The Home Buying Process Explained in a Simple Way
Are you buying your first home? Have you already bought a home but didn't really understand the home buying process at the time? For many people, buy property can seem overwhelming, but it doesn't need to be. Here we have compiled all the info you need — all into a simple explanation of the home buying process.
Even though it can be a lot of work, buying the right house is one of the most rewarding things you will ever do. Be patient with yourself and take your time making the decisions that will be best for you and your family. Think about what you really like and what kind of environment makes you feel safe and comfortable. Then go out and buy the home of your dreams!
First Steps
Before you get started, remember that you have a lot to do, but you can be successful if you break the process down into steps. Some of your first steps need to include next:
Making a Budget
If you have never made a budget before, this is a good time to get into the habit. Living within a budget is a skill that will help you throughout the rest of your life, and you will appreciate it, even more, when you have a home to maintain. Making a budget is the first step to buying a house because you need to know from the start what you can afford. Do not be disappointed if you wish you could afford a more expensive house, but focus instead on what you can afford today.
There are some helpful budget management skills you can read up on so that you have a better understanding of what will go into a budget and how your budget will help you. There are different kinds of budgets you can choose from, such as the zero-based budget and the 50/20/30 budget. Find a budget you are comfortable working with so that you will stick with it. The most important part of making a budget is that you will get a clear picture of your current financial situation, and then you can make the right decisions when buying your new home.
Pre-Planning
Even before you start the formal process of buying a new home, you can get ready in other ways. Whether you are buying the home on your own or with someone else, you can start taking stock of your current situation as soon as possible. Ask yourself the following questions:
When is my lease up?
If my children will be changing schools, is the calendar different in the other school district?
Do I need to take care of other accommodations ahead of time, such as finding a daycare?
Even if you do not yet know the exact location of your new home, you will feel more relaxed if you know how to take care of all those issues before you start. Being prepared will give you the peace of mind you need to focus on real issues that may come up during your move.
The Home Buying Process: Simplified
Now that you're prepared and know the basics about buying a home, here is the home buying process: simplified.
1. Educate yourself
Make sure that you educate yourself before choosing what home you want to buy. You need to make sure that you know what you're getting yourself into. Buying property is making a big investment, so you want to be sure that you are making educated and informed decisions.
There are many books and websites that you can utilize to learn about loans, real estate agents, appraisers, and home valuations. You should also consider brushing up on some common real estate finance terms and definitions, so that you can follow everything your real estate agent says, as well as ask the correct questions when searching for your dream home.
2. Check your credit
Your credit score is more important than you probably realize. A landlord may turn away potential tenants with a poor credit score, and you may find that you are unable to take out a traditional loan, especially an unsecured loan. If you have a poor credit score, it can affect your ability to get a home loan, and it may cause you to pay a higher interest rate. Your auto insurance company may even charge you a higher premium if you have poor credit. Luckily, there are some ways you can repair your credit, and you may want to work on improving your credit score before you apply for a home loan.
3. Budget
I already mentioned making a budget, but it's so important that I'm going to mention it again. Now that you have more background understanding of what you need to do and have in order to be ready for the home buying process, it's time to apply your budget with your new knowledge.
The budget you made before was probably just focused on organizing your finances — which is also extremely important. But now it's time to look at this overview of your finances and make decisions based on the information you have. How much money do you have leftover after paying all your bills every month, if any? How much money do you spend on non-essentials and would be willing to save for a while instead? Now is the time to ask yourself these important questions. Once you've answered them, you hopefully have a better idea of what you can pay out of pocket for your new home and how much you need to finance from outside your own bank account.
4. Apply for mortgage pre-approval
Depending on your credit, you may want to check the rates at more than one mortgage lender before applying. Some lenders work better with people who have less than perfect credit, and you may want to ask about that first. You will have to provide documentation, such as your tax returns, wage statements, and bank account balances. Once you are approved, you will get a letter that you can use for about 60 to 90 days to shop for your new property.
