A Step-by-Step Guide to Purchasing a Home
Buying a house with a mortgage can be a stressful experience because it is likely to be the most expensive and emotionally draining purchase you will ever make. Even in the midst of a pandemic, hard research and determination can help you obtain the keys to your dream home. We’ll walk you through the process of becoming a homeowner.
Before entering the buyer pool, it’s vital to determine whether house ownership is right for you.
Is renting or buying better?
When looking for a new place to live, the first question you ask yourself will lead the rest of your decision-making. Is renting or buying better? Buying a home may seem appealing because it allows you to avoid paying rising rent and build equity. On the other hand, routine home maintenance and repairs can quickly empty a bank account.
In general, your particular circumstances will determine whether you should rent or buy a home.
Here are some basic questions to consider when searching for a home:
How long do you plan on staying? If you plan to relocate in the next several years, renting is likely to be a better option.
What kind of home are you able to afford? Renting may be a viable alternative while you save if you can’t afford a home large enough to accommodate your family in a few years.
What options are there on the market? It’s probably not worth it to stay in a house you don’t like if you can’t find one you like.
Another factor to consider is that the current housing market is one of the most competitive in decades, with record-low inventory and record-high prices.
That means buyers should plan to submit multiple offers and be aware that they may have to pay more than a home is listed for — sometimes hundreds of dollars more — in order to have their offer accepted.
Still not sure if buying is the correct choice for you? Use The New York Times’ rent-versus-buy calculator to learn more about the costs. If your lifestyle and facts indicate that you should purchase, the next step is to determine how much home you can afford.
How Much House Can I Afford?
Examine your financial situation to determine how much you can spend on a home. Examine your recent bank statements and spending habits to see how much you’ve spent on everything from cellphone bills to streaming services to weekly restaurant takeout. The Consumer Financial Protection Bureau offers a monthly spending tracker to help you figure out where your money goes.
Because of the pandemic, home ownership is now more affordable than ever. Mortgage rates are hovering around 3%, which is close to a record low. These rates can save you a lot of money over the course of a 30-year loan if you can acquire one.
Once you have a better knowledge of your spending habits, decide how much you want to contribute toward a monthly home payment. This number represents your monthly mortgage payment, which includes principal, interest, taxes, and insurance.
Many lenders adhere to the Federal Housing Administration’s suggestion that your housing payment not exceed 31 percent of your monthly income. This amount will vary depending on the size of your loan. Buyers with no other debts may be permitted to spend up to 40% of their monthly income on housing. (However, keep in mind that you’ll be spending the rest of your money on heat, water, electricity, routine home maintenance, and food.) Your total debt-to-income ratio, including auto payments and credit card debt, should not exceed 43 percent.
Your monthly gross income, for example, is $4,167 if your annual gross income is $50,000. If your total monthly debt does not exceed $1,792, you should have $1,292, or 31%, to put toward your monthly mortgage. Our mortgage calculator can help you figure out how much your monthly mortgage will cost – just make sure the slider is set to the current interest rates, which you can check here.
However, keep in mind that, in addition to the mortgage, buying a home comes with a slew of one-time expenses, including closing costs, legal fees, and other closing costs, such as a home inspection. Remember to factor in moving expenses and home improvements.
Waiving them may provide buyers an advantage in the market, but they risk facing additional fees after the deal is finalized. As a result, tread carefully.
Organize your finances.
It’s time to assess your spending, rebuild your credit, and figure out how much you can afford.
Count the amount of money you have.
Have you decided to buy something? Before entering into the world of online home listings, open houses, and analyzing real estate agents, take some time to get your finances in order. It will be useful when the time comes to apply for a mortgage.
It will also assist you in putting things into financial perspective before you fall in love with that lovely center-hall colonial or the flat with park views.
1. Check Your Credit Report
Lenders utilize credit ratings, often known as FICO scores, to measure the risk of lending to you. Your score, which runs from 300 to 850, is better the higher it is. Borrowers with credit scores in the mid- to high-700s or above obtain the best mortgage rates, according to the Consumer Financial Protection Bureau.
Once a year, go to annualcreditreport.com to get a free credit report to see where you stand. The three major credit-reporting bureaus, Equifax, Experian, and TransUnion, each calculate their own FICO scores based on the information they collect; you can find all three here.
