Buying a house can seem like a monumental task. Here, the homebuying process has been divided into 3 main phases: Preparation, Find a Home, and Close the Deal.
Get your finances in order
Before you can buy a house, you must prepare your finances and gather the information you will need to qualify for a mortgage loan. This includes the following:
- Proof of income and assets (and sufficient debt-to-income ratios, 28%/36%)
- Proof of steady employment (for the past 2 years at least)
- A good credit score (740 or higher will get the best rates)
- A down payment (preferably 20%, but can be as little as 0% or 3.5%)
Learn about mortgage loans
There are many different types of home loan products available, including conventional fixed-rate loans, government-insured loans, and payment-option loans. It’s your job to learn about the various loan programs and shop around for the best rates before you try to buy a house.
Find a mortgage lender
Whether you decide to work with a traditional lender or a mortgage broker, make sure you are comfortable doing business with that person (and institution). Beware of predatory tactics that some lenders use on inexperienced homebuyers.
Get pre-qualified or pre-approved for a mortgage loan
If you want to buy a house, getting pre-qualified or pre-approved for a loan is smart because it gives you an idea of the price range you can afford. It also makes you a more attractive buyer and equips you with some negotiating power. Pre-qualification/pre-approval will speed up the mortgage approval process once you find a house, since you’ve already completed most of the necessary steps required by the lender.
Prepare for the house hunt
Before you go out to buy a house, research the neighborhoods you’re interested in and check the Internet or local newspaper for available homes. It’s recommended that you create a “House Wish List” with the amenities you will need and the things you can live without. Also prepare a list of questions for the realtor as you’re going through the property so you don’t leave anything out.
• FIND A HOME •
Go house hunting
Whether or not you hire a real estate professional to help you buy a house is up to you. Licensed agents have more access to property listings and can help find a home that fits your needs and your budget. However, they will likely charge a hefty commission fee. Otherwise, you can search for property listings (online, newspapers, etc.) yourself and keep an eye out for open houses.
Make an offer
When you find the right house, you should make an offer based on hard data about the property. A real estate agent can provide numbers from comparable sales in the area to support your decision. You will put together a written offer stating the amount you’re willing to pay and under what conditions you will buy the house ― your offer should be contingent on your financing (which still needs to be approved by the lender) and a successful home inspection.
Home inspection and appraisal
Once you’ve found a house you want to buy, the lender will order an appraisal of the property to determine its market value (before officially approving your loan). During this time, the house should also be examined by a professional home inspector.
In order to get a mortgage and buy a house, you must insure the property. You can ask an insurance company or agent for an estimate. Note that some areas have special requirements for hazard insurance (e.g., floods, earthquakes and wind).
Get approved for your mortgage loan
At this time, you will need to make a final decision about the type of mortgage loan you want. You should also lock in an interest rate for your loan. Your loan application information will be closely reviewed for accuracy and completeness. When a loan is approved, the lender presents an offer defining the mortgage amount, the terms of the loan, and any conditions that must be met before closing. If satisfied, you may sign the papers and proceed towards buying the house and the mortgage closing process.
• CLOSE THE DEAL •
The closing process
On closing day, you will sign two major documents:
- The agreement between you and your lender for the mortgage loan
- The agreement between you and the seller for property ownership transfer
Within 3 business days of applying for a loan, the lender is required to provide you with a good faith estimate (GFE) that covers the fees and closing costs associated with your mortgage and buying a house. Keep in mind that the GFE is only an estimate ― the final settlement costs may be different. Closing costs generally include, but are not limited to, the following:
- Credit report fee
- Origination points
- Discount points (a.k.a. mortgage points)
- Appraisal fee
- Application fees
- Title search / title insurance
Title search and title insurance
In order to buy a house, you will be required to have a property title search performed and to purchase title insurance. A title search is done to make sure that there are no outstanding claims on the property. Title insurance protects the mortgage lender against errors in the title search.
Most lenders will require you to deposit money into an escrow account. An escrow account helps ensure payment of the taxes and insurance associated with your mortgage loan. The lender collects the funds for taxes and insurance (from your monthly payments) and holds them in escrow until they are due.
At closing time, all parties involved sign the papers to finalize the deal and ownership of the property is transferred from the seller to you. Congratulations! You now know how to buy a house!