When it comes to buying a home, there’s often as much stress as there is excitement. Understanding how the home buying process works can make things a little less scary, so we’ve broken it down into the basic steps.
Determine a household budget
Don’t start shopping until you’re sure how much you can afford. Start by reviewing your monthly income and expenses. Then, add in any new costs associated with owning a home – like property taxes. Remember, some expenses are the same whether you rent or purchase a home, such as utilities, phone, cable, etc. Other expenses will be replaced by different, or possible higher costs, like transportation, appliances, or repairs.
After you’ve had a first run at coming up with a house-hunting budget, consider attending a first-time homebuyer class and consulting with a financial professional to help make sure you’re on the right track.
Compare the finances of renting versus buying
In general, renters have less home-related items to pay for and less unexpected costs that they need to cover, so if you’re thinking about buying, then you’ll want to be sure that your budget includes things that you may not be used to paying for.
We’ve listed a few financial considerations to consider below.
Renting a Home:
- Generally renters are not responsible for substantial maintenance or appliance repair costs.
- Renting typically requires a security deposit, and first and last month’s rent.
- Monthly rent is not protected from future increases.
- Renters are not responsible for property taxes or property hazard insurance.
- Monthly rent does not build equity in the home or provide income tax advantages
Owning a Home:
- Owners are responsible for all repairs and maintenance.
- Monthly payment of principal and interest will be fixed IF you take out a fixed-rate mortgage with your lender – which means you’ll know exactly how much you’ll spend on a mortgage each month.
- Responsible for payment of property taxes and hazard insurance – these can increase over time.
- Provides equity through appreciation of value and may have income tax advantages (check with your tax advisor).
- Costs to sell home and purchase a new home, ie sales tax, capital gains tax, etc.)
Shop for a mortgage lender
After you’ve worked through the initial finances and decided buying a home is right for you, it’s time to shop for a lender. We recommend attending a first-time homebuyer seminar and asking your friends and family that have recently bought homes about their experiences. After you’ve identified some potential lenders, it’s a good idea to get at least three different financing quotes to consider.
Apply for credit
After you’ve obtained different quotes for financing, it’s time to start the loan application process. Each lender’s requirements for applying for a home loan are a little different, but here’s how the process usually works:
- Borrowers complete the Uniform Residential Loan Application;
- After the borrower signs the loan application, requests to proceed AND identifies a property, the lender will provide a loan estimate within three business days;
- Your mortgage lender will ask you for additional documentation, depending on their requirements and the type of mortgage loan you’re applying for.
Receive a credit approval document, if applicable.
A credit approval letter or document provides basic information to help you move onto the next step of buying a home; the document includes your maximum loan amount based on your qualifications, term of the loan, and / or mortgage type and the expiration date of the credit approval (usually 60 days). Every lender’s credit approval process is different, so some will have different conditions than others, for example, some may require a recent paystub or other documentation.
Credit approval processes and requirements vary by lender, but most realtors will require that a borrower receive some type of credit approval BEFORE they shop for a home. This lets all parties involved in the transaction know what type of mortgage money that you, the buyer, are approved to borrow.
Select a realtor or broker
How do you decide which realtor to work with? Interview at least three realtors using the following sample criteria:
- The neighborhood (s) you want to live in – think about schools, shopping and freeway access.
- Expertise with your profile of a homebuyer – first time homebuyer, price range, etc.
- Experience in your type of transactions – years of experience and honors / award.
Negotiate a purchase and sale agreement for your new home
An experienced realtor should be able to help you navigate this important step. In general, you’ll want to consider the purchase price, the closing date and earnest money deposited when making an offer. Here are some questions and considerations that might influence these three factors.
- Do repairs need to be completed?
- Are furniture or appliances included?
- Will the seller be paying for any closing costs?
The Closing Date
- Closing dates typically require a minimum of 30 to 60 days.
- Sellers generally prefer shorter closing dates
- Buyers depend on their lender for the time required to close the financing.
Earnest Money Deposit
- Earnest money refers to a buyer’s deposit that accompanies a buyers’ offer; earnest money demonstrates a good faith commitment to the seller.
- Typically 1-2% of the purchase price.
- Sellers often consider a higher earnest money deposit as a measure of the motivation of the buyer.
- If the buyer’s offer is accepted, the deposit is usually held by the escrow or closing officer.
Inspect your home
Why the need for an inspection? As a buyer, you want to be sure you’re getting what you paid for, and sellers want to be sure they’re in the clear if problems arise after the home was sold. Unless you agree to different terms, in general, the buyer pays for the home inspection of the exterior and interior of the house.
Home inspectors are licensed and / or certified by state or local associations and their report may result in additional negotiations. In general, we recommend never waiving the inspection contingency. (The risk of not uncovering potential repair issues or defects is not worth a short-term savings of time or negotiating advantage.)
Complete the final steps from your mortgage lender
This typically includes a deposit to cover the cost association with the processing of the loan application, the appraisal of the property, title insurance and flood certificate. Depending on the lender’s process, you’ll also usually lock in your interest rate and firm up any underwriting steps and a transfer of funds through escrow.