Have you got a low FICO score? Paying off high credit card debt and resolving any financial issues, such as identity theft errors or mixed-up information from another person with the same or similar name, may help you improve your score.
Remember that these changes take time to appear in your credit score, ranging from months to years if you have tax liens or bankruptcies. Improved credit, on the other hand, can have a big impact on your mortgage rate.
2. Decide whether or not you want to go digital or analog.
Better.com, Rocket Mortgage, and LendingTree are among the most popular digital lending platforms for a reason: they not only allow potential buyers to apply for loans from the comfort of their own homes and on their own schedules, but they also have the potential to eliminate biases in the loan industry.
Candidates with a questionable employment history, credit issues, or those who rely on a gift for their down payments may have difficulty applying online, where their applications may be scrutinized more closely. In these cases, working with a traditional human lender may be a preferable option.
3. Obtain a Letter of Mortgage Preapproval
A preapproval letter is a documented estimate of the amount you will most likely be able to borrow from a lender. When you’re ready to make an offer on a home, this letter will assist you in determining how much you can afford and confirming that you can obtain a mortgage.
Preapproval for a mortgage is distinct from prequalification for a loan, which is merely a guess at how much of a loan you might qualify for based on unverified information. A mortgage preapproval application often requires pay stubs, bank statements, tax returns, and other financial documents.
Take the time to get one now so you can make an offer as soon as you find a home you like.
4. Draw a money line
The more money you can put down on your home up front, the less money you’ll need to borrow in the future. A bigger down payment lowers your monthly payments and lowers your total interest paid throughout the life of your loan.
You won’t have to pay mortgage insurance if you put down 20% or more on a property. Mortgage insurance is a cost that protects the lender in the event that you default on the loan. However, don’t spend all of your money on a big down payment.
Lenders will want to see that you have some cash on hand. Closing fees can range into the thousands of dollars, according to Bankrate.com, which conducts a nationwide survey of closing costs and provides a fee breakdown of the average charges by state. You’ll also require funds for relocation, renovating, and other unforeseen costs.
The Search for a New Home
Now that you have a better knowledge of your budget, decide where you want to live.
1. Choose a Family Area
What characteristics define a desirable neighborhood? That inquiry will elicit a variety of responses. However, by concentrating on a few key variables, you can quickly narrow down your choices:
Where can you find a good deal on a house?
Do you work from home or do you have to travel?
Do you want to be close to good schools?
Find out where your friends and coworkers live. Then, to acquire a better sense of the area, spend some time in the neighborhoods you’re considering, visiting shops, restaurants, and public spaces.
If you’re still not sure, try one of these quizzes: There are apps and online programs that use clever algorithms to assist you find the neighborhood that best suits your needs.
2. Go on a comparison shopping spree
Even before you started your home search, you undoubtedly spent some time looking at homes available in that area on websites like nytimes.com/realestate, Realtor.com, and Zillow. The time has come to focus on your actual desires.
If parts of your chosen municipality do not offer the style or size of property you want at a price you can afford, eliminate them from consideration. Setting up alerts on these sites depending on your criteria can help automate some of the work.
Many search sites show information like how long a listing has been on the market, if the price has been raised or dropped, past sales, and other relevant data that can help determine whether a property is expensive or has been on the market for a long time. After that, determine which homes you wish to investigate more.
3. It’s Time for a Tour
Open houses can help you get a sense of the local housing stock and define terms like dog-trot house and railroad flat.
Most open houses have been canceled and replaced by private appointment-only showings to keep buyers and brokers safe during the pandemic.
Many purchasers are avoiding in-person visits entirely, relying instead on the newly upgraded 3-D movies that accompany internet listings and sending an agent or proxy inside the house to tour it for them while they watch on a video call.
Virtual tours, which can range from polished, professionally made movies to shaky cellphone recordings, can occasionally conceal flaws such as creaking floorboards or insufficient lighting, so take measurements and ask questions.
A private showing with a real estate agent, scheduled in advance, allows you to get a closer look at a home and shows information that video cannot.
During your speech, say:
Open the closets to check the storage space.
Pull back the curtains to take in the view.
Take a walk around the backyard and assess the maintenance required to keep it in good shape. Make a list of everything you’d like to ask: How far is it from your residence to the railway station or bus stop? If you work from home, how loud is it during the day? What is the reason for the sellers’ desire to relocate? When was the last time things seemed to be getting better? What are the utility prices? Have you gotten any offers so far?
