Buying a home can be a stressful experience, with a lot of hurdles to go through, especially if you’re a first-time buyer. It’s both an emotional and financial decision that changes your life in the long run. While the process is indeed complicated, the current real estate market has also posed some challenges of its own, including high prices and a limited inventory. But it doesn’t have to be that way.
To help you make homeownership a dream come true, we’ve broken down the homebuying process in several steps below:
1. Decide why you want to buy a home
Factor in how buying a home will align with your long-term goals. You could be looking to turn rent payments into equity, or you see a home as a good investment. However, buying a home means you’ll be tethered to the area where the home is. Make sure you’re ready to live in the city where you intend to buy and if you think you’re ready to settle down there.
2. Determine the best time to buy
When you’re getting ready to buy a home, consider the timing as several factors can influence the process. Besides your financial readiness, consider the best time to buy a home– traditionally in the first week of October when homes are expected to be the cheapest – if you’re looking not to pay top for your home.
Moreover, the state of the housing market is also worth keeping in mind, Right now, the market is still hot, and prices are high, with the average home price standing at $331,500, a 20.3% hike over 2021, based on the Zillow Home Value Index. However, prices in various cities across the country vary greatly. Buying a home in Seattle will cost you $932,400, while in Austin, Texas you’d pay around $655,900. In other cities, such as Dallas ($302,800), Chicago ($309,300) or Columbus ($228,100), homes come with a lower price tag.
3. Review your financial situation
Buying a home might be one of the most financially taxing decisions you will make in your life, so going through your finances is a good place to start. Besides the down payment, mortgage payment, and closing costs, you will have additional expenses you might need to factor into your budget.
Here are some other financial aspects you might want to consider assessing your homebuying readiness:
- Check your credit score
Getting your loan approved hinges, among other criteria, upon your current credit history. Lenders turn to your credit score to assess how well you’re able to repay debt and also to establish your monthly payments, interest rate and total interest. You can check your credit score with your credit card companies and with either of the three major credit reporting agencies, TransUnion, Experian and Equifax, once a year.
- Establish your home buying budget
Setting a budget is essential to getting the process started. First, you should calculate your debt-to-income ratio. That tells you how much you can spend based on existing debts correlated with your income. If you’re not sure how much money you’re spending monthly, you can check the Consumer Financial Protection Bureau’s spending tracker.
Once you check your monthly spending, check how much of your income is going towards housing. You shouldn’t allocate more than 30% of your income for this expense category – to satisfy lenders. Make sure to include costs such as homeowners’ association fees, local taxes and maintenance into your new housing budget.
- Check your savings
In order to pay for your home, it’s customary to set aside 20% of the home’s price for a down payment (the minimum is 3%), which will save you the mortgage insurance. Check your savings account and even enlist the help of relatives and friends if you wish to pay upfront the 20% down payment. Additionally, there are closing costs involved in the selling of the home (3%-6% of the home value). You might even incur additional costs based on the type of loan you’re going for – a VA loan requires a pest inspection as well.
4. Find the best type of loan
Before applying for a mortgage, look into the various types of loans to ensure your application is approved and get the most favorable terms. Here are some common types of loans:
- Conventional loans
Conventional loans are the most common type of mortgage issued by a private lender such as Fannie Mae or Freddie Mac. They are also called conforming loans, and they can be approved with a 3% down payment.
- FHA loans
FHA loans are backed by the Federal Housing Administration. As insured by the government, they present less of a risk in case the borrower stops making payments. Therefore, they have less strict credit score rules. You need a 3.5% down payment to qualify for one. However, they have stricter rules for mortgage insurance.
- USDA loan
As a type of government loan, USDA loans come to the aid of rural and suburban borrowers. If your home is in a rural area as defined by the conditions of the loan and if you meet the eligibility criteria, you can obtain a USDA loan with no down payment required.
- VA loans
VA loans are a type of loan specifically designed for veterans, active members of the Army and their qualifying spouses. This type of loan is insured by the Department of Veteran Affairs and requires no down payment.
- Jumbo loans
Jumbo loans are specially designed for atypical loaners and are larger than usual loans. They require higher credit scores and a much heftier down payment.
5. Get pre-approved for a mortgage
Once you’ve selected the best type of loan for your needs and budget, you can apply with your lender. The application process requires you to provide information about your income, credit history and assets. You will then receive a letter from your lender which establishes how much you can afford to spend on a home based on income, credit history and assets. You will show this letter to your real estate agent when you’re ready to start house hunting.
6. Find a real estate agent
Your real estate agent is your representative in all the transactions leading up to the buying of your home. They will help you find a home that’s right for you, intermediate showings and also help you make an offer and more. Buyers typically work with real estate agents for free, as the seller will pay the buyer’s real estate commission, which is typically 3% of the selling price.
It’s possible to buy a home without a real estate agent, but it’s not recommended, especially if you’re a first-time buyer. With a real estate agent by your side, it’s easier to navigate the intricacies of home buying, from submitting the right offer to not overpaying for your future home.
You can find a real estate agent by asking friends and family or by looking up your local real estate companies if you can’t find a real estate agent through a referral. Before hiring them, find out their track record, knowledge and how busy their schedules are. You want to make sure you’re enlisting the help of an agent who is able to fit a new house purchase into their schedule.
