The home buying process is exciting but can also be a bit daunting. It would be wonderful to skip right to the part where you’re taking a picture in front of your new home with the keys in hand. But you need to go through several other important steps before reaching that coveted moment. Check out our step-by-step guide to help you buy your dream home.
Before you dive deep into the homebuying process, there are some preliminary actions you must take. Here’s what you need to do.
Decide Whether You’re Ready to Buy a Home
Buying a home is one of life’s most important decisions. Of course, you should have your finances in order— which we’ll cover in the next steps — but you also need to be emotionally prepared. The process of buying a house is complex. However, it can also provide a sense of pride and accomplishment once it’s all said and done.
If you’re still unsure about buying a house, ask yourself these big-picture questions and then decide if you’re ready to take the next steps:
- Why are you buying a home in the first place?
- Are you buying with your partner? Are you two on the same page financially?
- Are you thinking of starting a family?
- Do you have children or other family members to consider?
- Are you ready to stay in one place or keep some flexibility with your living situation?
- Is there a possibility of relocation due to work?
Calculate How Much You Can Afford on a House
Once you decide you’re ready to buy a house, it’s time to get your finances in order and set a budget.
A home affordability calculator is one of the easiest ways to check your current financial situation and determine a budget. It’ll take into account your income, monthly debts, location, credit score, and down payment, among other things. Numerous calculators are available online, so you may want to try out multiple ones to get a good idea of your budget.
Save for a Down Payment and Closing Costs
The down payment and closing costs are the biggest hurdles for potential buyers because you need to pay these large expenses upfront. Here’s what you need to know about a down payment and closing costs.
Your down payment is the percentage of your home’s purchase price you pay upfront. There's been a myth for years that 20% is the standard down payment. While a 20% down payment will help lower your mortgage payments and avoid mortgage insurance, this percentage is unrealistic for many people, especially for first-time homebuyers. Generally, you can put down a smaller payment, but expect to pay mortgage insurance, higher interest rates, and higher monthly payments.
The closing costs are required fees and expenses that come with closing a mortgage, which typically includes appraisal fees, title insurance, and property taxes. These costs usually make up 2-5% of your loan amount.
Luckily, there’s financial aid to help you cover both of these expenses. You’ll need to look into state homebuyer assistance programs, Federal Housing Administration (FHA) loans, and grants from a business or nonprofit organization. You may also want to reach out to family and see if they would be willing to contribute towards these costs.
Step #1 — Get Preapproved for a Mortgage
Unless you can buy a house upfront with cash, you’ll need to apply for a mortgage. The first order of business is picking a loan officer — the person who’ll secure a mortgage on your behalf. While you’ll have many choices at your disposal online, the best option is a personal referral, so reach out to family and friends to see if they have any recommendations.
When you meet with your loan officer, they’ll ask you to fill out a preapproval application, which will include your income, credit history, and current assets. Also, be prepared to provide financial documentation such as pay stubs, bank statements, and tax returns.
Once you complete your application, your loan officer will help you find the right loan for your situation. Generally, the better your credit score and the more money you can put towards your down payment, the better your loan terms. They’ll also help you decide how expensive a house you can qualify for.
Step #2 — Find the Right Real Estate Agent
Next, you’ll need to find the right real estate agent. This person is your personal shopper and main negotiator. Their job is to help you find your dream home and make a competitive offer. Like loan officers, real estate agents work on commission, which means they’ll be eager to get a home for you as soon as possible because they don’t get paid until the deal is done. Real estate agents are also widely available, so see if a friend or relative has any personal recommendations for you.
Step #3 — Begin House Hunting
House hunting is easily the most fun part of the homebuying process. You get to explore a wide array of homes and imagine all the things and projects you’ll be able to do to make it your own.
