A Comprehensive Guide to Home Buying
Your Step-By-Step Walkthrough to Buying Your First Home
It’s been said that shopping for a house is a little like trying to find the love of your life. You have to know what you’re looking for, balance your needs and desires with what’s available, try to avoid falling head over heels, protect your heart from being broken, invest time, money and energy into a long-lasting commitment, and sometimes, as hard as it is, you’ll find it’s necessary to walk away.
If you can successfully navigate the convoluted and stressful search for true love, home buying should be a snap. You might even find “the one,” the house you and yours will call “home,” forever.
What this comprehensive, 10-step guide will do is help you avoid the pitfalls and mistakes made by so many first-time homebuyers. Sometimes it’s because the house of their dreams turned out to be a dud, but more often that not, it’s because they weren’t properly prepared to begin with. And even if this isn’t your first rodeo, we’ve got you covered — from managing your money to understanding the housing market and managing expectations. We’ll steer you through the home buying process with a minimum of pain and aggravation.
1. You’ve Decided to Buy A House! Now What?
Let’s begin with the most important step of all: making the commitment to shop. This will probably be the most expensive purchase you have ever made, and with hundreds of thousands of dollars at risk, you want to do it right.
The best part about this stage is that you can do what we all do, day in and day out: surf the internet. But don’t stop there! In addition to listings online, you will find local newspapers and magazines offer real estate listings that might interest you, and articles that tell you about both the marketplace and the neighborhood you’ve identified as where you’d like to live.
When you’re doing it long enough, you might notice some houses linger, prices drop and other houses quickly get snapped-up. The price-point and location are often the greatest determining factors in that part of the equation.
Home shopping can be fun, and it also can be a chore. The things you will want to decide first are: where to look, and what to look for. It’s not uncommon to broaden your search if you’re not finding a match, but the next step is key in finding a house that could become your home.
2. Organize Your Finances
How much home can you really afford? Unless you have a large vault filled with gold coins, you’ll probably need a mortgage to buy your first or next home. Mortgage lenders generally recommend that the formula for finding what you can afford is a house that costs no more than three to five times your annual household income, provided you plan to make the traditional 20 percent down payment and your existing debt is manageable and under control.
But the cost of the house itself is not the only figure to calculate. What renters never have to worry about and homeowners do is something called “sleeper costs.” If the house you’re buying is brand new, remember that new construction doesn’t always come landscaped or fenced.
You may need to negotiate a separate price for a builder to finish a basement, purchase appliances, and other features. An existing home with old or broken down appliances or a house sold in “as is” condition might also present a giant budgetary challenge down the road.
In addition to repairs, you also need to be prepared to pay for maintenance, insurance and potential property-tax increases after the sale. A good rule of thumb is to make sure you don’t spend more than 28 percent of your gross income on housing costs in any given month.
And before you shop, avoid making any huge purchases for three to six months. Don’t move your money around either. In doing this you risk taking a hit with the major credit reporting agencies. Lenders need to see that you’re financially reliable, and to get you the best loan possible, they want a complete paper trail of sound fiscal stability. You’ll find it far harder to get a home loan if you open new credit cards, amass too much debt or buy a lot of big-ticket items in that three to six month period before trying to qualify for a mortgage.
3. Do Your Homework
Pretty much anybody can get “pre-qualified” for a mortgage. But what sellers want is a buyer who’s “pre-approved,” meaning a lender has reviewed all of your financial information and they’ve advised you how much of a house you can afford and how much money they will lend you. Being pre-approved not only reassures the seller and agent, but it saves time and energy for you the homebuyer.
A pre-approval is like a superpower, enabling you to shop around for the best deal and the best interest rates.
In fact, that traditional 20-percent down payment is not always the only way to go. In some cases, special loans may be available, such as government-sponsored Federal Housing Authority loans, as well as grants to help you make a down payment.
Check with your employer, the American Automobile Association and other organizations you might belong to, for special programs. But be wary: some unscrupulous real estate websites will offer to connect you with financing and realtors that you can easily find on your own. They’ll ask you for personal information upfront, and you’d best avoid signing up for anything without understanding what it is you’re getting in exchange for your private information.
And while you’re doing your homework, take time to learn the lingo: junk fees, mortgage processing fees, mortgage points, and more. When it comes time to close the deal, you’ll want to make sure there aren’t any hidden costs. That’s also because that closing will cost you between 2 to 5 percent of your total purchase price. But before you can close, even before you can go home shopping, there is typically someone you’ll want to meet.
4. Finding the Right Real Estate Agent
Some folks will go it alone and deal directly with a “For Sale By Owner” seller, but more typically real estate agents, brokers and realtors will be involved in the shopping, selling and closing of a home purchase.
So what’s the difference? A real estate agent is licensed to sell homes; there are two kinds: a buyers agent and a sellers agent. Sometimes one agent will perform both functions. A real estate broker has continued their education and obtained a broker license. Brokers can work independently or employ other agents.
And the main difference between them and a realtor is that a realtor is a member of the National Association of Realtors®. They have a set of standards and practices that all members must abide by.
All three receive a commission, or percentage, of the home sale as payment for their work. Some agents collect a salary in addition to the commission, and typically a buyers agent splits the commission with the sellers agent. The commission is usually in the range of 5 to 6 percent and is more often than not paid by the seller.
So who do you choose? Well, as before, it’s like dating: you need to look around and consider whether the person who wants to represent you is more concerned with getting their commission check than with helping you find a home that actually meets all of your needs.
