Buying a home will be one of the biggest purchases you might ever make in your life. To make this process easier, we’ve broken it down into 15 clear steps. Each step explains what it’s about and what you need to think about at that stage. There are some exciting steps, some stressful steps, and some annoying steps. But you have to go through them all so you might as well get started. Once you’ve made it to the bottom of the list you might even have your own home yourself! Use this as a guide to refer back to during the process as many times as you want.
1 – Are You Ready to Own a House?
There are two different steps to being ready to buy a house. Being emotionally ready and financially ready. This home might just be the first one you buy, but before you buy it, you should make sure that you’re actually ready to go through this process. It’s a huge financial commitment and will tie you to a certain area for at least a couple of years. A house definitely puts down roots and you should keep that in mind.
If you have other financial goals in your budget for the year, you should think about those before buying a house. You can’t always count on the cost of a house going up and so what would happen if it goes down or stays the same? Does buying a house line up with your other financial goals? Are you buying with a partner – do they want to stay in this area? Do you want to start a family? Looking at these big picture goals first will help you understand whether this is the right step. It’s okay not to own a house, especially if your money is working for you in other places. All of these questions combined will give you a good idea of whether it is a good time for you to buy a house.
2 – Prepare Your Finances
Purchasing a house could be the biggest single investment of your life and before you dive in, take a moment to think about the financial implications of buying. Before you even start the process you want to make sure your finances are solid and that is the right time for you to buy a house.
Calculating the cost of a home and its affordability of it is the first step. It will help you take into account your income, your debts, the location of where you want to buy the house, and what this means for a down payment. Down payments are different depending on what kind of property you’re buying and in which state. By calculating the full amount of your affordability you’ll be able to see where and what you can buy. You’ll also be able to see what your monthly payments could be. This can then be factored into a budget.
Calculating these amounts upfront will help keep you realistic about what you can afford. It’s very easy to get carried away. Looking at condos and houses without understanding the full financial picture. You might be able to afford more than you actually want to spend on the mortgage because of your other financial goals.
At this stage, you also want to check your credit score. The higher your credit score, the better rates and terms you’ll get on a mortgage. If you have a low credit score, you might want to spend some time increasing it before applying. A mortgage application is a hard check on your file and you don’t want to be rejected for it. If your credit score is low, have a look at what you can do to build it up before applying.
3 – Plan Out How You Will Pay For The Down Payment
After you’ve put a budget together and for how much you can afford, you’ll want to see how much you’ll want to spend on a down payment. 20% down payments used to be normal, but now there are many mortgage providers that offer lower down payment percentages. This means that many homeowners now put down less than 20% of the cost.
This means you’ll spend less money in the short term, but your mortgage repayments will be higher every month. It also means you’ll pay more interest over the lifetime of the loan. If you can get to 20% or above then the terms of your mortgage will be better. If you have 19% down payment, it is worth waiting and saving up that final 1% to reach the threshold of 20% for better rates.
If this is the first time you’ve bought a house or you haven’t owned a home in a long time, then you could look at the state’s first-time homebuyer programs. There are many that offer financial help, especially when it comes to down payments.
4 – Create Your Dream Home List
All of the steps up until now have been dry and boring, but this is a good one. You should be excited about owning a home and as part of this process, you should create a list of things that you want from your house. You can create a list of must-haves and nice to haves. This will help you create a list of things that you’re willing to compromise on and what things are essential. You can also look at the alternatives to single-family houses.
Some of the main ones that you’ll want to look at are:
- House vs. Condo: If you really want a backyard then a detached or attached house might be what you want. But if you want to live downtown, you might have to settle for a condo – especially if it’s your first home. It’s also more expensive to own a house even if you reduce your bills around the house.
- Location? Location? Location: Realtors say that the only thing you can’t change about a property is its location. And this is true. The value of a property is hugely based on where it is located. Do you want to be close to work? Does that mean that you have to buy a smaller place? Or do you work remotely and you can buy a bigger house with more space. Think about your priorities.
- Fix it up or move in immediately? You might love the idea of fixing a house up to make it your own and many people do. It’s great to put your own mark on a property, but it also means that it will take longer and potentially be more emotionally draining than moving into a house that is already ready. Maybe you find a property that just has one room that needs to be done. Start with a small project and go from there. Or find somewhere that’s already done- someone’s done the hard work so that you can move right into it.
5 – What Mortgage is Right For You?
Depending on which mortgage you get for your house, there are different factors that the lender will look at. Choosing the right loan will increase your chances of being approved- and this is important. If you find the right loan for you at the beginning, it will save you tens of thousands of dollars over the long run.