7. Make a checklist for your future home
Here are some options you need to consider when choosing your home:
Think about closeness to your job, whether you prefer living in the city or in the suburbs. Also, consider neighborhood safety, lifestyle amenities (walkability, restaurants) and the school district. Even if you don’t have children, living in a good school district can raise the value of your home. Remember to also think about additional costs. Include local taxes and HOA fees in your future housing budget.
- Type of home
Are you looking for a single-family home, a duplex, a townhouse or a condominium? If you’re looking to have backyard space, a single family home is best for you, but if you wish to avoid maintenance, a condo or a townhouse is probably the better choice.
Moreover, would you like a move-in ready home or a fixer-upper? With a tight market, a fixer-upper could prove to be a worthy investment if you’re looking for a more budget-friendly option.
- Home features
Take your checklist even further and envision your home layout. What kind of home would like? Can you picture the kitchen appliances and the bathroom layout? All in all, consider your future home size at least as a ballpark figure. You don’t have to think about every detail, but since buying a home is a long-term investment, you need to make sure you’re getting the features that matter to you.
8. Start shopping for a home
Now that you have a real estate agent lined up and you know what kind of home you want to buy, you can start browsing for one. You can consult online listings portals such as Point2 or have your real estate agent do that for you until you find a home that checks your boxes.
Make sure to visit an open house with your real estate agent or view a listing via a 3-D tour. They can help you look for home’s “health”, even if the final inspection is the step that eventually decides it. However, look for structural defects, check the water pressure, turn lights on and off, check windows and the exterior quality of the home. Look for access to transportation (if needed) and check to see how noisy the traffic and the neighborhood are.
9. Put in an offer
Once you find the ideal home, you can make an offer. Your real estate agent can help you decide which price to suggest making sure the house is yours. If the seller rejects your offer, you can increase your bid or start from scratch if they expect more than you can spend.
If your offer is accepted, you can make the first payment in the form of earnest money (1%-2% of the purchase price), which represents a deposit into an escrow account that stands as a promise that you’re serious about the transaction. Once the sale goes through, this deposit is used to cover closings costs.
Adding contingency clauses to the sale ensures that the home purchase continues only if there are no major problems with the home after the home inspection. If, on the contrary, the home inspection reveals the home does have issues, the buyer can withdraw the offer and they can get a refund for the earnest money put in escrow previously.
10. Proceed with the home inspection
The home inspection can help to check for home problems. The inspector will look at the plumbing, electrical systems, roofing and home appliances and more. You will receive a list of all the problems the house has. If there’s a serious issue such as lead paint or mold, you can ask the seller to fix it. If they refuse to do, you can back out and consider other homes. If you do go on with the purchase of the home while a serious issue remains unresolved, you should know that it will be your responsibility to fix it.
11. Continue with the home appraisal
The home appraisal is basically an assessment that establishes the value of the home you intend to buy. Your lender chooses the appraiser and you, as the buyer, will cover the cost of this process. If your offer is lower than the appraisal value, you might have difficulty getting your loan approved. That’s why including an appraisal contingency in the offer is paramount to helping back out of the purchase while being able to be refunded the earnest money.
12. Go through with the final walk-through
Once you’ve passed the appraisal step, you should schedule a final walk-through to view the property before buying. Prepare a checklist and a set of questions you might have regarding house issues. This can include repairs you’ve agreed upon with the seller and basically making sure the home is ready to be moved into. If some outstanding issues haven’t been addressed, your realtor can have your closing date delayed.
13. Close and say hello to your new home
If the home received the green light after the walk-through, you can close on your home. The lender will provide you with a closing disclosure prior to the closing day. This document details your loan specifics, the monthly payment, interest rate, annual percentage rate (APR) and also the closing fee. Make sure to check the closing disclosure against the loan estimate to make sure the closing fees and the loan terms are the same.
The closing is a meeting where the buyer, the real estate agents (buyer’s and seller’s), the buyer and the seller attend. At this time, you will wire the down payment and the closing costs, but make sure to check with the requirements of the escrow company. Then, you will receive copies of the paperwork and the keys to your new house.
14. Get self storage to help you maximize your living space
Now that you’re officially a homeowner, you can plan your move. Whether you’re buying a home in the same city you currently reside or buying out of town, getting all your belongings to your new home is not an easy task. Enlist the help of a moving company and consider using self storage to make the process easier. In case your belongings get there before you’re ready to move in, you can rent a self storage unit to keep everything. A 10’x20 unit can hold the belongings of a regular two- or three-bedroom home, but you might need a 10’x30’ unit if you’re moving the contents of a four-bedroom home.
However, even after you’re settled in, you can still benefit from using self storage. Seasonal and bulky items as well as furniture and appliances can stay in a storage unit until you can use them again. A 5’x10’ unit should do for this purpose, but if you have larger items, you can always upgrade to a 10’x10’ unit. Consider whether you need climate control as well. Living either in the humid South or the cold Southeast can require this type of amenity when renting self storage. Renting a climate-controlled unit in Houston, Texas can start around $100 and can go up to $200 for a larger unit.
Did you recently become a homebuyer? Let us know which step you found the most challenging in the comments section below.