Buying a house isn’t as complicated as most people think. The first step is to go to a local mortgage lender or online and get pre-approved for a home loan. The amount you are pre-approved for will tell you and everyone working with you how much house you can afford.
First 7 Steps to Buying Your Home
First off congratulations on deciding to purchase a house, one of the biggest investments you will make. To help guide you through the home buying process you need to put together a strong team that will help you with your steps.
- Mortgage Lender- The first step most Realtors will tell you is to get a pre-approved or qualification letter from a mortgage loan. This letter will give you and everyone working with you an idea of how much house you can afford. More on this later in the post.
- What can you Afford- Even though a mortgage lender may tell you you qualify for a $350,000 house you need to decide how much you can afford to pay each month. If you’ve been paying rent for the last 2-3 years that is more than your house payment would be, you should be good. Zillow has a good affordability calculator and your lender can give you an idea what your monthly payments will be.
- Start Saving- Even with no money down loans like VA and special HUD programs, you will still need earnest and closing cost money. Your mortgage lender or Realtor can give you an estimate of closing costs. Stop making big purchases and keep an eye on your credit.
- Determine What You Need and Want- Decide on what kind of house your want. How many bedrooms, bathrooms, square footage, garage, yard size, area of town, fenced yard, close to where you work or schools. This will help you narrow down your search from the thousands of houses on the market.
- Find the Right Realtor- Not just any Realtor but the right one. Not all Realtors are created equal. Get references from friends, family, people you work with, people you go to church with, etc. The right Realtor will guide you through the whole process from start to finish.
- Start Looking at Houses- Your Realtor will provide you with a list of houses and can set up search fields that will automatically notify you of newly listed homes. Another good source with links is Zillow, Trulia, and Realtor.com. Drive by the houses you are considering on your time without pressure and set up showing with your Realtor for the ones you like. It’s a good idea to drive by in the evenings also, when most people are home, it may not be as quiet as it was during the day.
- Make an offer- You found your dream home or close to it, work with your Realtor in determining the market value of the house and make an offer. This might go back and forth a couple times, with counter offers, so don’t let that worry you it’s a normal part of the process.
Key Players When Purchasing a Home
Mortgage Loan Officer– This should be a local bank or credit union. A place that you can talk to a real person face to face, drop off papers and get questions answered quickly. They get credit approval, loan application, and will guide you through the financing process.
I personally don’t like online mortgage lenders even though some are great. The problem we typically see is a lack of communication and questions not answered in a timely way. They are processing so many loans you are just another number. We typically see a lot of delayed closings and frustration because each phase of the loan is passed on to another person.
Real Estate Agent- Searches for homes, negotiates contract for the purchase of your home, serves as your expert guide in the entire process, attends closing, is available 24/7 to answer any questions or concerns you may have. The best part is they are typically paid by the seller of the house.
Home seller/owner- Hopefully a motivated seller, is the current legal owner of the property who will negotiate with you on price and terms. They may be a for sale by owner or represented by an agent that will help them through the process.
Home inspector- Inspects your future home, in accordance with regional standards, for any structural or maintenance issues. Gives a detailed report with photo’s and will conduct a re-inspections if repairs are needed. The buyer pays for the inspection so they work for you. You can meet them at the end of the inspection to get results face to face.
Termite WDO Inspector- In accordance with state and county guidelines, inspects your home for wood destroying organisms (WDO). Here’s a link to a post I wrote about WDO’s. Typically the buyer will pay for this but it’s negotiable.
Appraiser- Determines your home’s current fair market value. This is an apples to apples comparison and is all about managing risk for the lender. The buyer will usually pay for this at closing.
Surveyor- In accordance with the legal description of your property, the surveyor marks the four corners of your lot and draws house placement on the property as well as other structures like fences.
This is required by the mortgage lender to make sure there isn’t any encroachment to other properties. In some cases the seller may have a copy of an old appraisal that can be transferred to save you around $600, if not the buyer typically pays for this at closing.
Home Owner’s Insurance Agent- Insures your home against fire, floods, wind, etc. Talk to your mortgage lender or agent to get a list of references. Do not show the home inspection to your insurance agent. They will want you to repair every cracked light switch cover and loose tile.
Title Company- The role of a title company is to verify that the title to the real estate is legitimately given to the home buyer. Essentially, they make sure that a seller has the rights to sell the property to a buyer.
Once a title insurance company has done its verification, it will back that guarantee with title insurance, which protects the lender and/or owner in the event that someone comes along and makes a claim to the property in the future.
The title company is usually responsible for conducting the closing. It will maintain escrow accounts where your closing costs are kept until the day you close your loan. In some cases, the company that handles closing and the company dealing with title and title insurance will be different.
Related Thoughts for Buyers
When searching for properties look for houses $5,000-$10,000 above your pre-approval price. The price you see on a listing is asking price not necessarily what the house will sell for. Around my local area houses sell for 98-96% of asking price. A house that is listed for $200,000 would sell for $192,000.
How much you can negotiate with the seller will depend on the type of market. There are three types of market: buyer’s market, seller’s market, or a balanced market. A seller’s market means there aren’t enough houses compared to buyer’s, in other words the seller has the upper hand. A buyer’s market means there are more houses than buyer’s, so the buyer has the upper hand. Balanced mean it basically even.
Home inspections are an optional but recommended, average cost is $450-$500. This is well worth it to find out what’s wrong with a house that you will have for a long time. A home inspection is different from an appraisal but if it’s a VA or FHA loan the appraiser will list items of concern that need to be repaired. This is a good video from Jeb Smith on the difference.
It’s very common for first time home buyers to ask for closing costs in the offer to purchase a house. You are considered a first time home buyer if you haven’t owned a house in the last 3 years, here’s a HUD link that explains the qualifications. Talk to your mortgage lender about the various options and your current situation. They can match you with the best financing options.
A lot of buyers ask what happens to the Earnest money deposit (EMD) during closing. You don’t loose the EMD, it goes into the closing costs, loan or in some cases paid back to you. Typically an EMD is 1% of offer price so if the offer is $150,000 your looking at $1500.
Your mortgage lender should give you a pre-approved or qualified letter for you to show your Realtor and accompany any offers you make. This shows you are serious about purchasing a home and what your limit is. Just because you are pre-approved doesn’t mean you are guaranteed a loan, the lender will usually state that in the letter. There’s a lot that goes into the mortgage loan process but your lender will guide you through it.