When preparing to buy a home, it's important to understand there are necessary steps that need to be taken before making a purchase. Let's look at 10 steps to keep you on track toward the purchase of your first home.
- Get Your Finances in Order
- Understand Current Market Conditions
- Get Pre-Qualified or Pre-Approved
- Decide on a Real Estate Agent
- Start Looking at Homes
- Decide on a Home
- Make an Offer
- The Closing
1. Get Your Finances In Order
You need to know your credit (FICO) score before buying a house, as it will determine the type of loan (mortgage) you will qualify for. Your credit score helps predict behaviors like whether or not you can pay your bills on time or if you're able to manage a large credit line. You can get your credit score online and in most cases you can get it for free.
If you have a high credit score (700-749 is excellent), a lender will happily loan you money to buy a home. A score of at least 620 is required for many loans like conventional, VA, and USDA.
A low credit score (under 619), may qualify you for a FHA loan or for nothing at all. If you don't qualify or don't want to pay the high interest rates associated with the loan you qualified for, take measures to improve your credit score before applying for a mortgage.
2. Understand Current Market Conditions
If you decide to work with a real estate agent, he/she will be able to provide you with current market conditions. Otherwise, you can go online to research what's happening in your local market (ex. lender website). Market conditions include the economy, mortgage rates, the cost of living, demographics, and supply and demand, among others. Consider the following:
- Are mortgage rates increasing, making housing unaffordable?
- Is there a limited supply of homes for sale, pushing up the price?
- Is it a buyer's market, where you have more negotiating and purchasing power?
3. Get Pre-Qualified / Pre-Approved For a Mortgage
Unless you're going to pay cash for a home, you need to visit a lender to get pre-qualified or pre-approved for a mortgage. By getting pre-qualified or pre-approved, you will know how much you can afford and it will speed up the loan process once you decide on a home.
Compare lender rates and fees, as they can vary, then pick the best option for your needs. You can even get pre-qualified/pre-approved online, just make sure the company has a solid reputation and history and you understand the terms before committing.
Getting pre-approved is the most intensive of the two options. You'll likely have to pay a fee, but you will receive a commitment from the lender to provide a loan up to a specific amount (not guaranteed). A pre-qualification is usually free, much more basic but does not guarantee a loan by the lender. Pre-qualification is a good starting point but getting approved by a lender is ideal.
Agents are reluctant to work with buyers who aren't pre-approved/pre-qualified because they don't know the maximum they can spend. Agents waste time showing them houses they might not be able to afford. If you haven't been qualified by a lender, sellers may be reluctant to accept your offer and will gravitate toward offers from qualified buyers because they know they can close quicker.
You typically have 90 days, from the day you were pre-approved, to find a home. If you don't find something within 90 days, you will have to get pr-approved again. So it's best to get pre-approved when you are serious about buying a home.
4. Decide on a Real Estate Agent
When you choose a real estate agent, especially a licensed Realtor®, you have a professional in your corner who knows the market inside and out. A Realtor® follows a strict code of ethics, high level of education and is a favorable option. If you choose a real estate agent who is not a Realtor®, lean toward an agent with years of experience in residential sales.
When choosing an agent, get recommendations from friends and family, or if you visit open houses, you may want to interview some of those agents to find a good fit. You can choose to buy a home without an agent, but you should make sure you understand market value in that area, contract terms, contingencies, inspections, how to negotiate, etc.
5. Start Looking At Homes
These days most of us start our home search online then talk to a real estate agent. Whether you start with an agent or not, look at a variety of homes which fall under the amount you were pre-approved or pre-qualified for. By looking at a variety of homes, you can start to make comparisons, narrowing down what you really want and need in a home.
- View houses online
- Visit open houses
- Tour houses with your agent
- Search your favorite neighborhoods looking for FSBO's
6. Decide on a Home
As you look at homes, various features will be at the top of your list (ex. open floor plan, kitchen with an island, in-ground pool, etc.), but it's also important to consider the following:
- Great location
- Good resale value
- Ideal size (ex. large enough to accommodate the family you hope to have)
- Age/condition of the home (ex. upkeep/maintenance)
- Number of beds/bathrooms
- Functional layout
- Yard size
- Purchase price
Once you've found a home you want to make an offer on, your real estate agent will help you determine a competitive offer. If you are not using an agent, you'll want to find out how much comparable homes sold for in the neighborhood, negotiate a fair price, learn about contract terms (ex. seller disclosures), etc. to ensure you're making the best offer to satisfy the seller and work within your budget.
Unless you are paying cash, you need to get pre-approved/pre-qualified, as mentioned above. There are many mortgage options available, including some for special populations (ex. nurses, vets, firefighters). Your real estate agent and lender can help find the best option for you and your circumstances.
Plan the amount of your down payment too. Aim to put 20% down to decrease your monthly mortgage payments, reduce the need for private mortgage insurance (PMI), and/or the amount of time it will take to pay off your home. Avoid making extraneous purchases that would deplete the funds you've set aside for the down payment.
Even if you've been pre-approved/pre-qualified, if there are changes in your finances, you may lose your financing. For example, if there's a drop in your credit score, you lose your job, or you acquire new debt, among others. Try to keep your financial situation the same while you'll look for a home and throughout the closing period.
Title insurance is crucial in protecting you and your lender against problems with the title (ex. liens). Title insurance protects you from sellers who don't rightfully own the house (ex. renters posing as sellers), unpaid taxes, heirs to the property, fraud, errors, pending legal action, and problems with the deed.
Homeowners insurance protects your home in case of damage due to unforeseen circumstances like natural disasters and will be required by your lender if you have a mortgage loan. If you finance the purchase of your home with a mortgage, your lender will likely require this type of insurance.
PMI will be required if you have a conventional loan and don't make a down payment of at least 20%. PMI protects the lender if you stop making payments on your home loan.
9. Making an Offer
Once you've found a home you would like to buy, your real estate agent will help you determine a competitive offer. If you are not using an agent, you'll want to find out how much comparable homes sold for in the neighborhood, facts about negotiating a fair price, understand contract terms (ex. seller disclosures), etc. to determine what would make a fair offer.
Whether you're using a real estate agent or not, always make sure your offer is contingent upon the home passing a home inspection, includes a deadline for the seller's response, and include contingencies when necessary. Be prepared to provide earnest money,
You may receive a counter offer from the seller if you've offered to pay less than the asking price. Once you agree on a price and the offer's accepted, you can set a closing date.
10. The Closing
It will likely take up to 6 weeks to get to closing, but it can happen sooner. If you're financing your purchase, you'll likely attend the closing at a title company. In other cases, you may close at your lender’s office or at an escrow company. If you're purchasing with cash, you and the seller can decide on the location. One thing that's very important to do is make sure that you understand the closing costs associated with your home purchase.
Your agent and lender will have the closing paperwork in order, and you will be required to initialize many sections and sign multiple pages. You will be expected to pay transfer taxes, legal fees, closing costs and various other fees at this time.
Once everything's signed and finalized, you will receive the keys to your new home. Congratulations! Now you get to unpack all of those moving boxes...