For many people, buying a house will be the biggest financial decision they ever make - and the most complicated. It is a long process, but one that is less intimidating if you break it down into a series of manageable steps.
To walk you through that process, the following is a step-by-step guide for how to buy a house.
Can You Buy a House?
The first step in buying a house is to assess whether you are ready to take on the financial responsibility of a mortgage and the other associated costs of homeownership. Here are some key components of that decision:
- Credit condition. Have you established a credit history, and if so, what is your credit score? Check your credit report to get a glimpse of how lenders will view you. Do this early on, so you will have a chance to correct any mistakes or address any negative incidents in your credit history.
- Budget discipline. In order to take on the responsibility of monthly mortgage payments, along with a variety of other expenses that come with owning a home, you will want to make sure your have your household spending under control. Your expenses and spending habits should be predictable enough for you to be confident in how much money would be available for a mortgage payment every month.
- Stable income. Lenders like to see employment stability, and you should make sure you feel secure in your job before you make the long-term commitment of buying a home.
- Savings. Having some money set aside will not only allow you to afford the down payment on a house, but it will demonstrate that you have enough control over your finances to live within your means.
How Much Can You Afford?
Forget simple rules of thumb about what percentage of your income should go towards a mortgage payment. Each situation is likely to have its own twists and turns. For example, a couple that has several years of student loan payments ahead of them will have less money available for monthly mortgage payments than a couple with a similar income but no debt. Also, real estate values in some parts of the country force homeowners to commit a larger portion of their income to housing than in more reasonably priced areas.
It all comes down to budgeting. You can use a mortgage calculator to see how home prices will translate to monthly payments at today's interest rates. That calculation should account for not just the mortgage payment, but also other expenses associated with owning a home, such as property taxes and insurance.
Now, see what kind of monthly payment will fit into your budget. Ideally, that payment should allow you some breathing room for unexpected expenses, and to save money for future needs such as retirement and sending your kids to college. Work back and forth between the mortgage calculator and your budget to find the home price range you can afford.
Getting Pre-Approved for a Mortgage
You have a couple options for testing your assumptions about qualifying for a mortgage and affording your target price: you can get pre-qualified or pre-approved for a mortgage.
Pre-qualification is a relatively simple process. It does not involve a detailed examination of your finances, but instead, a mortgage lender will rely on asking some basic questions about those finances, and, based on the assumption that the answers are accurate, will give you an indication of whether you are likely to qualify for a mortgage in the amount you seek. However, this indication does not represent an obligation on the part of the lender.
Pre-approval is more involved, and besides requiring you to produce more in the way of financial information, is likely to involve paying a fee. In return, if you pass muster, the lender will conditionally approve you for a mortgage up to a certain amount and within a limited time frame.
Besides the peace of mind that can come with being pre-approved, it can be an advantage if you are in a hot housing market where there is a lot of competition among buyers. All other things being equal, a seller might look more favorably upon an offer from a potential buyer who has been pre-approved than from one who has not, because the seller can be more confident that the deal will go through.
Finding a Real Estate Agent
From the moment you start thinking about buying a home, you will no doubt see plenty of real estate agents advertising their services. How do you pick one?
This decision matters a great deal because the right real estate agent can help you choose the correct tactics in making an offer, can refer you to receptive lenders, and can shepherd the deal through any unexpected twists and turns in the closing process.
While a lot of people dabble in the real estate business part-time, you should look for an experienced pro who does it for a living. Look for somebody who has been in the business for several years and who has been involved in many deals in the neighborhood where you want to buy. Since real estate conditions are highly localized, it is important to find an agent who is familiar with the specific market where you are looking.
Going to some open houses in your target neighborhood is a good way to meet a few agents without having to make a commitment. Once you find someone with the right background and personality fit, you can commit to working with them exclusively.
Always remember, though, real estate agents get paid out of the seller's proceeds. They may be working with you, but their financial incentives are aligned with the seller.
Shopping for Your Mortgage
Once you know specifically what type of loan you are looking for and in what amount, a key step is to do some comparison shopping among lenders.
Remember, a mortgage loan is usually paid off over a great many years, so even small-sounding differences in interest rates can add up to a large amount of money over time. On top of that, besides comparing interest rates, you should also factor in a comparison of the fees and costs different lenders will charge.
Making an Offer
So, you've done your research, you've been house-hunting, and finally you find it: your future home. Or so you hope. Now all you have to do is make the right offer.
