Buying a home is an incredibly huge step in a person's life. There is a sense of pride that goes with home ownership, and being able to turn a dream into reality is very satisfying. After all, a home is a big financial commitment and usually a long-term one.
The idea of finding your dream home may sound like a lot of fun. However, when you dig into the details of buying a home, you may feel overwhelmed.
But - it doesn't have to be stressful. Everything you need to know is in this comprehensive guide, from your offer letter to closing.
When you first begin thinking about buying a home, it helps to have an idea of the features you want. How many bedrooms and bathrooms do you want? Do you want to be in a certain school district or near any amenities?
If you haven't already done so, make a list of your "must-haves" and "nice-to-haves." This will help you narrow your search. With your features in hand, you can start with online searches to get a feel for the price range for homes that meet your criteria. This is important for the next step in the process, which is financing.
The most popular way to find homes for sale is through online searches. You can view photos of homes for sale and sometimes see 360 tours of the interior. You can also find homes through word-of-mouth, neighborhood groups, or referrals from friends.
Don't fall in love with a home just yet. At this point, you are trying to see what is out there so that you can answer a very important question: how much house can I afford?
Once you have an idea of the price range for a house, your will need to begin talking with a bank about financing. This is a critical part of buying your home. You want to make sure that financing is available in the amount that you need when you are ready to put in an offer on a house.
You can start with local banks in your area and some phone calls. Call the bank and ask to speak to a mortgage lender. You can ask some basic questions to compare potential mortgage loans.
Mortgage interest rates can change daily, so it is important to call the banks on the same day to have an accurate comparison. You can also ask if the interest rate includes "points." Points are fees paid in exchange for a lower interest rate.
Ask friends or colleagues if they have had a good experience with any banks in your area. You want to have a smooth loan closing, and the bank you choose can make a big difference.
You can't apply for a loan just yet, but you can go through a process known as a pre-qualification. The bank will take your loan application and let you know if the loan would likely be approved in the future.
You'll let the bank know how much you think you want to borrow. This amount is the potential purchase price, minus your down payment. The bank will let you know if you qualify for the requested amount based on several factors:
Each bank handles its loan approvals a bit differently. However, ultimately they are looking at whether or not you can afford the house based on your income and your other debts. This is known as a debt-to-income ratio.
They also use your credit report to see if you have a history of making timely payments. If you have been late on payments in the past, it makes banks nervous that you might not pay your new home loan on time. Lower credit scores can also impact the interest rate that you receive.
Each bank has its own home loan programs. Most common are home loans for 15, 20, or 30-year terms. If you select a longer term, your interest rate will be lower, but you will also pay more in interest over the life of the loan.
Banks will also offer fixed-rate or adjustable-rate mortgages. Fixed-rate means that your interest rate cannot change over the entire term of the loan. An adjustable rate means that your interest rate - and monthly payment - will change.
Many banks also offer conventional loans that are backed by Fannie Mae or Freddie Mac. These are government-sponsored enterprises that make home loans widely available to potential homeowners. Your bank would submit your home loan application to Fannie Mae or Freddie Mac for approval.
To receive your pre-qualification, you'll need to submit a home loan application. This can be done in-person, or the bank may have an online portal.
With your application, the bank will require some initial documentation. Typically, you will need to provide proof of income, such as pay stubs or tax returns. You'll also need to provide bank or brokerage statements showing how much you have in your accounts.
If everything meets the bank's underwriting standards, you will receive a pre-qualification. The bank can issue a formal letter saying that you are tentatively approved for a certain loan amount. This is often needed when you submit an offer on a home to show the seller that you have financing lined up.
Once you have your financing lined up, you can continue your search for the right home. This time, you can start to look more closely and schedule times to see potential homes in person.
While you can look for a home on your own, the process will be easier if you use a real estate professional. There are laws and a lot of documents involved in a real estate transaction. A professional can guide you through the different steps.
There are different types of real estate professionals.
