuff is already done. At this point, you meet with your title/escrow agent and realtor to sign the paperwork and make your payment. You’ll make your payment to the title agent who will then distribute the funds to the various parties. Expect to spend 30–60 minutes having forms explained to you and be prepared to sign your name about 50 times (not an exaggeration).
Congratulations! After signing the paperwork on closing day, the house will officially be yours. The home buying process can take anywhere from a few weeks to a few months and there are lots of moving parts. Your home is likely to be the largest purchasing decision of your life and it can be a stressful and confusing time. But understanding the basic steps can help you smooth out the process.