So, you’ve finally decided to cash in on the American dream and buy your first home. After taking a second to pat yourself on the back, you may begin wondering ‘now what?’
Buying a home involves a lot of careful decisions and you should become familiar with the process and do a bit of research before diving in.
With that in mind, this article will give you an outline of the steps you will need to take before, and after, signing on the dotted line.
1) Start Saving Your Down Payment
Experts say that it takes most people 6 ½ years to save up for a 20% down payment on a home. Of course, this can vary depending on your financial situation. You may also be able to get loans with lower down payments, but these could mean higher payments in the future.
One of the best options for a first time homebuyer might be an FHA Loan program which only requires a 3.5% down payment. This is a program I used to buy my first property at the age of 21.
In any case, potential homeowners should start stashing away a bit of money every month way before they are thinking of buying. There are several online budgeting plans that can make saving easier.
2) Research Your Local Housing Market
Once you have saved up for a down payment and figured out what kind of property you are looking to buy in terms of size, price, type and location, start browsing real estate listings. This will give you an idea of what to expect but more than that, while you’re looking around, pay attention to how long these houses are staying on the market and any changes in asking prices.
3) Budget For Your Mortgage Payment – How Much House Can You Afford?
Most lenders recommend that people look for homes that cost no more than three to five times their annual income if they are doing a 20% down payment and do not have considerable debt. However, everyone’s financial situation is different. Fortunately, there are affordability calculators available online that can help you determine how much you can afford.
4) Get Pre-Qualified and Pre-Approved; Work with a Lender Or Mortgage Broker
Before looking for a home, it’s important to get pre-qualified and pre-approved. This will give you an idea of how much you can actually afford to spend given your credit score and your overall financial health.
It will also let sellers know you are serious about buying.
To get pre-qualified, lenders will need to look at your income, savings and investments. They will use this information to determine how much you can expect to borrow.
Getting pre-approved is more complicated.
In order to get pre-approved, you will need to fill out a mortgage application and your income and credit will be thoroughly reviewed. This will give your lender an indication of your creditworthiness and ability to borrow and you will get a good idea of what the exact amount of your loan will be.
5) More On Selecting The Best Mortgage/Loan Program
There are several different home loans available. They vary in whether rates will remain the same or fluctuate over the years (fixed rate or adjustable rate). You may also get an FHA loan which allows you to pay a lower down payment.
VA loans are for veterans. They are government backed and require no down payment or mortgage insurance. The USDA loan is for homeowners in rural areas. Eligible buyers do not have to pay a down payment and they also get discounted interest rates.
Bridge loans are recommended for those purchasing a home before selling their previous homes. Lenders allow these buyers to wrap their new and current mortgages into one and pay off the mortgage and refinance once the home is sold.
6) Now You’re Ready To Find a Real Estate Agent
A real estate agent isn’t absolutely necessary in the home buying process, but they will give you insider information on properties you might not have known about otherwise.
They will also guide you through the buying process to make things go as smoothly as possible. What’s more, real estate agents get a commission from the sellers, so they won’t cost you a penny.
The easiest way to find a realtor is by visiting an open house in a neighborhood you’re interested in purchasing your new home. While you speak with the realtor pick up a business card and see if they know the area well. If you’re confident they can help you find your new home, ask them to show you some listings around the area.
Some other ways to find a real estate agent include: Checking on Craigslist, RedFin, Zillow, Google and asking a friend for a referral.
7) Start Shopping for Your Home
Now that you’ve gone through the previous steps, you are ready to start seriously looking at homes. You may be visiting homes by appointment or during open houses.
Home viewing Tip: When looking at homes, it’s a good idea to take pictures. You will be seeing a lot of homes and taking pictures will help you remember the details on each.
There are certain things you will want to take note of when checking out different homes. Here are some things to look out for:
- Closet Space: Make sure there is enough closet and storage space for your family. Also, make sure closet doors open and close properly.
- Plumbing: Turn on a few faucets to test the water pressure and see how long it takes for the water to get warm.
- Electrical: Turn the electrical switches on and off to test the electrical system
- Windows: Open and close the windows to make sure they work properly
- Parking: Find out how many parking spaces are available and what street parking is like.
- Assess the Area: Ask yourself if the neighborhood seems safe. Look at the other houses and see if they are well maintained. This will affect the property value. Think of how much traffic the block gets to determine how noisy it will be. Find out if there are nearby places of interest likes shops, restaurants and schools. How near is the house to freeways and public transportation?
8) Make an Offer
Once you find a home you’re happy with, your agent will help you draft an offer. You might want to include a letter with your offer letting the seller know a bit about you and your family and why you are interested in the home. This can make them more likely to choose you as the buyer.
Including a letter is especially important in sellers markets like California where a home could can sometimes get multiple bids.
You can make an offer that is at, lower or above the asking price. If there is a lot of competition for the home, you can make an offer that is above the asking price to ensure you get the home.
If there is not a lot of competition or if you feel the home is not worth the asking price, you can come up with an offer that is lower. Your agent will help you come up with a fair amount.
Just remember, if you make an offer and it’s accepted, you are legally obligated to go through the sale. If you back out, you most likely will have to pay a penalty.
The seller can also reject your offer or make a counter and you can go from there to find a price that works for you.
9) Get a Home Inspection
Purchase offers are typically contingent on a home inspection.
The home inspection is arranged by the real estate agent a few days after the offer is accepted. During the home inspection, the property is checked for damage. Once the report is completed, both the buyer and seller will get copies of the report.
If there is damage found during the inspection that wasn’t revealed beforehand, the buyer may choose to withdraw their offer, renegotiate the price or ask that the seller makes certain repairs.
If you agree to have repairs made, a walk through will be conducted before the sale closes to make sure they have been completed.
10) The Appraisal
Your lender will bring an appraiser in to determine the value of the home. An appraiser is a third party company that is not associated with the lender. They will let all parties know if you are paying a fair price for the home.
When I got my last appraisal during my refinance, I paid around 500 dollars. When I researched to find out if I was getting a good deal, I discovered it could be plus or minus a hundred dollars depending on the area.
11) Cross the T’s and Dot the I’s
There is a lot of paperwork involved in the selling of a home. Your lender will bring in a title company to handle the paperwork. They will also make sure the seller is the rightful owner of the house.
Finally, Closing the Sale
At closing, you will need to sign all the necessary paperwork including your loan documents. In a few days your loan will be funded, a check will be delivered to the seller and you will be ready to move in.
Buying a home is not easy but it will all be worthwhile once you move into your new home. Good luck finding a property that is right for you. In the long run, it’s great watching your home get paid off and knowing your not just throwing your money away on rent.