Both real estate agents and brokers can be members of the National Association of Realtors. Membership binds them to a code of ethics.
As the buyer, working with a real estate professional will not cost you anything. The seller pays the commission if the seller is working with an agent.
Real estate professionals handle the legal requirements of the transaction, as well as the logistics. They will schedule showings on your behalf and negotiate an offer.
When you find that perfect home, your real estate professional will draw up an Offer to Purchase to present to the seller. In the offer, you will list the purchase price you intend to pay. The seller then can accept, reject, or counter your offer.
If you opt not to work with an agent or broker and the seller has an agent, the seller's agent will draw up the offer. While the seller's agent, in theory, is representing you, you do not have the benefit of someone negotiating on your behalf.
The purchase price can be tricky. Your real estate professional can offer some guidance around the sale price of similar homes in the area.
In a hot real estate market, the seller may have competing offers. In this case, you may need to offer more to make your offer the most attractive. However, if everything is relatively stable, you can offer a fair market price or lower to leave room for negotiation.
Your offer may include contingencies or conditions to purchase the home. It is common for offers to be contingent on passing a home inspection. And while you will already have your pre-qualification for a home loan, your agent will add a contingency on financing in case something happens during your loan's final approval.
If you find a home that is FSBO, the transaction will be a bit different. For starters, if you are working with a buyer's agent, you will need to negotiate payment of your agent's commission from the seller's funds. Otherwise, you will be responsible for your agent's commission.
You could negotiate an FSBO offer without an agent, saving both you and the seller the commissions involved in a transaction. However, in this case, you would likely want an attorney to go through the documents. In some states, you may even be required to have an attorney.
If the seller accepts your offer, congratulations! Now the process beings of moving toward closing and transferring ownership of the home to you.
Your offer will include earnest money, which is an amount you put down to show the seller that you're serious. Your earnest money is part of your down payment.
Earnest money is a good faith deposit that you intend to purchase the home. If you decide to cancel the transaction without a valid reason, you will lose your earnest money.
If the seller rejects the offer and does not offer a counter-offer, you have two choices. You can go back to the seller with an improved offer, for example, at a higher purchase price. Or you can walk away and continue your search for a home.
Once you and the seller enter into an agreement, a lot will need to happen to prepare for closing on the house. After all, legal ownership of the property is changing hands. Your real estate professional can help with some of the moving parts.
The accepted offer will state that the loan closing must occur within a certain timeframe, such as 30 to 45 days. This is so both you and the seller can plan for your upcoming moves. It also puts everyone involved on the same page regarding the closing date.
You will need to provide your accepted offer to your bank. At this point, your pre-qualification becomes a loan application that the bank will formally approve. You will lock-in your interest rate, which means that your rate is set for your loan even though mortgage rates change daily.
The bank will then begin the process of underwriting your loan. You will likely need to provide far more documentation than you provided during pre-qualification. If your offer was contingent financing, formal loan approval is required for the transaction.
Your bank will order an appraisal on the property, which is an assessment of the home's value. An appraiser is a licensed professional who provides an objective and unbiased estimate.
Appraisers will look at recent home sales in the area and the condition and features of the home, to arrive at the appraised value.
A home inspector looks at a home's foundation, roof, HVAC, plumbing, and more. The inspector will provide a condition report, noting any deficiencies.
If your offer to the seller was contingent on a home inspection, anything found could bring you back to the table. For example, you may require the seller to make a repair in order to remove the inspection contingency. You may also re-negotiate a lower price if you need to make the repairs after closing.
You can buy a home without doing an inspection, but it is a big risk. Homes may need significant, costly repairs that are not obvious during a walk-through.
Part of your transaction will include title insurance. A title company searches public records on the property for any claims. The seller's mortgage is a common claim on the title, but claims can also include judgments or other liens.
You want your purchase to have a "clean" title. Any liens against the property stay with the property, no matter who owns it. You will work with the seller to ensure any liens are removed before closing.
