Buying a home can be a time consuming, intimidating and stressful affair. But before you run screaming from the closing, there are some steps you can take to familiarize yourself with what to expect, making the process more manageable and maybe even enjoyable.
Step 1: Plan and prepare
Before you hit any real estate websites or become a regular on the open house scene, find a local real estate agent you feel comfortable working with. Preferably, get a recommendation from friends or family members, or search online sources for agent reviews. Look for an agent who is knowledgeable about the area in which you are looking, and who is experienced in the buying and selling process. Once you’ve chosen an agent, schedule a meeting to review what you are looking for in a home.
If you haven’t already, shop around for a mortgage lender to find the best terms possible. Interview at least three mortgage lenders to fine one who is experienced, knowledgeable, and who puts you at ease.
Once you select a lender, you still need to get pre-approved, a step that acts as a preliminary commitment provided in writing from a lender stating that you qualify for a particular loan amount based on your income and credit information. Getting pre-approved will give you an accurate idea of how much of a mortgage you can afford.
Step 2: Find the right property
Once you and your real estate agent have discussed all your needs and wants in a home, you can start looking at properties. You will probably do at least part of your search on your realtor’s website which will allow you to look for properties within specific neighborhoods, price ranges, size and feature parameters. Your online searches can help you eliminate homes that don’t suit your needs and point you toward properties that you may want to see in person.
Once you find a property that you’re serious about buying, go back and visit it at all times of the day. A street that’s quaint and quiet during the day could turn into party central on the weekend. If you can, talk to neighbors to glean extra insight about your potential dream home.
Step 3: Buy
Once you’ve decided to bid on a house, your agent will write your offer and present it to the owner’s agent. Smart sellers price their homes at market value, but your realtor may suggest you bid below the asking price if he or she feels you can get a better price than the seller is asking.
Your agent will be able to tell you how much comparable homes are listed for (or have sold for) which will help you determine how much you’re willing to pay. After you’ve made your offer, there may be a counter offer presented. Once you and the seller have agreed on a price, you will be expected to write a check, which will be placed in escrow as a sign of good faith.
Typically, purchase offers are contingent on the results of a home inspection to check for signs of structural damage or problems within the home that may need fixing. This contingency protects you by giving you a chance to renegotiate or withdraw your purchase offer without penalty if the inspection reveals significant damages. Both you and the seller will receive a report on the home inspector’s findings, at which time you can decide whether to ask the seller to fix any problems on the property before closing the sale. Before the sale closes, you and your realtor will take a walk-through of the house to confirm that any agreed-upon repairs have been made.
While the home inspection is being arranged, you will work with your lender to choose a mortgage, since many different types of mortgage programs are available. Three of the most common for first-time buyers are:
- Adjustable-rate mortgages (ARMs). These mortgages have an introductory interest rate that lasts a set period of time and adjusts annually thereafter for the remaining time period for a total of 30 years. After the set time period your interest rate will change and so will your monthly payment. The monthly payment amount is usually subject to a cap.
- Fixed-rate mortgages. Issued for 15, 20, 25 or 30 years, these are fully amortizing mortgage loans. The interest rate on this type of loan remains the same throughout the term of the loan, as opposed to loans where the interest rate may adjust.
- Interest-only. Both fixed and adjustable-rate mortgages can have an interest-only payment, which means for a period of time during the loan term, you’re allowed to pay only enough to cover the interest portion of your payment. You can still pay principal when you wish, but you don’t have to if your budget is tight. The benefit to interest-only mortgages is that you increase your cash flow by not paying principal.
Make sure to ask questions and provide a complete disclosure of your finances so that your lender can help you determine which type of mortgage is right for you.
Step 4: Close on your new home
Your real estate agent will help set a closing date that works for both you and the seller. Optimally, you’ll want to schedule your closing date to coincide with taking possession — either to move in or to begin renovations. Try to coordinate closing with the move-out date of the property you’re leaving so your housing payments don’t overlap.
Be sure you talk to your agent and lender in advance so that you have a clear understanding of all the costs associated with closing. Closing costs will most likely include your down payment, escrow deposit, title fees, loan origination fees, appraisal fees, survey fees, attorney fees, inspection fees, recording fee and points you may have bought to lower your interest rate. Typically, homebuyers pay between 2 percent and 5 percent of the purchase price of their home in closing costs, so if you bought your home for $200,000, you might pay between $4,000 and $10,000 in closing costs.
Once the papers have been signed and the deal is closed, it’s time to move in!
Buying property is not without challenges, but by knowing what to expect and by arming yourself with an experienced and knowledgeable real estate professional and mortgage lender, you can avoid a lot of the headaches and stress that so often go with the home buying process.