Open houses are also a great way to network with real estate professionals with whom you might want to work in the future.
4. Find a real estate agent.
You can search for homes on your own, but a knowledgeable broker can help you make informed decisions and navigate the home-buying process. A broker can also help you acquire access to houses before they are listed on the market or even before they are posted online.
To find the right broker for you, talk to friends and family members who have previously bought or sold in your community. Look for a broker who has worked with buyers in your scenario before and can respond fast.
Remember that your broker’s commission, which is usually 5 to 6 percent and divided with the seller’s broker, will be removed from the sale proceeds — but, this fee structure is being challenged, and some brokerages are dividing their commission with purchasers or charging less.
You can anticipate your agent’s fee to be added into the listing price even if you aren’t paying them directly. Also keep in mind that your broker works for you but is paid only if you buy a house.
Making an Agreement
Once you’ve discovered a home you like, make an offer right away.
Locating “The One”
When you walk into a private viewing, do you get goosebumps? Have you ever taken a 3-D virtual tour and realized you’ve finally found the home of your dreams? Have you thought about the benefits and drawbacks of three distinct homes?
Regardless of how you came to the decision to buy a house, the next steps you take are crucial.
1. Do Market Research
Look for comparable properties of similar size that have recently sold nearby to help you make a fair offer. A good real estate agent will compile such “comps” for you, talk with you about price and market fundamentals, and work with you to design an offer strategy that allows for bargaining.
If the home you fell in love with is listed with your real estate agent, he or she may offer to cut the commission and represent both sides. While working with many agencies might be useful, it can also lead to a conflict of interest.
Negotiating requires a lot of give and take, which can be challenging if your agent is also representing the seller. For your personal piece of mind, it’s fine to find another agent to represent you.
2. Be willing to negotiate
Recognize that making an offer on a home could be the start of a mental battle. You’re probably hoping to sell the house for as little as possible without completely losing it. The seller wants to get the best price for the house without scaring you away.
Where should you start with your first offer? According to common wisdom, you should begin by offering 5% less than the asking price, but the amount of wiggle room you have will be largely dependent on market conditions.
If the market is competitive, you’re more likely to encounter multiple bidders. In a soft market, where listings have lain unsold for a lengthy period, you will have more negotiating power.
Prime listings may fetch the full asking price or even more in a hot market, and even a few thousand dollars above the asking price might help your offer stand out. When making your first offer, keep your budget in mind and set a limit on how far you’re willing to go.
3. Expect to be in a bidding war.
In a highly competitive market with few appealing listings, you can forget about finding a good deal. While the highest bidder normally wins in a bidding war, being the first to submit a strong offer can give you an advantage.
The following items can help you stand out to a potential buyer:
It’s a smart idea to increase your down payment.
When it comes to the deadline, give yourself some leeway.
If necessary, be willing to forego contingencies.
4. Make a formal offer of acceptance.
Your agent will draft a formal offer for you to review and send it to the seller’s agent for approval once you and the seller have agreed on a price.
If the offer is accepted, a cash deposit, sometimes known as “earnest money,” is frequently requested to show good faith. (This money will be held in escrow until the transaction is completed and then applied to your down payment.)
While the specific process and legal requirements differ by region, the formal offer should explain out the terms and conditions of the purchase, including how you plan to pay for the property and any contingencies (if any have not been waived).
5. Speak with a Real Estate Lawyer
From now until closing, you’ll need the help of a real estate lawyer. He or she will help you resolve any issues that develop during a home inspection or the mortgage application procedure.
Look for an attorney that has worked with buyers in similar situations before and can respond swiftly.
For example, if you’re shopping for a co-op apartment in New York City, you’ll need a lawyer who is knowledgeable with co-op accounting and can check over board meeting minutes for red flags.
6. Refrain from falling in love.
This may be the most challenging part of the home-buying process. Be prepared to be let down. Counteroffers are common in business. It’s the same with rejection.
Even if the seller has verbally accepted your offer, keep in mind that he or she may still be willing to consider and accept other offers (it may depend on your state).
Problems can arise even after a contract has been signed. If you’re purchasing a co-op, the board of directors may decide to reject your offer.
To move from an accepted offer to a completed transaction, patience and organization are essential.
