Most people regard the home-buying process as incredibly stressful. It involves life-altering amounts of money and they typically don’t teach you anything about it in school. It also can also feel like anything can go wrong. It doesn’t have to feel that way. You can break the home-buying process into a number of manageable steps. For example:
- Financial Check-Up
- Casual Research
- Selecting a Real Estate Agent and Real Estate Lawyer
- Selecting a Lender
- Search for a House
- Negotiate an Offer
- Close and Get Your Keys
How Do I Prepare My Finances when Shopping for a Home?
As with any purchase that involves a loan, you’re going to want to review your finances before applying for financing. There are two major considerations when assessing your financial health in relation to buying a house:
- Credit Score
- Cash reserves
As with other types of loans, your credit score can have a major impact not only on your ability to secure financing, but also the terms of that financing. In preparation for applying for a mortgage, you’ll want to pay down debt at least 90 days before you start speaking to lenders; it can take up to three months for your credit report to reflect reduced debt. You might also want to review your credit history from each of the three major credit bureaus, Equifax, TransUnion, and Experian. It’s not uncommon for negative errors to persist on people’s credit reports and reduce their credit score.
As you are improving your credit score, you’ll need to accumulate some hefty savings. Down payments, also called earnest money, on mortgages can range from 3% to 20%, which is $6,000 to $40,000 on a $200,000 house. You’ll need to pay that to your lender, but it’s far from the only expense you’ll have during the home-buying process.
Frequently, lenders also require borrowers to prove that they have sufficient funds in their bank account to cover a few months’ worth of mortgage payments. Depending on the loan terms, you may need to pay an entire year’s worth of property taxes and mortgage insurance up front. You’ll also potentially need money for a home inspection, costs associated with closing, etc. And that’s not including moving expenses. The same $200,000 house from the previous example may have other costs ranging from $6,000 to over $15,000 dollars.
How Do I Start House Hunting?
This part of the housing process is probably the most fun, casual research. As you’re improving your credit in preparation for your mortgage, you’ll want to browse through homes in your anticipated price range, two to three times your annual income, so you can develop your need/want/like list of home features. The list should have three sections, things you must have, things you really want, and things that would be nice to have. It will not only help you and your real estate agent narrow down the number of homes you look at, but it will help you compare them to each other, and to your ideal home. Casual research will also help you gain a basic understanding of home prices and allow you to adjust your need/want/like list based on financial feasibility.
How Do I Select a Real Estate Agent and a Real Estate Lawyer?
Once you’ve got a general idea of the location and features you want, it’s time to start reaching out to real estate agents. You’ll want to assess them in a similar way you would assess any other expert. Be sure to ask them questions like:
- How much do you charge?
- Do you have any references?
- How long have you been in business?
- Are you local?
- How will you search for my home?
- Are there any questions that I should ask that I haven’t?
By asking questions like this, you’ll be assessing the agent from a number of angles. One is cost; the last thing you need is an additional, unexpected expense during the home-buying process. Another, and this is a major one, is competence. If they are new or inexperienced, they may not be able to negotiate as good a price as a more experienced agent. And if they aren’t local to the general area, they may not be familiar with the purchasing process in that part of the country. Look here for even more questions to ask your real estate agent.
It should be noted that you can buy a home without a real estate agent, but be careful. Real estate agents are specialists in home buying and selling and will know the ins and outs of the negotiating process. Additionally, they have connections to other reputable professionals that you will need as part of the home-buying process, like inspectors.
You’ll also likely want a real estate lawyer to look over any legal documentation. In addition to vetting lawyers through recommendations from people you trust, you can check the bar association in the state you are purchasing your home in. Or even a lawyer review site. Once you’ve vetted a few lawyers, make appointments to speak with them. Ask questions similar to those you asked your real estate agent. You’ll need to verify that they have experience dealing with local real estate transactions. Be sure to also to verify who exactly is performing all the work. Sometimes, lawyers delegate easier or lower-value work to more junior members of their firms. There’s nothing wrong with this. You should just make sure you are aware of it, since you will likely be interacting with that person.
How Do I Select a Lender for a Mortgage?
Whatever lender you choose, try to get pre-approved for a mortgage as it has a number of advantages. One of the major advantages is that a letter of pre-approval shows the seller that the bank is confident that the buyer will be able to borrow the stated amount of money. When presented with two similar offers, sellers may lean towards the one with a pre-approval letter.