Start by scrolling through real estate sites like Zillow and Trulia and list all the houses you’d like to tour. Once you visit the house in person, make the most of it because you may only be able to tour the home once, especially in a hot market. Take pictures to help keep track of what aspects you like and don’t like about the home. Maybe you love the huge backyard but don’t like the aging appliances. Factors like these can help narrow down your choices and find the house of your dreams.
Step #4 — Make an Offer on a House
Once you find a house that checks all the boxes on your list, it’s time to make an offer. You and your real estate agent will send a formal offer to the seller, along with a preapproval letter from your loan officer proving that you can afford the home. The seller may counter your price, terms, or contingencies. You can respond by accepting or rejecting their offer.
If the seller accepts your original offer or you accept their counteroffer, you’ll start the purchase process. You’ll sign a purchase agreement that includes the home’s price and estimated closing date. Typically, you’ll need to give the seller earnest money — a deposit of around 1% of the purchase price to let the seller know you’re serious about buying the home.
Step #5 — Get A Home Inspection and Appraisal
Once you give the seller earnest money, they’ll offer you a window of around 5-10 days to inspect the house and decide whether you want to close on it. You’ll need to hire a professional home inspector to ensure everything is up to code and that there are no structural issues with the property.
Additionally, your loan officer may require you to schedule a home appraisal, which helps determine the home’s market value. An appraiser will examine not only the property’s condition but also comparable home prices in the neighborhood, home features, area crime rates, and school zones. This evaluation helps your loan officer properly price your loan because they cannot provide more money than what the home is worth.
Step #6 — Ask for Repairs or Credits
If you run into any major problems with the home, such as a leaky roof, you and your real estate agent can ask the seller to:
- Fix the problems before your close.
- Give you credits to help cover some of the closing costs.
- Lower the purchase price.
Some sellers may not agree to any of these requests. That’s why it’s important to include a home inspection contingency in your offer letter. This contingency allows you to walk away from the property and keep your earnest money deposit.
Step #7 — Do a Final Walk-Through
A final walk-through is your last chance to view the property before closing. Here are some specific things you may want to do during your final walk-through:
- Come prepared with documents such as repair invoices and receipts to ensure any issues have been addressed.
- Ask your real estate agent to join you so they can help ask questions and address any concerns with the seller.
- Check if the seller hasn’t left any of their belongings.
- Double-check your home systems — i.e., HVAC, plumbing, electrical, etc. — to ensure everything is working.
Step #8 —Close on Your New Home
Before you can close, your loan officer will hand your file over to the underwriter. This person’s job is to inspect your file and verify that you’re a reliable, trustworthy borrower. Ultimately, the underwriter holds the power of approving or denying your loan.
If everything checks out, the underwriter will give you the green light to close on your home. Your loan officer will provide you with your closing disclosure, which outlines a definitive amount of how much you owe at closing and a summary of your loan. Read through your closing disclosure and compare it to your loan estimate to ensure all the information is accurate.
Once you’ve reviewed your disclosure, you must attend your closing meeting. Be sure to bring your ID, a copy of your closing disclosure, and proof of funds for closing costs. You’ll sign a lot of paperwork, so review it thoroughly and ask any questions you may have.
After the closing meeting, you’ll get your keys and officially be a homeowner. Congratulations!
Step #9 — Get Homeowners Insurance
- Dwelling protection — Covers damage to your house due to a storm, fire, smoke, and other covered losses.
- Personal property — Protects your household items in the event of a covered loss.
- Extended replacement cost — Provides additional coverage up to 150% of the dwelling’s policy limits to repair or rebuild your home due to a covered loss.
- Additional living expenses — Helps cover living expenses if your house becomes uninhabitable due to a covered loss.
- Personal liability protection — Helps pay for bodily injury or property damage caused to others if you’re held responsible.
- Guest medical protection — Helps pay for your guests’ medical expenses if they accidentally get injured on your property.
Mercury Insurance offers reliable coverage at an affordable rate. Contact us today for a free homeowners insurance quote.