Steps to Buying a Home

 It’s easy to get swept away by the romance of homeownership, but first things first: Is this the right time for you to make one of the biggest purchases in your life?  Determine your long-term goals then consider how home ownership fits in with those plans. Some folks are simply looking to transform all those "wasted" rent payments into mortgage payments that actually lead to owning something tangible—equity, baby! Others see homeownership as a sign of their independence and enjoy the idea of being their own landlord. Then, there's the issue of thinking of buying a home as an investment.
 

As you assess your readiness for homeownership, make sure you consider the decision with an eye toward the next four or so years. Why four? That’s typically the amount of time it takes to break even on your home purchase. If you have to sell your home before you break even, you’ll lose money. So, if you’re likely to move in the next few years for your career, family, a relationship, or just good old-fashioned wanderlust, it probably isn’t a good time to buy.  

Lenders generally recommend that people look for homes that cost no more than three to five times their annual household income if the home buyers plan to make a 20% down payment and have a moderate amount of other debt.  But, you should make this determination based on your own financial situation.  A good ballpark figure for determining how much house you can afford can be found by multiplying your total pretax income by three.   

Although a mortgage spreads out the cost of buying a house over m any years, you’ll still need to provide some money up front to pay for your down payment and closing costs. 

Unless you’re getting a VA loan or a USDA loan – neither of which require a down payment – you’ll need to make sure you have funds saved for a down payment. The minimum on a conventional loan, like a 30-year fixed loan, is 3%. An FHA loan is available with a down payment of 3.5%.   Keep in mind that the larger the down payment, the more equity you’ll have, and the lower your monthly mortgage payments will be. By paying more upfront, you’ll save on interest and be less likely to have to pay private mortgage insurance. Experts often recommend putting down 20% if you’re considering a larger down payment, as that’s the minimum you can put down while avoiding mortgage insurance.

Along with your down payment, you’ll have to save money for closing costs (fees associated with processing and securing your loan). Although the amount you’ll need will vary depending on your loan amount and the tax requirements in your area, you can generally expect closing costs to be 3% – 6% of the purchase price.   

 Getting preapproved for a mortgage is beneficial for you and the seller. First, it helps to confirm that you can afford what you think you can afford.  In order to get pre-approved, a lender will calculate your debt-to-income ratio and assess your overall financial health by reviewing your:
 

• Income statements, like W2s, 1099s, rental income, and tax returns
 

• Assets, like bank statements and retirement accounts
 

• Debts, including monthly expenses like student loans, credit cards, and other mortgages
 

• Records of bankruptcies and foreclosures
 

• Current rent, child support payments, alimony payments, and any down payment gifts
 

When you’re pre-approved, you’ll receive a pre-approval letter. Not only does it officially let you know how much you can borrow, but it can come in handy when submitting an offer. A pre-approval letter shows a seller you’re serious about buying their home.   

There are multiple parties involved when getting a mortgage and buying a house. Your real estate agent is your representative in the home purchase transaction. Your agent will look out for your best interests by finding homes that meet your criteria, get you showings, help you write offers and negotiate.   As a buyer, you can usually work with a real estate agent for free. In most cases, the seller will pay the buyer’s real estate agent’s commission. 

The commission is usually 3% of the purchase price.  A real estate agent represents you and helps you understand how to buy a house. Your agent will show you properties, write an offer letter on your behalf and assist in negotiations. Real estate agents are local market experts and can also advise you on how much to offer for each property.   It’s possible to buy a house without a real estate agent or REALTOR®. This isn’t recommended, especially for first-time buyers. 

The home buying process can be complicated and emotional. Having an agent by your side can help you navigate the housing market, submit a legally sound offer and avoid overpaying for your property. 

Here comes the fun part you’ve been waiting for! House-shopping time. Going to house showings and open houses will become a part-time job for a bit, depending on how long it takes to find the one. Searching available homes online is a great way to start your house-hunting process.  Have your agent set you up with a feed of available homes on the MLS that meet your criteria.      

Try to stay flexible — you’ll probably need to adjust your criteria as your home search continues. For example, you might decide it’s worth sacrificing an extra bedroom to be in your desired neighborhood. Play around with search parameters and see what your money would buy if you modified your wish list a bit.  

 Once you’ve  found the right home, you should make your offer based on a comparative market analysis (CMA) done by your agent. The CMA is a calculation of a home’s market value based on comparable recent sales in the same area.   

Using the CMA as your baseline, your agent should help you determine a fair offer price and help you decide if you should leave some room for negotiation — this depends on the state of your real estate market.    

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.  

• Try the electrical system by turning switches on and off.  

• Open and close the 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?   

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 agreement on a price, 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. 

Lenders usually don’t require a home inspection to get a loan, but you should still get an inspection before you buy a property.  During a home inspection, an inspector will go through the home and specifically look for problems. They will test electrical systems, make sure the roofing is safe, make sure appliances are working and much more. After the inspection closes, the inspector will give you a list of problems they found in the home.

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. 

Generally speaking, home appraisals help you ensure that the purchasing price of the home is in line with the home’s true value. Therefore, these home valuations are a protective measure for lenders.  

Lenders require appraisals because they can’t lend out more money than a home is worth. If the appraised value comes back lower than your offer, you might have trouble getting financing. Be thoughtful about your offer and consider contesting the results of the appraisal if you believe the appraised value is too low.

Closing time! It’s time to take your new home… well, home! 

Many buyers choose to have a final walkthrough a day before or the morning of closing. Its purpose is to be sure that the property looks the same as when you made your offer and that the seller completed agreed-upon repairs (if applicable).

On closing day, expect to spend at least a few hours at the title company signing paperwork. You should also be prepared to bring funds to cover your closing costs, which typically range between 3-5% of the sale price.

Once the signing is complete and the sale is recorded, you’ll receive your keys. The house is yours!