The homebuying process is a major undertaking for anyone. But it doesn’t need to be hectic.
In this article, we break down the whole process into 10 steps. A checklist for you to follow as you decide on your next house and close it. Let’s get into each one and see exactly what you need to go through to buy the home of your dreams.
1. Prepare a Budget
Before diving into the significant decision of buying a house, it’s crucial to ensure your financial foundation is solid. This process involves meticulously calculating all payments, taxes, loans, and related expenses to maintain a realistic perspective. While you might qualify for a substantial mortgage, it’s essential to assess whether committing a significant portion of your budget to housing aligns with your overall financial goals.
Additionally, checking your credit score is important. A higher credit score significantly enhances your ability to secure a lower mortgage interest rate. Understanding the mortgage options available based on your credit score is key. If your credit score requires improvement, it might be beneficial to postpone homeownership temporarily and focus on enhancing your score through strategic financial management.
2. Plan for the Down Payment
Once you’ve got your budget for purchasing a home down, the next step is to determine the amount you’d like to save for a down payment. While 20% down payments were the standard once, many homeowners now choose to put down less.
Going for a smaller down payment means less upfront money is required, but it also entails paying more in mortgage insurance, which typically increases monthly payments. Additionally, the type of home loan you select influences the minimum down payment required.
For first-time homebuyers or those returning to homeownership after a period, exploring state first-time homebuyer programs can be beneficial. These programs often provide financial assistance, including down payment support.
Furthermore, if you have a friend or family member who is financially capable, you may consider using gift deeds to supplement your down payment. However, it’s essential to know that rules regarding gift money acceptance vary based on the loan program utilized.
3. Decide on the type of house
Creating a list of must-haves and nice-to-haves for your new home is an exciting part of the process. Whether you’re seeking a starter home or envisioning a long-term residence, there are numerous factors to consider. Here are some key decisions to contemplate when compiling your list:
Housing Type
Decide between a detached house or an attached unit. If you prioritize having a backyard and prefer traditional single-family living, a detached house might be ideal. Conversely, if you prefer a lower-maintenance option or reside in a densely populated area, consider purchasing a condo or townhouse. Co-ops are also available in some cities, offering potential cost savings but may present challenges in financing.
Location Preferences
Determine your ideal location within the state, considering factors like safety, amenities (such as walkability, nearby green spaces, or access to amenities like coffee shops), and costs (including property taxes and potential homeowner association fees). Additionally, evaluate the school district’s quality, as it can influence the home’s value and impact resale potential, regardless of your plans for children.
Move-in Condition vs. Fixer-Upper
Assess whether you prefer a move-in ready home or are open to purchasing a fixer-upper. While a move-in ready property offers convenience, opting for a fixer-upper may allow entry into a pricier neighborhood or afford a larger house. However, be prepared for the investment of time, effort, and finances required to make a fixer-upper livable, ensuring you’re ready for the challenge it presents.
4. Understand Mortgage Options
The type of mortgage you choose to finance your home purchase significantly impacts your qualification requirements and repayment terms. Selecting the right home loan can increase your chances of approval and potentially save you money in the long term.
Before committing to a specific mortgage option, it’s essential to understand the benefits and drawbacks of each. Here are some of the main types of mortgages available:
Conventional Loans: Conventional loans are not backed by the federal government. They typically offer low minimum down payment options but have stricter qualification criteria compared to government-backed loans.
FHA Loans: FHA loans are insured by the Federal Housing Administration, making them easier to qualify for than conventional loans. However, they come with stricter requirements for mortgage insurance.
VA Loans: VA loans are provided by the Department of Veterans Affairs and are exclusively available to active or former service members and eligible spouses. VA purchase loans allow borrowers to make no down payment, providing significant benefits to qualifying individuals.
Jumbo Loans: Jumbo loans are designed for properties that exceed standard lending limits. They typically require larger down payments and higher credit scores due to the increased loan amount and associated risk.
For comprehensive guidance on mortgage financing and available options, refer to our article on mortgage servicing for detailed insights.
5. Find a real estate agent
Now that you know what kind of house you want and have sorted out the mortgage, it’s time to search for a real estate agent.
