9 steps to buy a home
For most of us, buying a home is the biggest purchase of our lives — and the process is far from simple.
Here are the steps to take to make sure the home you buy is one you can afford:
1. Check your credit score and look at your cash flow.
Start by checking your credit score. The higher your score, the better the interest rate on your mortgage will be. Good credit can mean significantly lower monthly payments, so if your score is not great, consider delaying this big purchase until you’ve built up your credit.
As for monthly payments, personal finance experts say a good rule of thumb is to make sure make sure the total monthly payment doesn’t consume more than 30% of your take-home pay.
It’s also to your advantage to plan on being in this home for a while. The longer you stay in your house, the more you save.
2. Have cash for a down payment.
Technically, you don’t always have to put any money down when financing a home today, but if you can’t afford to put at least 10% down, you may want to reconsider buying. Ideally, you’ll be able to put 20% down — anything lower and you will have to pay for private mortgage insurance (PMI), which is a safety net for the bank in case you fail to make your payments. PMI can cost between 0.3% and 1.50% of mortgage, depending on the size of your down payment and your credit score.
3. Plan for the surprise expenses.
Even if you can afford the monthly payment, be aware of hidden costs. Buying a home means property taxes, insurance, HOA and maintenance fees that can add hundreds of dollars per month. Use some calculator you can find online, considering factors such as home owner association fee, maintenance, renovations, closing costs, taxes, inflation, and cost of buying and selling, to help you decide whether renting or buying makes the most sense for you.
4. Get pre-approved for a mortgage.
Once you’ve aligned your finances and have decided investing in a home is feasible, determine how much you can afford to spend and stick to that limit.
Recommend that you get a pre-qualification letter from a mortgage lender before house hunting, which demonstrates to you, your realtor, and to sellers how much you can afford. When considering multiple offers, sellers will likely make an offer to those with a pre-qualification letter before those without one.
Remember: You don’t have to spend every cent for which you’re approved. It’s generally good practice to aim for a home that costs less than the maximum amount for which you qualify.
5. Find the right real estate agent for you.
Find the best realtor who understands what you’re looking for. If you’re buying a primary home and the most important thing is school district. If you’re an investor buying an investment property, you might be looking for a different personality
Meshing with your agent, and making sure they understand your needs, can pay large dividends in the long run. Find a real estate agent that puts client satisfaction as the top priority.
You’re going to be spending a lot of time with them, so it pays to put in the time and effort to find the right agent. Reach out to friends for recommendations, and interview several options over coffee to determine their level of experience and expertise in the neighborhoods you’re interested in.
6. Start hunting for places within your price range.
Start off by determining your general needs — where you want to live, how many bedrooms and bathrooms you need, and certain school zones you’re trying to be in.
Do some searching online, and to really understand the market before actually going out in person. If you’re a first-time home buyer, some employers/companies will offer special lower rates for first-time buyers.
7. Look at floor plans before going out to see the properties.
When you’re buying, you’re going to make that space your own, so it’s important that the floor plan and layout — the physical space — works for you. If it will work, then take the time to go out and look at properties in person. Don’t be fooled by photos, certain camera lenses can make spaces look much bigger than they actually are.
8. Put in an offer you’re comfortable with.
You want to make sure the home meets your basic requirements before putting in an offer. Buying a home is a very emotional process. It’s important to remain rational and stick with your price limit while buying. A lot of times people get caught up in bidding wars, and will go way over what their price needs to be because they love the house so much.”
Don’t just put in an offer because you’re emotionally drained and desperate to finish the process. Expect to miss out on a few homes before you find the one, Walker and Lang say. While you may find your dream home within weeks, it also could take up to six months or more — prepare for a lengthy and exhausting process.
If you’ve found the right one, make your bid quickly. There may not be much room to negotiate or drive the price down, as you’ll likely be facing competing offers. What people are competing on is who is most qualified to buy it. It’s not always the highest price offer that gets accepted. Sellers are really looking for certainty of close, so if you can provide the most certainty of close to that seller, they’re more likely to accept your offer.
9. Close.
If the seller accepts your offer, you will enter contract before closing, and the deal will be contingent upon you securing a loan with your lender, getting the home inspected, and doing a walk-through inspection 24 hours before closing.
Be prepared for closing costs such as appraisal fees, attorney fees, title insurance, property transfer taxes, and inspection fees, which can add up to be about 5% of the mortgage amount.
Closing customs will vary depending on the state you’re buying in, which your real estate agent or lawyer will be able to explain to you.