Whether you are ready to buy a home or just sticking a toe in the real estate water, it’s never too early to start doing your homework. Buying a home can seem overwhelming, so let’s break it down into a series of steps, and take them one at a time.
Step One: Getting Started
Before you begin any of the formal home buying processes, it’s best to sit down with your family, do some basic planning and express preferences for where to live, in what type of residence and with what amenities. Far too often, eager home shoppers can skip this step in the process, only to revisit it again and again when things get serious later.
Instead, thinking carefully about where you want to live should begin long before you actually start looking at any properties. A basic checklist of things to take into consideration includes:
- Commuting distance and difficulty
- Distance from Family & Friends
- Nearby Amenities
- Neighborhood Reputation
Identify three or four neighborhoods in communities that make the cut, and then use them to do a bit of online shopping. That will help you move to the next step in the process by giving you some sense of what homes in your desired location cost and whether now is the time to take the next step.
Step Two: Budgeting
Now that you have a general idea of what you’re looking at in terms of location, it’s time to sit down and work on a rudimentary budget.
Start by taking a hard look at your current financial picture. Calculate your monthly income then compile a list of monthly expenses. Go back six months if you can, to give yourself a good sense of how much money you are spending to maintain your household.
This is an important step, because it should give you a good sense of whether now is the time to buy a home. If you are struggling each month to meet expenses after making your monthly rent payment, you may want to save up for a larger down payment and even consider advancing your current career in some way prior to buying a home.
You’ll also want to consider the expenses that accompany home ownership:
- Mortgage Insurance
- Basic Home Improvements
- Utility Bills
- Commuting Expenses
- Maintenance Expenses
Keep in mind that mortgage interest and in some cases mortgage insurance are tax deductible. You will want to consult a tax professional in this area but, it is likely that your tax return each year will be higher than it was when you were renting. That can help you plan for some of those new expenses.
Step Three: Pick A Realtor
Now that you have a budgetary estimate and some neighborhoods picked out, it’s time to find a realtor to become your partner in the home buying process.
First, understand the difference between “your” realtor and a buyer’s agent or listing agent. When you see a home online, you’ll notice the name of a realtor named as a “Listing Agent” on the page. While there is no harm in contacting that listing agent, you should be aware that listing agents also act as “buyer’s agents.”
A buyer’s agent is a realtor that assists prospective buyers in locating homes to look at. This is where it gets a bit tricky: If you call a Listing Agent directly and they go out and show you a property, you are their client. That’s OK if it’s the realtor you want to use throughout the entire process of buying a home, but if not, it’s important to have your realtor of choice show the property.
The best strategy is to go online and view homes in the area you’re looking in, just to get a feel for home prices and do some basic investigation.
Start with friends and family, trusted work associates and neighbors. Ask around to see who has recommendations, and then follow up on them by doing some online research to see if your recommended realtors are active in the communities you have identified.
Then, before you call any agents at all, get a referral from a trustworthy source on a realtor that you can work with through the entire process. Having one realtor that assists you through the entire process will certainly help you find the right home for the right price.
Step Four: Finding a Lender and Pre-Approval
Now that you have a budget, a realtor and a sense of what you can afford and where you will want to live, it’s time to get a lender, and a pre-approval letter.
Start the process by once again talking to those close to you, asking around for trusted lenders. And if you have a banking relationship it is well worth a chat with a mortgage specialist there. Spend some time online as well, shopping for rates and terms. Scan and make PDF copies of all key documents, and you’ll find that most lenders, especially the online shops, will allow you to submit them electronically. Lenders vary greatly so talk with at least a half dozen lenders.
Be sure to ask lots of questions to determine exactly what points you would be responsible for, the most precise estimate of closing costs and the structure of the loan. Make sure you know whether you’re being presented with a fixed-rate, 30-year mortgage, and if you are not, make absolutely sure you know what you’re being offered and what the potential costs are to any alternative mortgage product.
Once you’ve identified a few potential lenders, ask a couple of them for letters of pre-approval. Pre-approval is much more powerful than pre-qualification. In pre-qualification, a mortgage lender takes a cursory review of your financial situation to provide a ballpark figure on how much they might be willing to lend you. Pre-approval is a more in-depth review process, in which a lender will request a variety of financial documents to review your credit score and other factors relating to your financial history.
A pre-approval letter will tell you how much the lender is willing to lend you. It's not a commitment by the lender, but it does give you a good idea of where you stand.
To ease the pre-approval process, go ahead and get your documents in order. At a minimum you will need to be able to produce these documents to start the pre-approval process:
- At least a full month of paystubs for anyone listed on the application as a source of income
- Two years of W-2s (or two years of tax returns if you're self-employed)
- Bank statements from the last three months
- If you are currently renting, proof of the last 12 months of rent payments
It’s worth remembering that a pre-approval doesn't mean approval. The only time you can be certain of your mortgage approval is when you formally apply and close the deal by moving from pre-approval to a formally accepted application.
To narrow down your choice of lender, ask for a good-faith estimate from each potential lender. Within three days of the completion of your formal loan application, a lender is legally obligated to provide you with a good-faith estimate, which lists all the expected costs of closing the loan. You can then take the good-faith estimate to other lenders and negotiate the fees, allowing a variety of lenders to compete for your business.
