13 Steps to Buying a Home
Congratulations! The fact that you are reading this means that you are serious about changing your long-term financial trajectory. Whether you pay rent or make a mortgage payment, you are paying interest, property taxes and insurance. When you pay rent, you are in effect paying 100% interest for where you live and you are paying the property taxes and insurance for the property owner! Unless you are only living somewhere on a temporary basis, it makes better financial sense to purchase a home and start building equity into your future.
With our years of Experience and Knowledge, we can take you from “Can we afford to buy a new house?” to “We just bought a new home!”
The 13 Step Guide
We have put together this 13-step guide to help you navigate and understand to process of buying your new home. You could call it a house buying checklist. Each step includes choices to make, things to do and tasks to accomplish. Some are stressful, some are pretty cool and some are, well, kind of annoying. Each step is important and each step gets you one step closer to your goal of homeownership.
It may have been a while since the last time you purchased a home so consider this a refresher/check list.
If you have owned a home in the past but sold it and have been renting for the past three or more years, you will be considered a “First-time home buyer” again.
If you are not considered a first-time home buyer, you will need to put more money down on your new home than a first-time home buyer would, typically around 5%-10% minimum. Why a higher down payment? Because they are assuming that you will be selling your current home and using the equity that you have built up as a down payment on your new home.
Still, if you familiarize yourself with the process and what it takes to buy your home beforehand, it can help you navigate the real estate market with ease.
Step 1: Make sure you are ready
For most people buying a house will be the largest financial decision they will ever make and it can be stressful. Not to mention if you are also trying to sell your current home at the same time as buying a new one.
It is best to take a few things into consideration before getting started, such as:
- Is your credit score high enough to qualify for a Mortgage?
- Are you carrying too much debt to qualify for a mortgage?
- Do you have enough money for a down payment?
- Do you have the money for the Appraisal inspection?
- Do you have enough money to cover the prepaid expenses?
- Do you have enough money for your closing costs?
I want you to get a new home, but I also want you to be informed, educated, and as prepared as possible for the home buying process.
Step 2: Check your Credit Score
It is a good idea the check your credit score on at least an annual basis and you are entitled to a free copy of your credit report annually. To get a copy of your annual free credit report, just go to freecreditreport.com.
Let’s face it, everyone makes mistakes from time to time and the credit reporting bureaus are no exception. Read over your credit report to see if there are any reporting mistakes that could be negatively affecting your credit score. Because, the lower your credit score, the more likely you will be paying a higher interest rate to borrow money.
If you have a mistake or have hit a few bumps along the way, do not worry, this is all fixable and once things are fixed your credit score should increase.
Depending on your current score, you may need to pay down debts or otherwise improve your credit profile before you can buy a house. Mortgage lenders typically require borrowers to have a credit score of at least 620 to qualify for a conventional loan. However, some government loans will accept lower credit scores.
Credit Report – A report documenting the credit history and current status of a borrower’s credit standing (worthiness). Credit bureaus use several factors to determine the score and profile from your history of loans, payments, debts, balances, and length of time you have had a line of credit.
Credit Score – A credit score predicts how likely you are to pay back a loan on time. Companies use a mathematical formula—called a scoring model—to create your credit score from the information in your credit report. There are different scoring models, so you do not have just one credit score. Your scores depend on your credit history, the type of loan product, and even the day when it was calculated.
Your credit score is based on:
- Your payment history
- Current unpaid debt
- Length of credit history
- Percentage of credit used
- Type of debt and when it began
- New applications for credit
Step 3: Get your Finances in Order
Paying Down Debt
Getting your finances in order goes hand in hand with your credit score, because you may be carrying too much debt in the form of revolving credit (Credit Cards) and installment payments (Temporary loans. Think Automotive loans or personal loans).
One of the factors in determining how much money a lender is will to loan you for a house is your debt-to-income ratio. Lenders typically want to see that ratio below 49.99% and that will include your mortgage payment.
Debt-to-Income Ratio – The ratio expressed as a percentage, which results when a borrower’s monthly payment obligation on long-term debts is divided by his gross monthly income.
The typical debt-to-income ratio is 49.99% and will vary depending what type of mortgage you are applying for.
For example: If you are spending $3,000 per month on debt payments and your income is $5,000 per month, your debt-to-income ratio would be 60% ($3,000/$5,000 = 60% or .60). So, if you added a $1,200 per month mortgage payment to your current debit it would be $4,200 per month and your debt-to-income ratio would be 84%!
In order to get under the debt-to-income ratio required by most lenders, you would need to reduce your current monthly debts of $3,000 to no more than $1,299, if you are trying to make a $1,200 per month mortgage payment.
($1,299 debt + $1,200 mortgage = $2,499 monthly debt | $2,499/$5,000 = .4998 or 49%)
Do You Have Enough Money?
