When it comes to buying a home, it can seem stressful and frustrating without the proper guidance. Buying a home, let alone your first ever property, should be an exciting time. So we want to provide you with a clear breakdown of the process of purchasing a home so you can understand every step along the way.
Step 1: Check Your Credit Report And Score
The very first piece of documentation you’ll want to gather is your credit report to evaluate your current credit score and make a plan if you would like to increase your score before purchasing. The credit planning should usually be done a year ahead of actually purchasing your home as you want the score to be as stable as possible when researching homes to buy. By law, you can get a free report once a year through Annualcreditreport.com. The higher your credit score, the lower the interest rate on your mortgage. If you would like to qualify for the best rates, a good score to aim for would be anything from 720 and up, however there are still options for potential buyers without an excellent credit score. For home buyers whose credit is lower, around 580 or under, they can still qualify for FHA and secured loans. With these loan products, the lender may require buyers to pay an additional fee included within the monthly mortgage payments because they are seen as riskier.
Step 2: Figure Out How Much You Can Afford
You can find a real estate agent to assist with this step, although you’ll ultimately need to speak with a lender for a pre-qualification. Pre-qualification differs from pre-approval in that it does not require the lender to run a credit check and therefore cannot be included in an offer package when actually making offers on homes. If you want to prepare on your own, be sure to take advantage and research an affordability calculator for housing, and with that tool, you'll get a glimpse of what to plan for.
It’s generally a good rule of thumb to look for homes that cost no more than three to five times their annual household income and for homebuyers to plan to make a 20% down payment and have a low to moderate amount of other debt. Although everyone's situation is different, here are some guidelines everyone should try to adhere to.
Generally recommended guidelines based on your gross monthly income (before taxes): Your mortgage payment should be 28% or less. Your debt-to-income ratio (DTI) should be 36% or less. Your housing expenses should be 29% or less. This includes things like insurance, taxes, maintenance, and repairs. Aim to have three months of housing payments and expenses saved up.
Step 3: Find A Real Estate Agent
Real estate agents are important partners when you’re buying or selling a home. Real estate agents can provide you with helpful information on homes and neighborhoods that aren't easily accessible to the public. Their knowledge of the home buying process, negotiating skills, and familiarity with the areas you desire to live in can be extremely valuable. And best of all, as a buyer, it doesn’t cost you anything to use an agent – they’re compensated in the form of commission from the seller’s proceeds for the sale of the property.
Step 4: Get Pre-Approved By A Lender
When you submit an offer to purchase a property, you will be expected to include a pre-approval letter in the offer package. If you haven’t yet received your pre-qualification, you just need to provide some financial information to your mortgage bankers, such as your income and the amount of savings and investments you have. Your lender will review this information and tell you how much they are willing to lend you. This will tell you the price range you should focus your homes search on. Later, you can get pre-approved for credit, which involves providing your financial documents (W-2 statements, paycheck stubs, bank account statements, etc.) so your lender can verify your financial status and credit. Remember, a pre-qualification and pre-approval are not the same thing. You will need a pre-approval before you can submit a purchase offer.
Step 5: Start Looking At Homes
This is my favorite part. As you start touring homes and going to open houses in your price range, it might be helpful to take notes on all the homes you visit. You will see a lot of houses! It can be hard to remember everything about them, so you might want to take pictures or video to help you remember each home.
Make sure to check out the little details of each house. For example: Test the plumbing by running the shower to see how strong the water pressure is and how long it takes to get hot water. Test the electrical system by turning switches on and off. Open and close all windows and doors to see if they work properly.
It’s also important to evaluate the neighborhood and make a note of things such as: Are the other homes on the block well maintained? How much traffic does the street get? Is there enough street parking for your family and visitors? Is it conveniently located near places of interest to you: schools, shopping centers, restaurants, parks, and public transportation?
Step 6: Make An Offer
Take as much time as you need to find the right home. Then work with your real estate agent to negotiate a fair offer based on the value of comparable homes in the same neighborhood. Once you and the seller have reached an agreement on price, the house will go into escrow, which is the period it takes to complete the remaining steps in the transaction.
Step 7: Work With Your Lender To Select Your Loan
Your lender should have a wide range of competitively priced loan programs and a reputation for exceptional customer service. You will have many questions when you are purchasing a home, so having an experienced and responsive lender can help you make the process much easier. Every homebuyer has their priorities when choosing a mortgage. Some are interested in keeping their monthly payments low, while others are more concerned with making sure that their monthly payments are fixed and do not spike. Still, others pick a loan based on the knowledge that they will be moving again in just a few years, so you need to consider your priorities as well.
Step 8: Home Inspection Day
Typically, purchase offers are contingent on a home inspection of the property to check for signs of structural damage or things that may need fixing. Your real estate agent will arrange to have this inspection conducted within a few days of your offer being accepted by the seller. The inspection contingency protects you by giving you a chance to renegotiate your offer or withdraw it without penalty if the inspection reveals significant material damage. Both you and the seller will receive a report on the home inspector’s findings. You can then decide if you want to ask the seller to fix anything on the property before closing the sale. Before the sale closes, you will have a walk-through of the house, which gives you the chance to confirm that any agreed-upon repairs have been made.
Step 9: Have The Home Appraised
Your lender 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 whether the home is truly worth what you have agreed to pay for it. It’s purpose is ultimately to assure the lender that the asset is valuable enough to justify their investment. If the home is found to be less valuable than the loan amount, the lender will likely be unable to provide funding.
Step 10: Coordinate The Paperwork
As you can imagine, there is a lot of paperwork involved in buying a house. Your agent 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 have agreed to purchase.
Step 11: Close The Sale
At closing, you will sign all of the paperwork required to complete the purchase, including your loan documents. It typically takes a couple of days for your loan to be funded after the paperwork is returned to the lender. Once the check is delivered to the seller, you are ready to move into your new home!
Step 12: Get Insurance & Establish Utilities
You're finally ready to move into your new home! Now that you have just bought your property, one of the first steps in setting up your home is getting utilities installed before moving day arrives. If you're in the same city or service area and already have an account with the local utility company, they will likely be able to transfer service to your new home and keep your account open. Let them know the service end date at the old home and the start date at the new home. At this point, the seller has received their proceeds for the sale, all involved professionals have been paid, and you are the brand new owner of your very own home!