If you’re thinking about buying a home, you may not know where to start. The entire process can be very stressful, time consuming, and costly. Before you even begin to look at homes, make sure that you understand these fifteen steps to buying a house. This will help to make the process much more enjoyable, and hopefully, you’ll be better equipped to make the best decision possible.
1. Review Your Finances
When buying a home, especially for the first time, it is important that you first review your finances. This will help you to determine how much you can realistically afford to spend on a home. The three factors you should consider include your monthly income, monthly expenses, and home costs. There are many online “new home calculators” that you can use to help crunch the numbers. In general, you should consider the amount you and your significant other earn each month before taxes and subtract your monthly expenses. These expenses could include a car payment, school loan payment, or credit card payment. Then, consider how much you have saved for a down payment. This will impact the characteristics of your future loan, including the amount of interest you pay over the lifetime of the loan. There are other costs associated with home buying as well, including the closing costs, which can be between $2,000 and $5,000, homeowners insurance, mortgage insurance, and property taxes. Remember to keep these costs in mind as well when reviewing your finances.
2. Speak with a Lender
In addition to reviewing your finances, speak with a mortgage company about getting pre-qualified for a loan. This will give you a better idea of the amount a lender would potentially approve for a future home loan. It’s a simple, quick, and free process. It’s as easy as a short phone conversation with a lender or completing an online form. You will be asked questions about your income, debt, amount in savings accounts, and other investments. The lender will then estimate the home loan amount, the types of mortgages available, and may even provide a recommendation on the type of loan that best suits your situation. This will give you a better idea of what you can afford when you start searching for homes.
It should be noted that pre-qualification is different from pre-approval. If you want to take the process a step further with a mortgage company, fill out a mortgage application. You will have to provide information about your finances and the lender will check your credit score. This process will take a bit longer, and will require you to pay a credit check fee, and possibly an application fee. Your credit score is important for determining whether or not a lender will approve your application, and the type of loans available to you. The higher the score, the better! Remember that you are permitted to submit an application to more than one lender in order to compare loan options. Your pre-approval statement will list the mortgage amount and interest rate. When you begin to shop for homes, having pre-approval for a mortgage shows potential sellers that you have already taken the initial steps to purchasing a home.
Start looking at homes for sale online, in the newspaper, or by simply driving around. Find the neighborhoods that you would ideally like to live in, and follow current home listings. Track the length of time that homes are on the market and compare the asking price to the selling price. This will give you a better idea of the housing market for that region.
Also, make a list of your ideal home features: number of bedrooms, number of bathrooms, architectural style, lot size, and the floor plan. You should also consider your ideal distance from amenities and your job, school district (if you have children), and neighborhood crime statistics. Make adjustments to your expectations as you compare these factors to home price, estimating what you can afford based on your budget.
4. Check for Benefits
In addition to researching homes, take some time to look into assistance programs. There are many grants, credits, and incentives available for first-time homebuyers. If you know the city or suburb where you’d like to reside, search their government website for buyer programs. Often, the grants are available to first-time homeowners, military veterans, individuals with low incomes or those who would not otherwise qualify for a loan, and/or homes under a certain value.
For example, if you are interested in living in Minneapolis, MN, there is a program set up to help pay the down payment on a home. The fund considers individuals who would not typically qualify for a mortgage. The program pays 20% of the home price and a lending institution pays the other 80%. This helps to reduce the new homeowner’s monthly loan payments and eliminates the mortgage insurance requirement.
If you have an IRA, first-time homebuyers are also permitted to withdraw up to $10,000 from their account without paying any penalty fees. However, with a traditional IRA, you will still pay income tax, but Roth IRA account holders will not (because that money has been previously taxed). If you have a spouse who also has an IRA, they can withdraw $10,000 for the home purchase as well. This money can be used towards the down payment on a home or for the closing costs.
5. Get a Realtor
Once you have your finances in order and are serious about touring homes, find a real estate agent that you can trust. They can provide additional guidance when navigating the often-confusing world of home buying and selling. Find someone who is knowledgeable about the local real estate market, and can recommend home inspectors, home appraisers, and independent homeowners insurance agents. Tell them what you can afford and the maximum amount that you are willing to spend on a house.
Homebuyers benefit from using real estate agents because they have training and knowledge of the home buying process and the cost is free. Their services are reimbursed through the commission paid by the seller. The buyer’s agent and seller’s agent both receive an equal percentage of the sale price.
6. Start Shopping
Work with your real estate agent to schedule tours of the homes you are interested in buying. Make sure to stay in your price range; it is very easy to fall in love with a home that is far outside your budget. During and after each home tour, take notes on what you liked and disliked. Touring so many homes in such a short period of time can make it hard to remember specific details about each home.
When you are traveling to the home, make sure to pay attention to the neighborhood- the location of parks, proximity to busy streets, and the quality of the surrounding homes. Once inside, feel free to look around each home, but also make sure to turn the lights on and off in each room, turn on and off the faucets in the bathrooms and kitchen, and test to make sure each door and window works properly. Don’t feel like you need to rush through each home tour.
7. Check the Utilities
Many first-time homebuyers are unaware of the costs it takes to keep a home in good working order. The water, electric, and gas bills for a home are usually much higher than for an apartment unit. This is because the square footage of a home is generally larger, there may be higher ceilings, leaky windows, or inefficient air circulation. If you are interested in making an offer on a home, you can contact the utility company and request the billing statements for the previous 12 months. This will give you an idea of how much you can expect to pay each month on top of the mortgage and insurance.
