Buying a house is likely the biggest purchase you are ever going to make. The entire process is a roller coaster ride where you learn something new with every turn. The best thing you can do for yourself is to be prepared from the start. Understand the process, what you can expect to happen, and what costs you are going to incur. No matter how prepared you are, you are likely going to experience some unexpected twists and turns. But if you go into it with an open and flexible mind, you can easily navigate the process.
It is hard not to be emotionally invested when buying a home, especially if it is your first. Remember that this is a substantial financial commitment. Try your best to keep your feelings out of a decision. If the numbers don’t add up, walk away, and don’t force the issue. Once you own the home, all the responsibilities of that home fall on your shoulders. So listen to any warning signals that go off throughout the buying process. Also, keep in mind that, no matter how prepared you are, things can go awry. Once you move in, you may uncover problems in the home. This is an inherent risk every homeowner deals with.
Read this article to help navigate yourself through the process of buying a home. Everyone’s journey is going to be a little bit different, depending on their financial situation and the condition of the home buying market. This overview can help you understand what the process looks like and what to expect along the way.
Step 1: Check your Credit Score and Credit Report
Though your credit is going to be checked when applying for a mortgage, it is good to know what your credit score looks like ahead of time. This allows you to dispute any discrepancies that appear in your report. If there is a problem in your report, it takes a while to iron out the issues. Give yourself that time to do so. Not properly addressing issues in your credit score may affect the amount a bank can approve you for.
Everyone is entitled to one free credit report per year. Requesting this report does not affect your credit score. Equifax, TransUnion, and FICO are all able to provide you with your credit report and score. Each credit union offers the same basic report, and generally, reports from all of the unions’ line up. Be aware of the odd time there may be a discrepancy between the different unions.
Credit scores range from 350 to 850. The better, or higher, you score, the better your credit is considered to be. A good credit score is a big piece of being approved for a mortgage. A higher credit score sometimes also lowers the interest rate on your mortgage. Obviously, making sure you have good credit is an essential part of your financial health.
Your credit is calculated based on your overall debt amount, or how much you currently owe on credit. It is also based on your bill payment history. Do you always pay your monthly bill promptly? Are you always late? Do you have any bills sitting in collections? Your credit score also looks into how long you have been borrowing money for. Are you a new borrower? Are you established, and do you have a history of repaying those debts on time? It also looks into your recent credit applications. Have you recently shopped for credit, maybe for a new car or credit card? Finally, your score assesses the types of credit you have used. It is better to have a diverse credit history here.
Anything over 720 is considered a good score. However, some lenders can work with lower credit scores, such as 580 and above. This is why it is so important to check your credit score before you jump in. Your credit score determines who can lend you money and how much.
Step 2: Determine How Much You Can Afford and Get Pre-Approved
There is no point in looking for a house if you don’t know how much you can actually afford. It is very easy to fall in love with a home. The disappointment of not being able to afford that home can weigh on your entire search process. So having an understanding of your price range beforehand helps properly navigate your search.
A basic rule of thumb from many lenders is to find a house that is no more than two to three times your annual household income. This is especially true if you plan to put down a 20% down payment and have some other outstanding debts. Many lenders have mortgage affordability calculators on their websites. These can be a good tool to help you see how much you may be approved.
Talk to your bank or a mortgage broker to start the mortgage pre-approval process. The broker or financial institution needs to collect all of your financial information. This includes not only your credit score, but possibly your paycheck stubs, banking information, and any other savings or investments you may have. This provides them with a financial picture that allows them to determine how much you can be approved for.
The purpose of pre-qualifying helps you genuinely know how much you can afford and helps to eliminate any surprises later in the process.
Step 3: Start Researching the Housing Market
It is a good idea to start researching homes for sale early in the process. You are not necessarily looking for your home-to-be, but you are researching what a home you like costs. See what homes are selling for in your preferred neighborhood. Are they selling quickly? Is their list price dropping? This gives you a good indication of what is going on in the market.
