This step-by-step guide will walk you through each step of the home buying process. Use it as reference and remember to ask your REALTOR® anytime you have questions. Your REALTOR® will help you through each step.
Buying a home is a complex and sometimes intense journey that is much easier when you’re prepared and have clear guidance and expectations. Use this step-by-step guide to help you through the process. Let’s get started!
PREPARE YOUR FINANCES
Preparing your finances is the first and possibly the most important step in buying a home. This is going to help you figure out exactly what price range fits within your budget before you begin looking at homes. This is important because if you begin your home search in a higher price range than you can afford, you are only setting yourself up for disappointment. Start preparing your finances from the very beginning and you’ll be ready for the next step. Take some time to review the following 5 important tips to help you through the financing process:
Know Your Credit History
If it’s been a while or if you have never looked at your credit report, now is the time for you to review it and make sure there is no incorrect information listed. It is easy to assume your credit is good enough to buy a house if you have never had a late payment, but if you don’t know what’s actually showing on your credit report you might be unpleasantly surprised. No matter what your situation is, you need to know your credit history at this point. Anything showing up on your credit report that is incorrect will be questioned by a mortgage lender, so if you find something that is incorrect, be sure to get it resolved before buying a house.
Calculate Your Debt-to-Income
Your debt-to-income ratio (DTI) is one of the most critical benchmarks a mortgage lender will consider when qualifying you for a loan. The DTI is a measurement that lenders use that compares your debt payments to your overall income. This measurement is one way that the lender will judge your ability to manage your monthly payments and repay the money you have borrowed. DTI is calculated by dividing your total recurring monthly debt by your gross monthly income, and it is typically expressed as a percentage. Most often, mortgage lenders don’t want your DTI any higher than 43%. However, there are exceptions to this rule.
Example: Your mortgage payment is $1,500 per month, your car payments total $750 per month, and credit card payments total $750 per month, then your total recurring monthly debt equals $3,000.For brevity we will assume that these are your only recurring monthly debts. If your income is $7,000 per month, your debt-to-income ratio would be 43% ($3,000 / $7,000 = 43%).
Monthly expenses that are not included in the debt-to-income calculation are typically payments that are not meant to repay a loan, for example cell phone payment, utility payment, cable payment, etc. However, payments such as child support and alimony are included in the calculation. Because this is such an important factor in qualifying for a mortgage, please ask if you are still confused or want more information.
Gather Key Financial Documents
When you apply for a mortgage, the loan officer will ask you for your 2 previous years’ tax returns, most recent 30 day paystubs and other employment verification forms, and at least 30 days worth of your most recent bank statements. It’s a good idea to have these documents easily accessible and preferably in an electronic form (PDF files are great!) before looking at homes. Some lenders may not ask for these documents until you are under contract, but if you cannot provide them in a timely manner, it could affect your ability to purchase the home. Take the time to have these key documents ready ahead of time and if possible get them to your loan officer before you put a contract on a home. The more information the lender has early in the process, the more likely you won’t run into a disappointing situation when you’ve fallen in love with your dream home.
Find a Mortgage Lender
Now that you’ve prepared yourself and know more about your financial situation by checking your credit, calculating your debt-to-income, and gathering your financial docs, you’re ready to begin narrowing down the mortgage loan officer options. There are MANY loan officers to choose from. Make sure you take your time and do some due diligence on the loan officers you’re talking to in order to find the one that works best for you. Closing costs, interest rates, ease of closing and speed of closing are all great topics to discuss with your loan officer. Most good REALTORS® will have lenders they’ve created good working relationships with that they can recommend. Make sure you contact several mortgage lenders to compare costs and personality types. The wrong mortgage loan officer can make the home buying experience miserable and difficult to the point of possibly losing the house, but having the right loan officer on your side can make your home buying process feel seamless and stress free. Make sure you choose one you are comfortable working with as you will be communicating with them frequently throughout your home buying process.