Step Five: Start Shopping!
Work closely with your realtor to identify communities you are interested in, but keep an open mind. Your realtor has a keen sense of all the options and can help you broaden your search a bit, but also be sure to make clear the must-haves and non-negotiable features on your list. If you require a yard for your dog, a walkout basement or a three-car garage, your realtor needs to know.
Keep your search grounded in reality. Think about the ideal number of bedrooms and bathrooms you need, but also be willing to give a little where you can to broaden the number of properties that might work. Keep the potential resale value of your new home in mind throughout the process. Schools, parks and other amenities strengthen resale value, so make sure that you look not only at the home but also at the surrounding community. Walk the neighborhood, stopping to chat with potential new neighbors. Ask them why they chose to live there.
Working with your realtor, narrow your choices until you find the home you want to make an offer on. Before you do, your realtor should provide you with “comparables” – assessed values of adjacent properties and similar homes in the neighborhood. Do a quick check with the municipality’s planning and zoning office to ensure that your dream home is zoned appropriately and that no surprise shopping centers are going to pop up down the street.
If everything checks out, you’re ready to make an offer.
Step Six: Making An Offer
Drafting the offer, or purchase contract, is a bit of a dance. You want to pay the lowest possible amount for your new home and maintain flexibility for items such as earnest-money deposits and closing dates. Keep in mind, however, that a contract should persuade the seller to negotiate and then reach an agreement.
Work with your realtor in structuring the offer, and fight the urge to lowball. When there’s ample supply of homes on the market, you can feel pretty safe in knocking 10 percent off the asking price, but if you bid 15 to 20 percent below the asking price you may find your offer rejected outright. Listen carefully to your realtor’s advice, as they usually have a sense of what the market will bear.
Choose your battles carefully. You can be flexible with some items, while others are much more important to you.
Avoid getting caught up in a bidding war for a property with other buyers. You may end up paying too much for that dream home and regretting it. You will not know how many offers the seller has on the table, because real estate laws allow listing agents to keep such information confidential to protect the seller’s interest in getting the maximum offer.
Once your realtor drafts a purchase offer or contract in your name and submits it to the seller’s agent or attorney, the seller then responds in one of three ways: they can accept the offer, counter it with a higher asking price or reject it.
The counteroffer is the most common response, so don’t be surprised by a bit of back and forth. Develop a strategy for negotiating before the contract is formally presented.
When you and the seller accept the terms through the counteroffer process, it’s known as acceptance. Most states require all contracts and offers of price and other terms to be in writing. Each counteroffer should be presented in writing to the seller or their agent. Make sure you keep careful notes during the offer process, and note any changes to agreements made with any involved parties. It’s easy to forget details in the heat of the moment.
Step Seven: Appraisal
If the seller is ready to move forward with your offer, the next step in the process is for a real estate appraiser hired by your mortgage lender to come up with his own value, which may match the contract price, or be higher or lower. To determine the property’s current value, an appraiser will consider recent sales of similar homes in the area and will compare those that have sold in the last six months.
The appraiser visually inspects the home’s features, noting the number of bedrooms, bathrooms, location, condition and other factors that could affect a home’s value. Measurements and photos are taken and then the appraiser prepares his report.
If the home appraises for less than the contract price, your lender will only loan the amount of money based on the appraised value. This means that you will have to put down more money to meet the shortfall. Fortunately, this rarely happens, but if it does, know that you can informally appeal the decision and ask the appraiser to reconsider.
Step Eight: Home Inspection
Once the appraisal is complete and you've negotiated a purchase contract, it’s time to hire a licensed home inspector to make sure the property is ready for purchase.
The inspector will examine all the systems and structural features of the property. This includes checking the home’s roof, chimney, porch and any decks or other exterior features. The inspector will look for structural cracks in foundation walls and floor problems, will inspect the home’s wiring and electrical system as well as the heating and air systems and will examine all the major appliances in the kitchen and laundry rooms.
The inspector will give you a final report of all structural elements, mechanical systems and rooms, and will list all the defects he discovers, which you should show the home seller when requesting repairs.
Unless a major structural defect is discovered, most items identified by the inspector can be addressed by asking the seller to repair problems before closing. The more repairs identified by the inspector, the more back and forth you can expect with the seller. Communities have varying ordinances and building codes that mandate correcting violations discovered during an inspection.
Step Nine: Closing
Time for the big day! Closing -- also known as escrow closing, or settlement – is when you go to the title company to sign your mortgage and other documents to transfer ownership.
At the closing, you’ll be presented with a dizzying array of documents required by your mortgage lender, the title company, and local and state agencies. Don’t be overwhelmed by the process, and ask any questions you want throughout. Essentially, closing works like this: the seller gives you the title in exchange for the contract purchase price. The seller also delivers a deed, title evidence and insurance, the property’s plat of survey and proof of any required repairs based on the home inspection. Once the funds arrive and the proceeds are distributed to the seller, title company and real estate brokers, you will have possession of your new home.
Start planning your housewarming party!