The Race to the Finish Line
When your property bid is accepted, you can start the process of getting your hands on the keys.
While you may be eager to settle into your new home, it is in your best interests to undertake due diligence to ensure that you purchase a property in good condition and at a fair price.
1. Fill out a mortgage application.
A mortgage can be obtained in a number of ways:
Contact bank lenders or mortgage providers directly for current rates.
Online lenders are becoming increasingly common, allowing you to shop without leaving your house.
Request recommendations from friends and family who have recently acquired a home.
Engage the services of a mortgage broker to assist you with the procedure.
Because they are not affiliated with any one institution, mortgage brokers can save you time and effort by completing the legwork for you.
(Note that a broker gets paid a percentage of the loan amount; however, the lender may cover this expense.)
Long-term borrowers may qualify for lower bank interest rates. Whatever course you choose, make sure you shop around for the best cost.
2. Obtain a home inspection
In order to get your offer approved in a competitive market, schedule a home inspection as soon as possible if you haven’t waived your right to one. Home inspections can disclose any issues that could keep you from buying a house.
A standard home inspection report will cover the condition of the house from the foundation to the roof, as well as the heating, air conditioning, and plumbing systems, allowing you to reconsider or renegotiate if structural damage or needed repairs are discovered.
Request recommendations from local friends, relatives, and your real estate agent, and then ask for references from former clients from those inspectors. You can also check out who the inspector is by contacting your local Better Business Bureau.
Plan to attend the inspection if it is safe and practical. It will allow you to observe that the inspector is doing a thorough job, such as climbing up on the roof rather than looking at it from the ground and testing the heat during the summer.
You can, however, use this chance to enquire about the home’s condition and gather important maintenance information.
The inspection will usually take two to three hours. The average cost of a home inspection, according to HomeAdvisor.com, is around $300, with most homeowners spending between $270 and $400.
All homes should be tested for radon and mold, and if buying an older home, asbestos and lead should also be checked. These tests clearly increase the cost of the inspection.
3. Get an appraisal from an expert.
Before you can finalize a mortgage to buy your home, the lender will want to assess the property value to ensure it is in line with the amount you are borrowing.
An appraisal considers everything from the layout and square footage to what similar homes in the neighborhood are selling for to determine the home’s value.
While the appraiser is chosen by the lender, the buyer can check that his or her appraiser is licensed and familiar with the area where the property is located.
Inquire about the appraiser’s qualifications and the number of appraisals conducted in the region. If you are not satisfied, you might request that the lender send someone else.
Appraisal fees are usually paid by the buyer and vary greatly depending on the extent of the job and the size of the home. (A single-family home appraisal costs about $400 on average, according to HomeAdvisor.com, but some can cost more than $1,000.)
4. Homeowner’s and title insurance are both offered.
To protect your investment, you should purchase a good homeowner’s policy as well as title insurance. Your lender will normally request this as a condition of your loan. The American Land Title Organisation, a trade organisation, maintains a searchable listing of title insurance companies by state.
You may compare homeowner’s insurance prices on websites like Insure.com and NetQuote.com. You may be able to save money if you purchase your homeowner’s and auto insurance from the same company. For additional information, visit Consumer Reports’ online homeowners insurance shopping guide.
5. Review everything one final time
It’s critical to make a last walk-through before closing on your new home to confirm that everything is in working order, including ceiling fixtures that the sellers pledged to leave behind and old built-ins that they agreed to take with them.
Go during daylight hours and be thorough, flipping light switches, turning on water taps, running appliances, and flushing toilets to confirm that no new concerns have surfaced. You can obtain a credit at closing to cover the expense of garbage removal or repairs if the attic hasn’t been cleared out or a broken window has been discovered.
6. Finish the transaction.
All parties involved — the seller, the buyer, and their representatives — will sign the documentation that officially seals the deal on the day of closing. (Parties may not necessarily need to be present for the official close — DocuSign and new remote notarization standards have gained popularity as a result of the pandemic.)
To settle closing costs, which include title search fees, attorney fees, transfer taxes, and homeowner’s insurance, buyers must present a check. Once all of the paperwork has been signed and the monies have been properly disbursed, the deed of ownership will be passed to you.
Finally, the property is yours to keep. Take your new keys and take pleasure in the first time you enter your (most likely empty) home, visualizing your future existence within its confines.