Having a letter of pre-approval removes a step in the home-buying process, meaning you can get to homeownership more quickly. It also helps give you an idea of the amount of home you can afford. This should be more accurate than the previously-mentioned two to three times your annual income. To get pre-approved for your mortgage, you’ll need many of the same things you need for the final loan approval. Among other things, you’ll need documents like:
- Tax documents going back two years
- Two to three months’ worth of bank statements
- Proof of other forms of income
- Paperwork dealing with any other debts
The pre-approval process generally takes 24 to 48 hours. Once you’ve been pre-approved, it’s time to take your need/want/like list, your pre-approval letter, your real estate agent and go house hunting.
How Do I Look for a House with a Real Estate Agent?
Generally, a real estate agent will have an in-depth understanding of the local housing market. They will also be familiar with general buyer concerns. For example, they should have a working knowledge of, or the ability to quickly find out about, things like zoning laws, local schools, property taxes, etc. They should use a database of listings to locate properties you might be interested in. Then it will be up to the buyer to select the properties they wish to see. In addition to finding potential homes, the real estate agent should help the buyer by pointing out any concerns or particular selling points of a house, for example an old furnace or proximity to public transportation.
The real estate agent will also provide a number of logistical services. In addition to obtaining relevant disclosures, they will ensure inspections and repairs are completed in a timely fashion. Real estate agents facilitate communication between the buyer, the seller or their agent, the lender, and any other professionals involved in your home purchase.
How Do I Make an Offer on a House?
Once you’ve found a house you wish to make an offer on, you’ll have to submit an offer letter to the seller. As an offer letter is usually considered to be legally binding, be sure to use a legally-approved form. If you have a real estate agent, they can help ensure you have the proper form. Many people also choose to involve a real estate lawyer at this stage of the process to help avoid costly or time-consuming mistakes.
Once the offer is made, it may be accepted or you may go back and forth a few times with counteroffers. Once a price is settled on, it’s time for an inspection. Typically, an offer is conditional upon the home inspection finding no major problems, a cracked foundation for example. If an issue is found, it may be grounds for the buyer to withdraw or renegotiate their offer.
How Do I Close on a House?
Depending on the state, you may need to deposit a certain percentage into an escrow account. Assuming the sale goes through, this money will go towards your down payment. If you violate the purchase agreement, it may go to the seller. Your real estate agent can tell you if you need to make an escrow account.
You’ll also need to complete your mortgage application. You should complete as much of this as possible prior to beginning the offer process. It can take up to a month for your mortgage to be fully underwritten. Once the loan is prepared, read it to ensure it’s accurate and outlines:
- Mortgage Length
- Interest Rate
- Prepayment Penalties
- Total Cash Amount Needed to Close
- Projected Monthly Payments
- Closing Costs
There’s one more major opportunity for the price of the home to change. Your lender will want the house to be appraised. If it appraises for significantly lower than the agreed-upon price, they lender may reduce the amount they are willing to lend the buyer. Depending on the circumstances, the buyer may need to renegotiate the purchase price. Once this hurdle is cleared, the buyer will need to obtain any necessary insurance, likely homeowners and mortgage insurance.
With your lawyer, you’ll want to decide how to take the property. If there is only one buyer, they will likely take is as the Sole Owner. Multiple buyers can own it in equal or unequal shares, which impacts things like inheritance rights. You’ll also need to sign your Closing Disclosure at least three days prior to closing, or risk delaying your closing date. This form outlines the final details for the loan and is your last opportunity to back out of the loan.
In preparation for closing, gather all the documentation you’ve accumulated over the course of purchasing process. You’ll need things like:
- Purchase and Sales Agreement
- Inspection Reports
- Closing Disclosure
You’ll also need to provide your bank with the information necessary to wire the money. The closing agent should be able to provide you with the details. The day before closing, you normally have the right to do one final inspection of the premise. Use this opportunity to ensure there is no new damage and any agreed upon work was completed. If things aren’t to your satisfaction, contact your real estate agent to discuss your options.
Allot several hours for your closing. You’ll need time to present all your documentation to the seller and review any agreements. Be sure your real estate lawyer and real estate agent attend. They can help you interpret any confusing legal language. The lender’s representative should also be there. They can explain any questions about your monthly payment letter and your Closing Disclosure. Note that your Closing Disclosure should match your loan estimate. It should outline:
- Total Amount Financed
- Interest Rate
- Total Cost Over the Loan Life
Note that if the closing costs estimate has changed, you should consult your attorney. In some states it’s illegal to add new costs at closing.
Once you’ve established everything is in order, you’ll need to sign your:
- Promissory Note: This is the loan agreement between you and the lender.
- Deed of Trust/Mortgage: This pledges the home as security against the loan.
- Probation Papers: This outlines how the seller and buyer are dividing things like property taxes and homeowner association fees.
- Other documents: This will vary from purchase to purchase, but will include documents like the Declaration of Reports and Abstract of Title.
Once all the documents are signed and closing costs are paid, you’ll receive your keys and be a homeowner.