If you are selling your current home, hopefully you will get enough equity from the sale of that house to cover all the expenses involved with purchasing your new home. But if there is not enough equity you will need to have some extra savings or receive a gift from a family member to cover the difference.
If you are a first-time home buyer you will not have any equity from the sale of a house and will need to have sufficient savings or a gift from a family member to cover the costs involved with the purchase of a house.
Equity – Equity is the amount your property is currently worth minus the amount of any existing mortgage on your property. AKA the profit you would make from selling your current home.
Costs involved with the purchase of a new house:
- Down Payment
- Appraisal inspection fee
- Prepaid expenses (Home owners’ insurance and Property taxes)
- Closing costs (Title company fees)
It is possible that there could be other costs involved, but that is not always the case. Each and every home purchase is unique.
Step 4: Find a Mortgage Broker (Like Me)
What is a Mortgage Broker?
Mortgage Broker – A Mortgage Broker is an independent loan officer who acts as an intermediary to offer mortgage products from many different lenders. Mortgage brokers may work for a larger company or be independent and work for themselves. The mortgage broker takes the application from a borrower to determine which mortgage products from different lenders work best for their situation. By shopping their application around to different lenders, they can find the best rates and terms for their borrowers.
I have some GREAT news for you! If you are reading this, and you are wanting a home in Texas, then you have already found a Mortgage Broker. I have access to over 40 different lenders and will help guide you to and through the right mortgage for you. Consider me your experienced guide through the mortgage journey. That said, to complete this journey, you will need the necessary amount of funds, credit score, income and qualify for the mortgage that you are seeking. In the event (and it happens sometimes) that you do not have some or just one of the necessary items needed to complete your mortgage journey, I can help to guide you through that process as well. I am on your team! I do not work for the lenders; I work for you.
Step 5: Get Pre-Approved
It is assumed that potential home buyer should first contact a realtor before finding a mortgage broker. However, the reality is, the realtor will want to know whether you are pre-approved or not. If you are not pre-approved, the first thing they are going to want you to do is get pre-approval before they start showing you houses and bring them the pre-approval letter.
Pre-approval Letter – A mortgage pre-approval letter is a document from a lender indicating that you have the financial means to qualify for a certain mortgage amount. Getting pre-approved for a mortgage shows that you are serious about buying a home and that you can afford it.
The reasoning behind getting pre-approval before finding a realtor is twofold. First, realtors are busy people and they want to know if you are serious about buying a house. Secondly, they need to know how much you can afford so that they can put together a list of homes to show you that are within your price range.
The simple fact is, if realtors begin by showing potential buyers houses that they cannot realistically afford it can impact their home buying experience negatively. In many of cases potential buyers cannot get those houses out of their mind and the houses that are in their price range can seem inferior by comparison.
It is best to not get started on the wrong foot. Contact a mortgage broker first, get pre-approved and start shopping for house that are within your pre-approved price range.
Step 6: Find a Real Estate Agent
Find an agent you feel comfortable working with. I can refer you to some wonderful real estate agents who have years of experience and knowledge. You may also want to ask friends and family members for referrals as well, and interview several real estate agents.
A knowledgeable real estate agent can make the home buying process much easier, especially for first-time home buyers. Not to mention, working with an agent does not cost you a dime as a buyer!
A local agent can tell you if a home is well-priced, help you draw up a winning offer, negotiate a contract, and walk you through due diligence and closing. They will also be able to spot any potential issues that an appraiser/inspector may flag.
With a Mortgage Broker/Realtor team, you should not be confused about anything you sign, or have to nod and pretend that you understand everything we are saying. Ask questions if you do not understand something, that is one of the things we are here for. We will answer all your questions, and help guide you all the way through.
Step 7: Start Shopping for Your New Home!
This is the fun part! As a home buyer, you can peruse thousands of real estate listings on the internet or your agents own listings page, then ask your agent to set up appointments to see your favorites in person.
Since the sheer number of homes can become overwhelming, it is best to separate your must-haves from those features you would like, but don’t really need. Do you need two bathrooms or three? How many bedrooms do you want? Make a list of your wants and needs to get started, and whittle down your options.
Step 8: Make an Offer
Found your dream home? Then it is time to make an offer to the seller. Your real estate agent will walk you through the steps required to make an offer on a home in your area. If your offer is accepted be prepared to write a check to the seller, this is called an “Earnest Money Deposit” and it is different than the down payment.
Your Earnest Money Deposit will apply toward your down payment on the home and your offer should include contingencies such as an Inspection contingency, Appraisal contingency and a Loan contingency. Earnest money deposits are usually 1 percent to 3 percent of a home’s purchase price, depending on local custom and the pace of current market conditions (the faster the market pace, the higher the deposit). So, if you were buying a $300,000 home, the deposit would be $3,000 to $9,000.