Also, search for homes in neighborhoods that may not be your first choice but are still acceptable. Your mortgage pre-approval may require you to rethink where you want to live, so keep an open mind here. If you have kids, you should also look-up the local schools and how close you can be to their various activities. Many municipalities also release crime reports so that you can understand what the crime rate is in the area. Perhaps you ride the bus to work. Search out the local bus stops and how long your commute would be. All of this information is pertinent to your everyday life. You may love a neighborhood and think it is ideal, but then your research may show that it does not work for your lifestyle. It is better to know all of this ahead of time.
Step 4: Hire Your Real Estate Agent
More and more people are opting to navigate the home buying and selling process without a real estate agent. They are hoping to save money on the commissions an agent is going to charge. If you feel that is the right path for you, then go for it. However, real estate agents provide some very important information that the general public does not have access to. They are also skilled negotiators, so they can help to get you the best possible deal.
In many cases, the agent is paid for by the seller of the house, not the buyer. Because of this, there is no reason to avoid using an agent. The seller may choose to forego their right for an agent, but don’t let this sway you out of using one.
A real estate agent can provide invaluable information for you. Firstly, they have access to what the current homeowner paid for the property. This can help you set a purchase price. They also know what other homes in the area sold for and how long they were on the market. Again, this can help you set your offer price. They also have access to a database of all the homes that are listed on the market. Sometimes these homes are not yet advertised to the public, so they may be able to find you a home that you didn’t even know was listed. Finally, an agent deals with all of the scheduling of home viewings. Letting someone else deal with the back and forth is immensely helpful.
When buying a home, it is your choice to use an agent. But in general, the benefits of using an agent are well worth any money that may be paid to them. Just be sure to enlist an agent you trust. If you get a bad feeling from them, do what you can to walk away. It is always better to work with someone you know has your best interest at heart.
Step 5: Find Your Home and Make an Offer
Now comes the fun part! Searching for the perfect home that is in your price range is so exciting. You may find you spend all of your free time browsing houses online or driving through neighborhoods to seek out for sale signs. Weekends may be spent visiting open houses and doing everything you can to find that perfect place. Ask your real estate agent to take you through homes you are interested in. They can walk through with you without pressure from the seller or listing agent. They can help you to make an impartial decision. This is where it is essential to shop with your wallet and not your heart.
When walking through all of the homes, it may be a good idea to bring a pen and paper. You are going to see a lot of homes, so details may become a little blurred. Pictures or videos may also help to jog your memory or make comparisons later.
When you are at home, do a thorough check of some vital home functions. It is better to know ahead of time what works and what doesn’t. Here are a few things you should be sure to check out:
- Plumbing: Do all of the taps turn on and off properly? Is the hot water actually hot? Do any of the faucets leak? Does the water run clean? How is the water pressure in the shower?
- Electrical: Do the light switches work? Are any of them wired so on is off and off is on?
- Windows, doors, and closets: Do all these functions properly? Do closets need to be forced shut, or do they pop back open? Are there any windows that can’t open? Are there doors that just can’t stay shut?
Check out the neighbors and surrounding neighborhoods while you are in the area, and consider:
- Are the neighbors’ houses well kept, or are they in disrepair?
- What is your visitor parking situation?
- Is this a busy street with lots of vehicle traffic? Are you okay with that?
- How close is it to amenities like the grocery store, schools, shopping malls, green space, bus routes, or good restaurants?
If any of those items are deal breakers for you, then do not feel pressure to make an offer on any given home. Searching for your ideal home is likely going to take a bit of time. So let yourself have that time. Keep in mind, though, it is likely that you are going to have to give up something in your home search. The exact perfect home may not exist in your price point in your preferred neighborhood. But there is likely a home that can come very close. Know what criteria you are okay to sacrifice and which characteristics are must-haves. Having an idea of this before you start is going to make the selection process easier.
When you find the right home, tell your agent. They can then begin the process of submitting an offer. They are going to compare other homes in the neighborhood to suggest the best price to offer. The number you submit is your choice entirely, but the agent can guide you in the right direction. Even though you may want to go in as low as possible, it is important to offer a fair price. The sellers have the right to reject any offer. You don’t want your offer to come across as anything but serious.
