6 Steps to Buying a Home

Buying your first house is a monumental life event. It should be a celebration. You’ve worked hard to plan and save. But if you’re not sure what to expect or how to prepare, you could find the experience overwhelming and stressful. Here are six steps to help you prepare to buy your first home.

Step One: Understand the Money Matters

There’s more than a down payment to consider when saving money to buy residential real estate. You’ll also be responsible for an earnest money deposit, closing costs, and your moving expenses such as utility deposits, moving trucks, boxes, and all the other costs involved with moving.

If you opt for a conventional loan, which is the most popular home mortgage loan, your down payment will be around 20 percent of the sales price of the house.

An earnest money deposit is estimated between 1-3 percent of the sales price of the house you’re making on offer on. You submit that deposit with your offer, signaling to the seller and the lender that you’re serious about the purchase. 

Closing costs add up to an estimated 2-6 percent of the sales price of the property. In other words, they’ll accumulate to several thousands of dollars. These costs include lender fees, escrow fees, attorney fees, appraisal, inspection, title check and transfer, property taxes, homeowner’s insurance, and other costs associated with your purchase. 

Rather than paying each provider individually, they do the work up-front, and you pay the fees collectively at closing.

Step Two: Know the Numbers

Your credit score should be about 620 or higher. A higher score equals lower interest rates.

Your debt-to-income ratio, your debt divided by your gross income, should be no higher than 43 percent, but 36 percent or lower for best results.

A lender wants to see a work history of at least two years with one employer. This lets the lender know that you’ve got a reliable source of income that isn’t likely to change.

The lender will run your credit, check your bank statements, and verify your employment when you apply. They’ll do it again near or on closing day. For this reason, it’s crucial that you do not finance anything, take out new credit or loans, and that you don’t change employment.

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Step Three: Find the Best Agent

Your agent will be a great asset from the beginning of your home-buying journey through the time when you get your keys. They have professional contacts with providers of services you’ll need, such as lenders, appraisers, inspectors, and more.

The agent will also help you know how much house your money can buy. They’ll help you shop homes that match your criteria, draft an offer for you, negotiate on your behalf, and will guide you through the closing process.

Step Four: Get Pre-Approved

Many first-time homebuyers make the well-intentioned mistake of shopping for their dream home before they’ve secured financing. There are several reasons that it’s best to get pre-approved before you start the house hunt.

Getting approved for a home mortgage loan is a time-consuming process. It’s best to get that part out of the way so that when a seller considers your offer, they know they can close faster. Furthermore, it tells the seller that you’re already financially prepared and able to buy.

Re-approval determines your home-buying budget. Without it, you won’t know what price point to shop in for your new house.

Your lender is largely responsible for the amount you’ll pay in closing costs. They’ll provide you with an estimated list of costs. Check-in with at least three lenders so you can compare their costs and terms and make an educated decision. With three estimates, you may also have a bit of bargaining power to negotiate lower costs with the lender of your choice.

Step Five: The House Hunt

Knowing what you can afford will help you and your agent look for homes that match what you’re looking for. 

Keep in mind that location drives home values, so the closer you are to schools, parks, restaurants, shops, and public transportation, the higher the houses will be priced. 

If fine finishes, bells, and whistles are more important to you, such as hardwood floor, stainless steel appliances, or granite countertops, you may have to sacrifice location and live further away from the amenities of living near the heart of the city.

Don’t attach to any one house emotionally. It’s easy to fall in love with a property and start imagining yourself living there. But several things could happen that could cost you the deal.

For example, the seller might choose another buyer’s offer, the appraisal could come back short, or the inspection could reveal issues. Don’t get too emotionally invested until they keys are in your hand.

Step Six: The Closing Process

During the closing process, all the professionals involved with your transaction go to work. The house is appraised and inspected, the title is checked and prepared for transfer, the loan is processed, and the seller prepares the house for you to take ownership on closing day.

If there are problems revealed with the appraisal, inspection, or title, then you have the right to ask the seller to reduce the price of the house. Another option you have is to ask the seller to fix the problems before you take ownership. And if the problems are bad enough, you have the right to terminate the contract, which would put you back at square one.

On closing day, you’ll attend a meeting known as “the closing table.” Many of the processes, however, can now be done digitally, such as signing documents and transferring funds.

At the closing table is when you’ll pay your closing costs, sign the final documents, and have the all clear to collect your keys and take possession of your new home.

Conclusion

Buying a house is hard. Make sure you’re financially prepared and that your credit score and DTI are ready. Find the right buyer’s agent to guide you.

Get pre-approved for your home loan, shop houses in your budget, and then be patient through the lengthy closing process.