Obtain a Pre-Approval Letter
As you begin the process of making offers on homes, the best way to be viewed as a legitimate buyer in the eyes of a seller is to have a pre-approval letter from your lender. This gives the seller a sense of comfort that you can actually afford to buy their house if they accept your offer. Once you’ve gone through the steps above and you have chosen your mortgage lender, it’s time to get a pre-approval letter from them. Many lenders will complete a basic pre-qualification questionnaire without thoroughly investigating your finances. This could potentially cause major problems later when you are actually under contract to purchase a house. Make sure your lender of choice has thoroughly investigated your finances and is willing to issue a pre-approval letter to give an extra layer of comfort that your financing won’t fall apart later when you’re halfway into buying your dream home.
FIND A HOME
Now that you’ve prepared your finances to buy a home, the next step is to find one. This is the exciting part of the home buying process, but recognize that it can also be very exhausting. Follow the steps below to help find the best home that fits your needs.
Use a Good REALTOR®
Using a good REALTOR® is going to be your best decision when buying a home. A good REALTOR® is your best asset throughout this process. They will provide you with online tools that will keep you updated when new homes come on the market so that you are not missing out on your potential dream home. They will also help educate you on the home buying process and can provide you with good advice on how to respond in difficult situations that may arise. I have your best interests in mind when I tell you not to just hire the first REALTOR® you know or who you’re related to. Be sure to take your time to find a REALTOR® with strong credentials and a proven track record of helping people.
Research Your Local Communities
Which part of town do you want to live in? Do you have a specific school district that you need to stay in? What amenities do you want to be close by? Make sure to research local crime stats, school ratings, and area amenities to help determine where you would enjoy living. Keep in mind that these things will also affect the future resale value of the home. There are nuances to every neighborhood that you will want to try to familiarize yourself with to help narrow down where you can really see yourself living. It can take some time to research your community, so be patient and do your due diligence.
Use Online Tools
Once you have a good idea what areas you like the best, you can begin searching for all of the homes available in those areas. Home buying has become very interactive online in recent years. The tools available to you and me have vastly improved. It is very important to set yourself up to be notified anytime a new home comes on the market that matches your search criteria. If you need help being notified when houses come on the market, please contact me and I can set you up in our notification system. In a real estate market where there are more buyers than sellers, you need to be prepared to make an offer on a home quickly when you find one you like. Also, keep in mind that not all REALTORS and sellers take the time to prepare the house to shine online. Some homes will look better in person than online and sometimes homes can look better online than in person.
Look at Houses in Person
Once you’ve narrowed in on some houses that you would like to see, have your REALTOR® set up a time to view them in person. Your agent will handle all of the coordination and details. A good agent will provide you with a schedule of houses you will see and details on each house so you can compare them and take notes as you look at them. As you visit the homes, be sure to take notes, pictures, and even videos to help remind you of the details. As you look at several houses within a short amount of time, it becomes easy to forget individual aspects of the different homes. Make sure to tell your REALTOR® the things that you do and don’t like so that your agent can learn more about your styles and preferences as you look at more homes.
Make Your Offer
Have you found your perfect dream home? Now it’s time to make an offer on it! Your REALTOR® will be able to help you determine what a good offering price is by providing you recent sales data on comparable homes that have sold recently in the immediate area. This is a similar technique that any appraiser is going to use to determine the value later on in the process, so it’s a good idea to know what others are paying for similar properties. Each home will have different aspects that determine the value. Taking all of these aspects into account will help you present an offer that is fair, but strong.
GET THE KEYS
You’ve prepared your finances, found your dream home, and submitted an offer. Now what? Now it’s time to close on your new home and GET YOUR KEYS! The following steps need to be handled in a timely manner and your REALTOR® will guide you through each step. Use this section as a reference as you move through the final steps of buying your new home.
Negotiate the Deal
This step is going to be different on each and every deal you try to make. Once an offer has been submitted, the seller has to respond. Sometimes they will accept your offer as submitted, but this isn’t the norm. Often times the seller will send you back a counteroffer trying to renegotiate the terms of the deal you have submitted. This is perfectly normal and should not cause you any despair. At this point you will need to negotiate with the seller to come up with terms of the deal that are mutually acceptable to you as the buyer and also to the seller. Some common areas of negotiation are sales price, closing date, seller concessions, inspection deadlines, repairs, etc. Your REALTOR® will help guide you through all of your options and make everything clear. There are many different variables to negotiate on a sales contract, so take your time and think through your options. Once the deal is signed by all parties, it is very difficult to renegotiate the terms later.
