Step by Step Home Buying

Buying a home is a long and complicated process. Find out how to research homes, hire realtors, negotiate with lenders and prepare an offer.

For many individuals, the biggest purchase they make in their lifetime is a home. The cost of homes varies greatly depending on where you live as well as your needs. Even if you want to buy a modest home in a less expensive state, you can expect to spend over $100,000. Few homeowners are financially secure enough to purchase a home outright. Instead, they place a down payment on the house and cover the rest of the costs with a mortgage loan. 

Because it is such an important purchase, you do not want to rush into buying a home. There are many steps you need to follow, and it will take time and effort to perform all the necessary research. The process may seem intimidating, but if you break it down into individual steps it becomes much more manageable. Listed below are all the necessary steps and advice to purchase your first home.

Understanding your Finances

Before you even begin to look at houses, you need to look at your finances. Your financial health is the biggest determining factor in what loans are available for you. It has the biggest impact on your mortgage rates, which will become one of the largest parts of your budget. 

A common area many buyers overlook is their savings. It is strongly advised to wait until you have an emergency savings account to cover at least three months before you consider buying a house. Paying your mortgage is expensive, and if there is ever an unexpected financial change, you must know you can cover your expenses. Having an emergency savings account also looks good to lenders. It shows financial responsibility, which signals you are ready for a monthly mortgage.

Next, you want to look at your credit score. For most lenders, whether you are eligible and the rates you receive is determined by your credit score. Your credit score provides a detailed breakdown of your general spending, whether you have outstanding debt, how much you borrowed in the past and whether you frequently missed payments on previous loans.

Each lender sets different credit requirements. Typically, you need at least a score of 620 to even be considered for a loan. For the best rates, real estate experts recommend a score of 720. There are some options available for applicants with low credit scores, such as government loans from the Federal Housing Administration (FHA).

Normally, you must pay for a credit report. However, each year the major bureaus like, Experian, TransUnion, and Equifax are legally required to provide a free credit report upon request. In addition to looking at your score, make sure the report is accurate and up to date. If you notice there are incorrect items, such as a listed credit card you previously cancelled, report the error to the bureau.

Finally, take the time to plan a budget. Review all your monthly spending and get an idea of how much you have each month to pay your mortgage. Make sure you also take into account how much you will pay in utilities for your new home, especially if you are coming from an apartment or other location where these costs were factored into your rent.

Getting Pre-Approved

Once you know the type of house you want to purchase, the next step is getting a lender. Unless you are lucky enough to pay for your house in cash, you must get pre-approved by a lender. In order to get pre-approved, you must meet with the lender and present your financial history. Lenders look at your credit score, bank statements and current assets. If they do not spot any risks, you will receive a letter of pre-approval. The letter states how much you are eligible for and is presented as proof you can afford the house you are interested in.

Hiring a Realtor

While it is not required, most homebuyers hire a real estate agent, especially if it is their first purchase. Real estate agents act as guides, answering all your questions and helping to find suitable homes based on your criteria. They will also help you with negotiations and can make recommendations for mortgage lenders.

Finding the Right Home

With so many homes to choose from, it helps to narrow your selection by identifying the most important aspects of your house. Start with the basic details, such as the number of bedrooms. Do you want a big yard? Are you comfortable being close to your neighbors? Do you want a one- or two-story home? You can also look up what locations are close to your home. For many, the distance from work to home is a major consideration, as well as what schools are in the area. 

A good way to start your search is through real estate websites, such as Zillow, Realtor or Trulia. These sites not only have extensive listings, but you can filter your results based on your needs. If you are having trouble thinking about what features you want in your house, look through some of the listings to get a feel for what aspects are commonly highlighted.

Make a list of homes you are interested in. Do not make the mistake of zoning in on one specific house, otherwise, you risk getting drawn into a bad deal because you have no other options. Whenever possible, get a tour of the house in-person. Speak with the realtor about the property and do not be afraid to ask questions. During the tour, make a note of what aspects of the house you want to change, or areas that need repairing. Try and factor these into your overall budget.

Making an Offer

Once you finally find the house you want, the next step is making an offer. During this process, either you or your realtor negotiate with the seller to determine the final price. Some considerations include how much the other properties are valued and whether the property needs repairs. Closing dates are also discussed, which determines when your payment is processed. Most closing dates take place within 30 to 45 days, but you may be able to rush this process if the seller agrees. Your payment is placed in escrow until the agreed upon closing date. This allows you to pull your payment if there are any unexpected issues with the sale.

Before the closing date, schedule a home inspection. This ensures everything in the house is currently up to code and there were no damages or other issues not listed by the seller. If the house passes the inspection, the final step is to complete all the paperwork to formally purchase the property and release your payment.