Choosing the right real estate agent can significantly impact your homebuying experience, from navigating the local market complexities to providing support during the search and negotiation phase.
Consider interviewing at least three agents to find the best fit for your needs. Seek recommendations from individuals who have recently purchased homes and inquire about their experiences with their agents. However, it’s important to avoid using the real estate agent representing the property you’re interested in purchasing. Instead, go for your agent who will advocate and negotiate on your behalf.
Typically, the buyer’s agent is compensated through a commission paid by the seller. However, you may be required to sign a representation agreement with your agent, outlining the terms of payment. While it’s rare for buyers to cover the commission, it’s essential to review the agreement thoroughly to understand your financial responsibilities, especially in unique situations such as purchasing a property being sold by the owner himself.
6. Go Look for Houses
Time to get out there and look for some houses now.
Don’t take this step lightly, as it may be your only chance to see a home in person before making an offer, especially in a competitive market. Especially, don’t let the seller’s agent, who may or may not be present, distract you.
Use your phone to take photos during the walk-through, aiding your memory when evaluating whether to proceed with an offer. While it’s easy to remember key features like a breakfast nook or a bonus bedroom ideal for a home office, potential issues such as aging appliances or deteriorating decking may slip your mind. These factors can influence your offer amount or serve as discussion points with a home inspector.
7. Time for an Offer
Once you’ve found the perfect home, it’s time to make an offer.
Your real estate agent can prove valuable here by offering comparable sales information and insights into the sellers’ situation, such as their motivation to sell. Depending on your location, you may also consider involving a real estate attorney, as some states require their presence in real estate transactions.
If the seller rejects your initial offer, you have the option to make a counteroffer or walk away, depending on the reasons for the rejection. Your agent can help navigate negotiations, ensuring your interests are represented.
If the offer is accepted, congratulations! However, there are still a few steps to complete. Typically, you’ll write your first check at this stage, known as earnest money. This deposit demonstrates your commitment to the purchase and is often placed in an escrow account. When the sale is finalized, earnest money is commonly used as part of your closing costs.
8. Getting the mortgage
You know the property you want to buy and how much you’ll have to pay for it. Now you’ll choose a mortgage servicer like Rocket Mortgage.
Be prepared for a paperwork-intensive process, as you’ll need to provide several documents for your mortgage application. Here’s a list of what you’re likely to require:
Pay stubs covering the last 30 to 60 days.
W-2 forms from the past two years (potentially more if there have been recent job changes).
Federal income tax returns from the past two years.
Documentation of other sources of income, including any gifted funds.
Recent bank statements, typically for the last couple of months.
Identification and Social Security number.
Information on long-term debts such as car or student loans.
Once your mortgage application is complete, it will go into underwriting. During this stage, the lender evaluates the application to determine whether to approve the loan, ensuring that the transaction doesn’t pose any risk to them.
9. Get a home inspection done
A good home inspection provides a comprehensive visual assessment of the property, covering everything from the foundation to the roof and all systems within the house. This inspection can uncover potential issues and necessary repairs that you may encounter in the future.
If you have specific concerns, such as mold or seepage, you may opt for specialized inspections in addition to the standard inspection. Additionally, if the property features amenities like a pool, it’s advisable to have that inspected as well.
It’s your responsibility to choose and pay for the home inspector. If the inspection reveals undisclosed problems, you may have grounds to negotiate with the seller based on the findings.
10. Finalize your new house
As you approach the final step of the homebuying process, familiarizing yourself with the standard closing documents is recommended.
Your lender is required to provide you with the closing disclosure at least three days before the finalizing date. This document outlines any changes in closing costs compared to the initial loan estimate, allowing you to understand the total amount of cash needed for closing.
Leading up to or on the closing day, you’ll conduct a final walk-through of the property with your real estate agent. Despite the excitement, it’s crucial to ensure that everything is in order according to the agreed terms. This includes verifying that all appliances included in the sale are still present and in working condition.
Conclusion
The homebuying process is tough, but we hope you get through it with this checklist.
If you, or anyone you know, is going to be buying a home in the future, make sure to share this with them. It is important to know all the details before you get into this long and tiresome process of homebuying.
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