Critical to the purchase of your home is your homeowner's insurance. Not only does insurance provide you with financial relief in case your home is damaged by a fire or natural disaster, but it also pays out if you're held responsible for an accident that occurs on your property.
Your bank will require homeowners insurance. You need at least enough insurance to cover the value of the property. An insurance agent can help you determine how much insurance you need for liability and your personal possessions.
While many people are working in the background to meet the loan closing requirements, you will be working on preparing to move.
You are responsible for setting up the utilities in your new home. You can get information from the seller, but you'll need to reach out to the utility companies. You'll provide your closing date so that the companies know when your legal ownership of the property begins.
Common utilities to set up include:
If you plan to hire movers, you can begin to coordinate this effort as soon as you have a closing date. Because you cannot begin to move in until the closing has occurred, you may not be able to have movers come the same day. However, you can schedule for a day immediately following if you are ready to go.
Moving companies will usually provide a quote based on an assessment of your belongings. If you are moving across state lines, the price is often based on estimated weight.
Moving companies provide supplies, such as boxes or furniture protectors, but these are also items you can get on your own from stores. You can also see if any neighbors or friends have moved recently and have boxes you can re-use.
While this may seem minor, a change of address is actually a big task. Think of every company that has your address on file: your bank, your credit card companies, your car loan. The list goes on and on.
Any statements or other information that comes in the mail needs an address change. You will want to time this so the mail will go to your new address after closing. You can also set up a mail forward with the post office so that anything that is missed will be delivered to your new address.
The day is here: closing day! All of your work over the prior weeks and months have culminated in your new home's closing.
Closing will often take place at the title company or an attorney's office. There are a lot of people involved, but they may not all be at closing at the same time. Closings typically include you, the sellers, the real estate agents for both the buyer and seller, attorneys, title insurance agents, and the lender.
Whether an attorney is at closing may depend on your state. Some states require an attorney to be present at closing. In other cases, you may opt for an attorney.
Attorneys ensure that there are no legal issues with the underlying transaction. They have an obligation to represent your best interests.
The morning of closing, you will do a final walk-through of the home, usually with your real estate agent. You want to make sure that the sellers did not damage anything when they moved out.
Your closing will include a large stack of documents that need to be signed. These documents cover the transfer of ownership, as well as the bank's loan documents.
The final amount due from you at closing will be your down payment, plus any closing costs. Closing costs include your appraisal, inspection, and title insurance fees, as well as any closing fees from your bank.
You'll also receive some credits from the seller. For example, the seller needs to pay property taxes until the date of closing. This, along with some other costs, such as homeowners association dues, will be prorated on your closing statement.
You will also need to have an insurance binder at closing, showing that your property is covered by homeowners insurance, effective from the closing date.
Once your closing documents are signed, you will receive keys from the seller. You can breathe a sigh of relief that all of your hard work has paid off.
Even if you do not begin moving immediately, drive to your new home and take a photo to commemorate the day.
Can an accepted offer fall apart?
Unfortunately, yes it can. Any number of issues with the appraisal, inspection, or financing can cause a deal to fall apart.
What is escrow?
If you don't have a large down payment, the bank may require you to escrow. Escrow means that the bank will collect monthly amounts for your homeowner's insurance and your property taxes. The bank then makes these payments on your behalf.
What is private mortgage insurance?
Also for scenarios where you don't have a large down payment, private mortgage insurance (PMI) reduces risk to the lender. It is an amount that will be included in your monthly mortgage payment until you have enough equity in your home.
Should you schedule a cleaning of the home?
Ultimately, this is your preference. When you do the final walk-through, you'll get an idea of how the sellers left the house after moving out. A deep cleaning may also go a long way in making you feel like the house is "yours" but you can also do the cleaning yourself.
While buying a home is a lot of work, remember that it is a short amount of time compared to your overall home ownership. You can use this real estate guide to follow the steps of the process. Know that each completed task is one step closer to home ownership.