This involves making a formal written offer, and there is something of an art to it. Even if you love a house and are prepared to pay the full asking price, be aware that it may not be that simple. In a competitive market, you may be up against other buyers willing to do the same. Or, if a house has just gone on the market, an immediate full-price offer might start the sellers second-guessing about whether they should have asked for more.
This is where the value of an experienced real estate agent comes in. That agent can help you find out how long the house has been on the market and whether there has been a previous price reduction. Your agent should also have a feel for local market conditions - how many other properties are on the market nearby and how long such properties are typically taking to sell. All of these things should go into your decision of how much to offer and how hard to negotiate if your initial offer is not accepted.
Finally, be sure to include in the offer any stipulations you want to be part of the deal, such as leaving certain carpets or drapes in place, or what repairs need to be made in advance of the sale. Don't overreach on these issues because these stipulations will turn a seller off if they seem like too much of a nuisance, but if there are some reasonable concessions you want to be made, now is the time to ask.
Inspection and Appraisal
Once a deal is accepted, the house must be formally inspected and appraised. These steps are designed to protect the mortgage lender by verifying that the loan collateral is worth a sufficient amount, but they also work for your protection too.
An inspection is a mechanical and structural assessment of the house's condition. It is not the inspector's job to find every little flaw, but the process is designed to identify conditions that could significantly impair the home's value. If a problem is found, it is the seller's responsibility to address it - so better to have such problems found now than after you buy the home.
Because of this, you may want to start looking for a reliable inspector while you are still house hunting, so you have the time to ask for referrals and check qualifications. You can find a list of certified home inspectors on the website of the American Society of Home Inspectors. The inspector will have to pass judgment on everything from the electrical system to the structural soundness of the foundation, so you will want to find someone with a broad base of knowledge.
In contrast to the inspection, which is a physical examination of the home, an appraisal is a financial assessment of the home's worth, given the characteristics of the property itself and local market conditions. Again, this is designed to make sure the lender is getting enough collateral, but it also helps make sure that the price you are paying for the property is not way out of line with current values.
Finding a Real Estate Lawyer
You may previously have used a lawyer for other matters, but keep in mind that real estate is a highly-specialized area of the law. You will want to work with someone with plenty of experience in this field. A good real estate attorney can be instrumental in spotting any oddities in the contract, title, or other documentation, and can help resolve any issues.
If you've used an attorney for other matters, ask that attorney to refer you to a real estate lawyer, or else ask friends and colleagues who have recently bought a house whether they can make a recommendation. Ask attorneys you are considering about their experience with real estate transactions and, in particular, about any troublesome situations they have encountered and how they resolved them.
Also, before you commit, have a conversation with the attorney about fees. Some real estate attorneys charge by the hour, while others charge a flat fee for standard deals. Having a flat fee can be helpful by placing a limit upfront on how much this aspect of the process will cost you.
The Closing Process
The closing process involves getting a large number of components to line up - the legal details, mortgage approval, your down payment, etc. It is complicated, but this is where having an experienced real estate agent and an attorney can really pay off. They can help guide you through the process and help keep the various components of the process in line.
Here are some key elements of the closing process:
- The final walk through. A day or so before closing, you should arrange to take a final look through the house in detail, just to make sure everything is in the agreed-upon condition.
- The closing meeting. A meeting will be scheduled involving a variety of parties - you and the seller, your respective attorneys, a representative from the lender, the real estate agent, and possibly others. Set aside plenty of time - such as a full morning or afternoon - to let this process play out. It tends to be time-consuming under the best of circumstances, and if you allow plenty of time you won't feel too rushed to ask questions about anything you are unsure of.
- Mortgage agreement. At closing, you will sign the final mortgage agreement. Up to that point, the loan has not been finalized, so keep in mind that any last-minute changes to your job situation or financial condition could affect the ultimate approval of the loan.
- Sale agreement. There are a great many routine aspects of a sale agreement, but it should also include any particular stipulations between you and the seller. While you will have to rely heavily on your attorney to make sure everything is in order, take the time to look over the paperwork yourself and don't hesitate to ask to have anything explained to you.
- Your down payment and closing costs. You will be told what amounts you will be expected to provide at closing. You need to not only make sure you have this money available, but you may have to provide a bank check rather than write an ordinary personal check.
After all the steps involved in buying a house, don't forget the most important one - the first step you take over the threshold of your new home. That's the step that makes all the others that came before it worthwhile.