Before choosing which mortgage to apply for it’s worth looking at the pros and cons of each one. Below we have listed the main advantages of each loan:
- Standard loans are mortgages that are not guaranteed by any federal program. They typically offer low minimum down payments, but the qualifications to apply are typically higher.
- FHA loan: these are loans that are backed by the Federal housing association of America. Because they are backed by the government, they are typically easier to qualify for the normal loans but require strict mortgage insurance.
- Veteran affair loans. These are provided by the department of veteran affairs and are former or active service members and of those eligible spouses. If you use a VA purchase loan, it allows you to buy a house with no down payment.
- Renovation loans. With a renovation loan, you can add the cost of renovations to your total loan. This works well when interest rates are low because it’s a very cost-effective way of borrowing money to improve your house.
Once you’ve chosen which loan you would like, then you can decide whether you want a variable or fixed-rate mortgage. Fixed-rate mortgages have a fixed rate for a set amount of time (2, 5, 10 years are all common). Adjustable-rate mortgages have a rate that tracks the federal reserve. Typically you also need to choose how long you want the term of the mortgage to be. This is the time period in which you want to pay back the loan. 10, 15, 20, and 30-year mortgages are common.
6 – Pre-Approval
You know how much you want to spend on your house and you know what kind of mortgage you want. What’s next? At this point, you’ll want to start searching for a mortgage lender. You can find a mortgage lender online or in a bricks-and-mortar shop. Or go down and visit your local bank. Credit unions also provide loans depending on what terms you are looking for.
The first step that you can’t miss is to make sure that they offer the type of loan that you want. If you decided on a VA loan and they don’t provide VA loans, then you won’t be able to work with this lender. After you’ve passed this first step, you’ll want to compare their rates to the market average, make sure closing costs are what you’d expect, and also look at what their origination fees could be. Lots of this information will be on their website and if it’s not, you’ll need to speak to a loan officer to find out more. You can also work through a mortgage broker who will do all the legwork for you in exchange for a small fee.
You’ll want to work with a lender to get pre-approval before you go any further. Pre-approval is a mortgage and principle, which means that if you find a place for the amount of money that they’ve pre-approved you, they’re very likely to offer you a mortgage. When visiting open homes and seeing houses, the seller will take you much more seriously with a pre-approval then if you do not have it.
A mortgage pre-approval also gives you real numbers to work with instead of the budget that you did higher up in this list. Be careful though, a pre-approval is a hard check on your credit history and so you’ll want to make sure that you’re likely to pass it before applying. A benefit of applying for pre-approval with many lenders at the same time is that it will only count as one credit check.
To get pre-approval, you’ll need to pull together many documents – this could be time-consuming, but is 100% worth it in the long run. You’ll receive a pre-approval letter from the bank and also a form that estimates how much you’ll get a loan for. This form isn’t final but will give you a good basis to start comparisons with other loans.
A pre-approval letter is typically valid for 60 to 90 days and beyond that, you’ll need to get another one.
7 – Work With A Realtor
Now you’ve got your pre-approval you can start looking for a house that’s within your budget. You also know what kind of property that you’re looking for and with this information, you can go to a real estate agent and tell them your budget plus the type of property. A good real estate agent will make a huge difference in the process and can help speed things up significantly.
Realtors are busy people and it’s always good to interview a couple of them at the same time before choosing who to work with. It’s also worth asking people who’ve recently bought a house if they would recommend their realtor, and if so ask for a recommendation.
In a typical sale, the seller is liable to pay the buyers agent. When you sign an agreement, make sure that you are not liable for any costs.
8 – Let’s Look For Some Houses!
Again – an exciting step. You get to look at some houses. You’ve probably been looking at Zillow for a couple of months (or even years) and now it becomes real. Get some listings from your realtor and start to view some properties. Make sure you pay close attention when you walk through the property because you might only get to see it once before having to put in an offer. Especially if it’s a busy market.
It’s crazy that for the biggest purchase of your life you’ll sometimes only get to look at it once. But that’s how it is. Take videos if you need to. And many photos. Don’t rely on the listing photos because you might forget a key detail that you love. You might like the way that the backyard faces a forest or that there’s a great spot to put your home office.
It can also remind you of things that you’ll need to spend money on to upgrade – new appliances or worktops. Some of these things can be glossed over in professional photos and so it’s worth taking your own with a phone.
It’s also worth making notes about what you love and what you change so that when you get home you have a clear and accurate picture of the property.