Deposit Earnest Money
Once you have a signed and executed sales contract, you will need to deposit earnest money at the title company. Think of earnest money as a sort of down payment for the transaction. Seller’s want some sort of financial consideration before they take their house off of the market. The earnest money you deposit is at risk if you don’t live up to your side of the agreement, but depositing this money proves to the seller that you are a serious buyer and ready to purchase the home. Keep in mind, however, that you are not losing this money. It will be credited back to you at closing and there are protections built into the sales contract that provide you provision on how to get out of the contract without losing the money if the house has flaws that weren’t disclosed to you. This leads directly into the next step.
Most contracts are written with an inspection period to allow the buyer time to hire a home inspector and have the property thoroughly inspected. There are many different types of inspections, such as pest, structural, septic, water, and full home inspections. Having an inspection performed is one of the most important parts of the home buying process. Make sure that you allow plenty of time to get all of your inspections done within the days allotted in your sales contract.
It is a very good idea to schedule your home inspection at a time when you can be present to walk through the home with the inspector. This gives you the opportunity to look at the home in more detail than you did during your initial walkthrough and familiarize yourself with some of the subtleties you might need to know as the future homeowner.
Once the inspection is complete, your home inspector will issue a very detailed report with pictures and descriptions of any issues that they found during their inspection. If the seller has heeded my advice and performed their own inspection prior to listing their house for sale, then there may not be many repairs needed after your inspection. However, most sellers won’t complete an inspection prior to listing the house for sale and you will most likely have a list of repairs that the inspector is recommending to be completed. At this point you should consult with your REALTOR® to determine the best route to take to either get the repairs completed prior to closing or get a monetary adjustment to help cover the cost if you are going to complete the repairs after closing. This is all negotiable, however, and the seller may or may not accept your request for repairs. It is best to work with your REALTOR® to figure out the best way to negotiate this portion of the sales process.
Once you are past inspections, you are almost done!
The appraisal is one of the last steps in the home buying process. Mortgage companies require appraisals to verify that the appraised value of the home is equal to or higher than the loan amount they are providing. This is protection for the lender in case of a default in payments by the buyer. If the house does not appraise for at least the value required by the lender, then the contract will either be terminated or renegotiated. Be sure to have the appraisal ordered as soon as your inspections are done. Delayed appraisals are one of the main causes of late closings.
Closing on YOUR Home
You’ve prepared your finances, found your home, and made it through all of the contract negotiations and terms successfully. Now what? Your final step in buying a house is to close on YOUR home! Your REALTOR® should help you schedule a closing date and time with your title company. You will be required to bring your driver’s license (or passport) and any money that is due to closing. Check with your title company to make sure you present any money in a form that is acceptable to them. Often times a title company will want you to send a bank wire for any amount due and most will not accept any cash payments. Make sure you get a copy of the closing settlement statement ahead of time so you can review it and check for any inaccuracies. If you have questions about the settlement statement, please feel free to discuss this with your REALTOR® and the title company BEFORE you sign any of the documents.
Once both parties have signed all of the documents and the mortgage company has funded the loan, you will be given the keys. You are now the proud owner of your new home. CONGRATULATIONS!
The home buying process can seem complicated, but working with a good REALTOR® makes the process much easier. Your REALTOR® will keep you on track and make sure that every step of the process is handled correctly and in a timely manner. Happy house hunting!
About the Author:
Hi there! I’m David Carpenter, a REALTOR in New Braunfels, TX and an associate with NPL Group. Real Estate is my passion! I truly enjoy writing useful articles for home buyers and sellers to help simplify the real estate process and provide a visual guide through one of the most complex times of your life. Feel free to contact me directly or leave a comment in the comment section below.