Do they understand the type of home and know the specific neighborhood you’re looking for? How knowledgeable are they about the local market, the homes that have sold and those that are now for sale, and are they savvy enough to foresee potential issues that could pose a problem after the sale? Do you find them attentive and responsive to your questions?
Ask them questions — and pay attention to the questions they ask you — to find a good fit. This isn’t like purchasing a car, where you’ll be working with a salesperson for a few days and never look back. You are looking for the right person to help you find the right home.
Even if the first one you find seems right, you’ll know better by visiting their competition and seeing who else might help you find the home you’re looking for.
Reach out to friends, family, co-workers for referrals! This can be an effective way to find the right person (but keep in mind that just because your co-worker had a great experience it doesn’t mean you will too — always do an additional reference check of your own).
5. What to Look For When Home Shopping
This is another time-consuming investment but it’s probably the most important one you’ll make on your own. Make a wish list of what you want — and make a list of what you don’t want — but realize no home will have every single characteristic you desire. Compromise is key and your focus should be price, location and size. Weigh your priorities to make a final decision or choose between the lesser of two evils.
Even if you don’t have children and don’t plan to have children, you should still consider the quality of the school district. A good one will command a higher price, but also translate into higher property taxes. A mediocre or lower-ranked school district could mean a bargain but also may make it harder to sell that same house down the road.
Bigger is usually not better when it comes to houses. No matter which one you purchase or how much you invest in improvements, any home you buy will go up or down in value in line with other houses in the neighborhood.
Say you pay $500,000 for a home, and your neighbors’ homes are valued between $250,000 to $300,000. Your home’s appreciation is going to be limited. Longtime agents recommend buying the worst house on the block, because the worst house per square foot always trades for more than the biggest house.
Work with your agent, broker or realtor to better understand the market where you’re looking, and how that can determine whether your offer ultimately wins. This person should be able to guide you each step of the way and create a strategy to help you win the home you have your heart set on.
6. You’ve Found It! Now What?
Drive by the property at all times of day: morning, afternoon and night. Consider how you might commute from there to work or shopping. Talk to the neighbors. It would be good to know if they’re planning to put up a new addition or a basketball court or tennis court, something that might have an impact on your property’s value down the road.
Find a home inspector you can trust. Usually your agent, broker or realtor will recommend one. Word of mouth goes a long way so ask friends, relatives and neighbors, too. The cost is around $200 but it’s another investment that could save you thousands of dollars. The home inspector’s job is to provide you with information so you can decide if it’s the house to buy, or the one to say “buhbye.”
The inspector is typically an unbiased third-party opinion. Any issues they find can give you power — you can use them as a bargaining tool for lowering the price of the home. Better you spend that money on an inspector now, than find out you’ll need to spend a fortune later.
7. The Bid
Before you decide what price to offer, do some more homework: Sometimes sellers are behind in their property taxes, and that valuable information will give you an advantage to negotiate a good deal. Finding out is as simple as a visit to the county or town clerk’s office.
Before you decide what price to offer, do some more homework: Sometimes sellers are behind in their property taxes, and that valuable information will give you an advantage to negotiate a good deal.
Your opening bid should factor in what you can afford and what you and your agent believe the property is really worth. Use “comps” or comparative sales provided by your agent to make the best bid. Compare on a price-per-square-foot basis. Sometimes an oddball number is a good maneuver to show the seller you’ve done your calculations and are serious.
Think about how much under or over the asking price you’re willing to pay. In case there are multiple bids, you may need to consider unusual tactics to win over the seller, such as a personalized letter that touches their heartstrings instead of just their pursestrings.
While the usual strategy is to go lower on the opening bid, that really depends on what the market is doing at the time. You may need to pay over list price in a seller’s market, especially if many buyers are vying for the same inventory.
8. Your Bid Is Accepted! Now What?
Get that home appraised. Your mortgage lender will make the arrangements to provide an independent estimate of the house’s value. There is a lot of waiting, and paperwork, but eventually you’ll set a date for the sale, called “the closing.”
9. What to Expect At Closing
This is it! You and the seller sign paperwork to complete the purchase, including your loan documents. And there are a lot of documents. But the cost is usually even bigger than the pile of papers. The homebuyer is often expected to pay attorneys’ fees, homeowners insurance, home inspections and title searches.
You can try to defray those costs by asking the seller to pay for a portion of your closing costs or negotiating your real estate agent’s commission. You can also have these costs rolled into the loan, so that they don’t constitute an out-of-pocket expense.
Once the check is delivered to the seller, you’re done.
10. You’ve Closed! Now What?
The expenses don’t end at closing. You should also budget for moving costs, which vary but can set you back a couple thousand dollars.
Still, from the moment you have the keys, the home is yours. And so will of all the things that go wrong! A home warranty might be a great way to protect your budget from unexpected repairs that may come up in the future.
You’ll now experience the joy of making this home your own. Tear down a wall to join two rooms, change that carpet for tile, paint walls your favorite color.
Upgrading the landscaping is a fun first project and substantially improves both the look and the value of any property — and gets the house ready for a first-ever barbecue or backyard party.
Two projects new homeowners tend to love — and which make sense financially, too — are redoing the kitchen and remodeling the bathroom. Choosing every aspect of these spaces really gives you a strong sense that this is now YOUR home.
Remember, don’t overwhelm yourself — one home remodeling job at a time.
But it’s your home, and it’s yours to enjoy… until it’s time to sell!