9 – Put In An Offer
You found a place that you like and now it’s time to put in an offer. This is when the realtor really makes their money and can be a huge help. They can give you some sales comparable and any information that they have about the seller based on their interactions with them. For example, they might know that the seller already found a place to move and is highly motivated.
You might also want to hire a real estate attorney at this point to help in the process. Some states require an attorney at this stage and so make sure you know the local state laws.
At this point, try not to let your emotions get away from you- especially if a bidding war starts. It’s very easy to continue to offer more money. And before you know it, you’re outside of your budget. You need to know what your upper limit is and when you’re going to walk away if you have to.
If your offer is accepted, that’s great news and you’ve got a few more things to do before you can move in. At this point, you’ll probably part with your first check – it’s real now! This first check is called “earnest money” and it is deposited towards the house. This money usually goes into an escrow account and is used as part of the final financing for the house.
10 – Get Your Mortgage
You know how much you’re going to have to spend on the property that you want. Now you need to confirm with your lender and get a mortgage. You don’t have to go with the lender who pre-approved you but it is an option. Even if you’re going through an online-only lender, you’ll still work closely with a broker that is appointed by them. They’ll help you complete the actual application.
There is lots of paperwork involved with a mortgage and so get ready to do lots of compiling and uploading to their website.
You’ll probably need the following:
- W-2 forms from at least the last two years. If you’ve changed employers recently then you might need more.
- Payslips up to 60 days.
- Any other sources of income- including any gift money that you’re given.
- Federal tax returns from the last 2 years
- Bank statements for anyone who is applying.
- Information about any outstanding large loans like a car or student loans.
- Social security number.
- ID details driving license or state ID.
After you’ve completed the mortgage application process, you’ll move to the stage called underwriting. This is after you’ve uploaded all of your documents and your application is passed to the insurance company to do their due diligence.
At this stage, you might be asked to provide more documents because underwriting is a very detailed process. They’ll also independently appraise the property that you’ve chosen to make sure the value is accurate.
11 – Find Homeowners Insurance
You might wonder why you need to take out homeowners insurance if you don’t actually own the property yet. Most lenders insist on homeowners insurance before they will give you the mortgage. You’ll need to get enough coverage to completely replace the home and its contents if anything were to happen. The policy should come into effect on the day that you close your deal.
12 – Home Inspection – Schedule It
The basic home inspection is a good idea. Whenever you’re buying a property as it can identify issues that might become problematic down the road. The basic test is a visual assessment, looking at anything from the roof to the foundations and its systems. If you have specific concerns about the property, make sure to ask that the inspector looks into that in particular. If that’s not covered in the basic home inspection, then you should look to work with a specialist to make sure you’re covered.
It’s up to you to organize the home inspection and if anything is found that wasn’t included in the original seller’s documentation then you might be able to negotiate.
13 – Appraise The Value of the Property
This is a completely different step to the home inspection. The home inspection is to give you peace of mind to know that when you’re buying a home it won’t cause any issues in the future. The appraisal is for the lender to give them peace of mind that the money that they’re lending you is secured by a property of the same value. The appraisal will look at market rates and what is sold recently and also look closely at the home that you are buying to make sure everything adds up.
Ironically, the lender will choose the appraiser, but you will have to pay for it. If you’re buying a property in cash you still might want to get an appraiser to make sure that what you’re buying is really worth it.
14 – Negotiate With The Seller
Many of the items will have already been negotiated with the seller like HOA fees and property taxes. This doesn’t mean that you can’t negotiate on some other things before it closes.
Your ability and desire to negotiate or be based on a number of things. If it’s a hot market and the seller has lots of offers, then you’re not in a great position to negotiate because they might just work with someone else. If it’s a buyers market and you found some issues with the property that weren’t disclosed originally. Then you might have some more room to negotiate. Especially if it’s something that would be flagged by any home inspector like a faulty roof or unstable foundations.
15 – Close On Your Brand New Property
You’ve made it all the way through the list to step 15. If you’re smart, you would have read through the whole list already and started to prepare the documents that you need way ahead of time. The closing process is always nerve-wracking because you never know what’s going to happen and so being prepared for this final step is a good idea.
The lender will send a closing document at least 3 days before the closing. Compare it closely with your loan estimate to see if any closing costs have changed. This will let you know exactly how much money you need to close on the property.
On the day of closing or a couple of days before you can do a final walk-through with your realtor. You’ll probably be incredibly excited about closing, but look closely and make sure that everything you’ve agreed to is in place. For example, if the seller said that the fridge is included, make sure it’s there.
It’s a long process, but hopefully a rewarding one. We hope with this list it makes the home buying process easier and more straightforward. Good luck in your new home.