Earnest Money – Earnest money is a deposit a buyer pays to show good faith on a signed contract agreement to buy a home. The deposit is held by a third party like a title company. If the home sale is finalized or “closed” the earnest money may be applied to closing costs or the down payment. If the contract is terminated for a permissible reason, the earnest money is returned to the buyer. If the buyer does not perform in good faith, the earnest money may be forfeited and paid out to the seller.
Expect some negotiation, and discuss a competitive offer with your agent. Who knows, you might even be able to negotiate for some Seller Concessions! You may also want to negotiate any repairs that might need to done as well.
Seller Concessions – AKA Seller Credit, Seller Contribution and Closing Cost Credit – Seller concessions can benefit the buyer by helping pay for closing costs associated with the loan, and they can benefit the seller by helping them sell their home faster. Seller concessions are considered a sales expense and are therefore tax deductible. The amount of a seller concession can range from 2 to 9% of the purchase price of the home, and is based on several factors including loan type and down payment amount. Is it better to ask for seller concessions or a lower sales price? It depends on your situation.
Step 9: Home Inspection
A home inspection is where you hire a Home Inspector to check out the house from top to bottom to determine if there are any problems with it that might make you think twice about moving forward. Think: termites, faulty foundation, mold, asbestos, etc. Sure, a lot can go wrong, but rest assured that most problems are fixable.
Is a home inspection required when buying a house?
While home inspections are typically recommended when buying a home, they are typically not required unless there is an inspection contingency in the purchase contract. The terms of some mortgages may require you to have an inspection. A home inspection is different from a home appraisal, which is almost always required.
Who is responsible for paying the home inspection fee and the cost of repairs?
The truth is, buyers may choose to schedule and pay for a home inspection to protect themselves before making a large home purchase, but proactive sellers may also choose to get the home inspected to fix major issues before going to market. Depending on several factors like market conditions and state laws, the person responsible for paying for the repairs after a home inspection may vary.
How much should you pay for a Home Inspection?
According to HomeAdvisor, the national average cost of a general home inspection is about $300 dollars. But that price can vary from $200-$900 dollars depending on the type of inspection and/or how remote the home is from a major population area.
Step 10: Get a Home Appraisal
Even though you are pre-approved for your home loan, your lender will almost always require a home appraisal. The appraisal is to ensure that the purchase price is in line with the actual value of the property. The lender is not going to give you $300,000 dollar loan for a property that is only valued at $200,000 dollars. It is like a home inspection, but for your lender. The Buyer almost always pays for the appraisal and it is paid for up front, before closing.
How much does a home appraisal cost?
The average cost of a single-family home appraisal is about $300-$450 dollars. But the appraisal costs can go as high a $1,500-$2,000 depending on how remote the home is from a major population area and if the appraiser is required to come back or not.
Step 11: Clear to Close – The Final Approval for the Mortgage
Clear to Close or CTC – A Clear to Close means the mortgage underwriter has fully vetted the borrower and the property. The underwriter issues a Clear to Close after they feel comfortable to instruct the closing department to prepare closing docs and wire the funds.
Sometimes mortgage underwriters can issue fresh conditions after reviewing the initial conditions from the conditional loan approval. There are instances where mortgage underwriters and processors can go back multiple times with updated conditions back and forth before the underwriter feels satisfied enough to issue the CTC.
The great news is the mortgage process leading to the home closing is quick and fast after the Clear to Close. As soon as the mortgage underwriter issues the CTC, the file is then transferred and assigned to the lender’s closing department and a closer is assigned to the file.
Step 12: Close on Your New Home.
Closing, which in different parts of the country is also known as settlement or escrow, brings together a variety of parties who are part of the real estate transaction, including the buyer, seller, mortgage representative, real estate agents and the title company.
Closing is the day you officially get the keys to your new home, and pay all the various parties involved. That will include singing final mortgage documents, making your down payment for your loan, plus closing costs, and the extra fees you pay to process your loan. Be sure to bring your checkbook!
Closing costs can be sizable, averaging anywhere from 2% to 7% of the home price.
Closing usually takes place in the offices of the title company.
Title Company – A title company is a firm that researches legal ownership claims on real estate. Title companies come into the homebuying process after an offer has been made and the property is under contract. They work to protect the buyer from fraud by making sure there are no outstanding liens or mortgages on the house so the buyer can be confident in their purchase.
Title companies also often maintain escrow accounts, these contain the funds needed to close on the home, to ensure that this money is used only for settlement and closing costs, and may conduct the formal closing on the home. At the closing, a settlement agent from the title company will bring all the necessary documentation, explain it to the parties, collect closing costs and distribute monies. Finally, the title company will ensure that the new titles, deeds, and other documents are filed with the appropriate entities.
Step 13: Move into Your New Home!
Done with closing? Got your loan? Got you keys? Congratulations, you officially have your new home! See, the process of buying a house was not so daunting after all, right? Now it is time to kick back and enjoy the many benefits of your NEW HOME!