Your agent may suggest you add some conditions to your offer. Often, these conditions include financing and a home inspection. If you find yourself in a bidding war, it may be tempting to waive these conditions in order for your offer to seem more attractive. Only go down that route if you are truly comfortable with the possible consequences.
Once the offer has been sent, you enter a waiting game. There are usually one of three responses. First is a flat-out no. In which case, back to the drawing board. Second is a counteroffer that you now have to consider if you find it acceptable. The third is a straightforward yes. In which case, congratulations!
Step 6: The Home Inspection
Unless you waive your right to an inspection, it is highly recommended to go through this process. In this process, you are going to hire a home inspector to go through the home with you from top to bottom. Your agent can likely recommend a reliable inspector. It is essential to do this step because the inspector may uncover some severe structural or functional deficiencies. If this is the case, you can amend your offer to cover the anticipated costs, or you can walk away from the deal entirely.
The inspector is going to walk through your home with a fine-tooth comb. They check the roof to see if there are any leaks. They crawl through the basement to see if there are any cracks in the foundation. They can see what type of electrical system runs through the home and if your system is overloaded. They can even check your HVAC system to see how well it is working.
Both you and the seller receive a copy of the inspection. From here, you can decide if you want to proceed with the purchase or if there is anything you want the seller to address. If you and the seller agree on any fixes to the home, you should have the opportunity to inspect the changes before the sale closes.
Step 7: Finalize Your Mortgage
Even though you have been pre-approved, you still have to go through the process of actually setting up your mortgage. Here is when you can discuss with the lender the specifics of your loan. Are you going for a fixed or variable interest rate? How long is your mortgage? Can you make lump sum payments? All of these questions can be planned and answered with your mortgage representative. Don’t hold back on any questions or clarifications. This is a significant purchase and major financial commitment. You need to be sure you understand what you are agreeing to.
What works for you may not work for others in terms of payments. For example, you may want the lowest possible payment or payment with the least frequency. Some people make a decision for a short-term mortgage because they intend to move again soon. Know your situation and what you are comfortable with. Mortgages often need to be negotiated in the coming years. So if you are not satisfied with your terms, you may be able to renegotiate after you have paid into it for a while.
Step 8: Home Appraisal
This step may not be for everyone, and yet some may be forced into it. A bank or lender may not approve the mortgage if they think you are overpaying for a home. They want to be sure the money they are lending you is actually worth the value you agreed to pay. An appraiser is often a third-party company so that they can give an unbiased review. Even if you are not forced into an appraisal, you may choose to have one anyway. If this is your intent, make sure to include an appraisal as a condition in your offer of purchase. Otherwise, even if you aren’t happy with the results, you are locked into your purchase.
Step 9: Paperwork
There is so much paperwork to deal with when you buy a house. The real estate agent is going to have you sign a stack of paperwork, and so is the lawyer and your mortgage loaner. A lot of this signing may be time-sensitive. It is essential to set aside time for you to do this. It may make sense, or even be necessary, to take time off work to take care of everything.
Step 10: Set Up Homeowner’s Insurance and Utilities
It is imperative to have insurance set up before you move into the home. You want to be covered as of the first day of possession. Your mortgage lender may even insist you have insurance set up ahead of time. If you already have some form of insurance, like auto insurance, your current provider may cover you for house insurance as well.
It is a good idea to transfer the utilities to your name as well. Tell the company your date of possession so the utilities are in your name as of that date. It would be awful to walk into a home with no electricity or heat.
Step 11: Close the Sale
Your final signatures and any last-minute details that need to be ironed out take place a couple of days before you move in. Your mortgage lender sends the seller your check, and the seller sends you the keys. Then, that’s it; it’s moving day!
Buying a home can be an overwhelming process. It is an exciting time in your life and a big step into adulthood. Be prepared for the process by doing research and asking questions. Don’t be discouraged when things don’t seem to be going your way. There may be times when you have to go back to the drawing board and put in some more time and money. If your goal is to own your own home, patience and persistence eventually payout.