8. Make an offer
Once you have decided on the right home, it’s time to make an offer. Work with your real estate agent to research comparable homes in the same area that have recently sold. This will help you to decide on the offering price you’d like to submit to the seller. Some experts recommend that your initial bid be about 5% below the asking price. Be prepared for the seller to make a counter-offer, and for the negotiations to go back-and-forth a bit.
Once you have both agreed to a price, the buyer submits an earnest money deposit. These are funds that show the seller that you are serious about purchasing the home. The money goes into an escrow account where it is held until the purchase has been finalized. Then, the money is put toward the down payment. If you walk away from a deal after paying the deposit, you will likely not be refunded, and it will go to the seller instead. If the seller backs out, then the buyer will be refunded.
9. Get a Home Inspection
Having the home inspected is a great way to assess any damage or disrepair before officially closing. It is recommended that the accepted purchase price be contingent upon the results of the home inspection. This should be completed within a few days after your offer is accepted. Keep in mind that the home inspector is only there to assess the condition of the home, not to determine the home’s value.
It will cost a few hundred dollars, but is definitely worth it. The inspector may find a leaky roof, mold, a cracked foundation, an outdated water heater, and much more. The damages could be between a couple hundred and several thousand dollars. Once the inspection has been completed, both the buyer and seller receive a copy of the report. The buyer can rescind their offer if the damage is significant, have the seller fix the damaged areas, or have the seller reduce the price of the home to compensate for the areas of the home that need to be repaired.
10. Get a loan
You have already been pre-approved, so it is now time to speak with the mortgage company about your loan options. The lender will work with you to determine the right type of loan for you. An adjustable rate mortgage (ARM) is one in which the interest rate is fixed for a designated period of time. Once that term has expired, the rate will fluctuate each year, depending upon the market. An ARM is best for a homebuyer who does not expect to live in their home for very long. A fixed-rate mortgage is usually for a longer term, up to 30 years. The interest rate, and the monthly payment, will stay the same. This type of loan is best for homeowners who plan to stay in the same home for a long time.
11. Get a Home Appraisal
The lender will have the home appraised before the sale is closed. The appraiser is not affiliated with the mortgage company, buyer, seller, or real estate agent. Their job is to assess the fair-market value of the home. This helps to validate the amount approved for the loan. For example, the lender does not want to provide the homebuyer with a $400,000 loan when the home is actually only worth $250,00, according to the appraiser’s estimate. It also protects the buyer from paying too much for the home.
The appraisal will cost a few hundred dollars and takes a few days. During that time, the appraiser gathers information about the home: square footage, condition of the home, number of bedrooms and bathrooms, and age of the home. The appraiser will notice obvious damage and disrepair to the home, but it is not their job to report it—that is the job of the home inspector. The appraiser simply considers these factors when estimating the value. They then compare that data to other homes that have recently sold in the same area. Next, the appraisal is submitted to all parties. Hopefully, the appraisal will align with the sale price, and your loan will proceed as planned.
12. Get Homeowners Insurance
Before the sale is closed, speak to an independent insurance agent. You will need homeowners insurance the moment the home is officially yours, so it is best to start this process early. There are no legal requirements for purchasing homeowners insurance if you own the home outright. However, most homebuyers take out a loan, which means that the mortgage company will require that you have enough insurance to cover the unpaid balance of the loan. However, most homeowners decide to insure 100% of the home’s value, which is usually a larger amount than the loan.
Homeowners insurance is key to protecting your home against loses affecting the property inside or outside of your home. It covers in events of bad weather, fire, theft, and vandalism. For example, if there is a heavy rainstorm and the roof begins to leak, the policy will help to cover the cost to repair or replace the roof, as well as anything inside the home that experienced water damage.
13. Fill Out Paperwork
There is a lot of paperwork involved in buying a home, and patience is key. There are several types of documents that need to be reviewed and signed. The first are real estate transfer documents, including the deed, bill of sale, seller’s affidavit, and transfer tax statements. Each of these pertains to the transferring of the property from the seller to the buyer. The second are the home loan documents, including the mortgage note and mortgage agreement. This paperwork outlines the details of your loan. A title company handles the third type. This includes the title commitment, a judgment affidavit, compliance agreement, and disbursement agreement. These documents are related to the home’s title and liens. Some of these documents will be filled out and signed before the closing day, while others are done on the final day of the sale.
14. Close the Sale
The penultimate step to buying a house is closing the sale. The seller and the buyer need to agree to a specified date called the “settlement day”. The date is established during the sale negotiations process. It will usually be several weeks or more after both parties agree to the final offer. The period in between is called escrow. On the settlement day, the ownership of the home is transferred to the buyer. Within 24 hours of this day, the buyer should have a final walk-through of the home to make sure that the home is in the same condition it was when the offer was accepted. If you notice any problems, mention them to the realtor, so they can bee addressed before the closing.
On the settlement day, you will need to bring any paperwork you have signed or need to sign. You will also have to bring a cashier’s check to cover the closing costs and the amount owed for the cost of the home. Part of the purchase price will likely be a check from the mortgage company. The seller and the real estate agent will receive their allotted funds on that day as well. Then, the deed is transferred to the buyer, you are handed the keys, and the closing is done!
15. Move In!
Now that all of the paperwork is completed and the deed has been transferred, it is time to move into your new home. The home buying process is complete and you can start moving your belongings into the home!
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