But be careful, a mortgage pre-approval isn't necessarily a golden ticket to buying your new home. FOX Business shared 5 reasons why your mortgage could be denied after preapproval. The important takeaway: have a plan. It is important to make sure that your credit is in good shape and that you're prepared for any emergency expenses that may come your way. If not, you may find a hit to your credit score and an increase in debt, which could ultimately affect your mortgage pre-approval.
But don't worry! This is unlikely. It just shows how important preparation is during the home buying process. Any obstacle could pop up at any time — what's important is how you deal with each obstacle.
5. Get a real estate agent
One of the best ways to get a good real estate agent is by asking your friends and family for a referral, so you know they have experience helping others meet their goals. Check out their online presence first, and then interview at least your top three or four choices. When you first meet them, show them your pre-approval paperwork, so they know you are a serious buyer.
Check their references and make sure they're licensed, but in the end, choose someone you feel comfortable with. Buying a house is a personal process, and you want your agent to understand you in order to help you better. Once you have made your choice, read the contract carefully before you sign it.
6. Find a home
Buying a home is a big decision, so don't just buy any old home — find your dream home. For most people, the perfect home will have the right:
Location
It may be important to consider whether the home is close to a specific school or park, or maybe you just want to be away from the hubbub of the city.
Price
You need a home that fits within your budget, so making sure that you only consider homes within your price range will save you from disappointment or tough decisions later on.
The Level of Upkeep Your New Home Will Need
An older home with all its original appliances may cost you more in time, money, and energy. Plus, if you aren't big into gardening or lawn upkeep, then getting a home with a big garden area may not fit well with your interests or willing level of upkeep.
Size
You need to make sure you have enough room for your family, including possibly a special place for grandparents or house guests.
7. Make an offer
Once you have found a home you like and that fits your needs, make a reasonable offer. If you bid too low it may seem insulting, but you also do not want to bid too high and spend more than you need to. Consult a friend or trusted advisor who knows about accurate home values to help you decide what the best offer is for the house you are interested in purchasing.
8. Schedule a home inspection
If you are taking out a mortgage to buy your home, your lender will likely require you to show a recent inspection of the property. Even if the seller is being honest, a thorough inspection may still find important issues that need to be fixed. If the inspector finds something wrong, the seller may either fix the problem or lower the price, knowing that the new owner will have to deal with the issue.
9. Secure financing
You already used the budget you made to help you determine how much you could spend on your new home, and now it's time to determine — based on that information — which financing options are available to you. Before looking at your options, I recommend using a mortgage calculator. A mortgage calculator will allow you to see what your planned down payment will mean for your monthly mortgage payment. This can help you determine if some houses are really just out of your price range and not worth considering.
Here are some of the common financing options available:
Loans
This term is broad and includes other options (listed below), but it's also good to look at the idea of a loan from a broader perspective. I think it's important because buying a home comes with many other expenses besides just purchasing your new home — which is already quite a large chunk of money, but loans can help with many of the other expenses you may find you now have, such as residency relocation and general moving expenses.Even just moving across the same city may require you to need to rent a big truck to move all of your stuff from your old place to your new home. If you're moving on an even larger scale — like across the country, then you will probably also need to spend a couple of nights in a hotel. Moving loans can help you afford all the expenses associated with your move.
Home Equity Loans
A home equity loan is a specific type of loan, which allows you to use the value of the home to borrow money. You essentially use the portion of the home which you already have paid as collateral — so if you don't make your payments or make them late too often, then you will lose your new home. While it isn't normally a good idea to use your home as collateral, this may be a good option for you, as it does provide some flexibility and, depending on the type of home equity loan, doesn't require you to pay interest on money that you haven't used yet.As mentioned, this loan can be used on the parts of the house you have already paid off. Because of that, a home equity loan does not work for those who are buying a home and have only started the process and haven't paid anything off yet. This is better for once you already have some of the home paid off and are in need of financing repairs, expansion, or renovation.
Home Purchase Loans
If you are just starting out, then a home purchase loan could be a good option for you. This is like any regular loan, where you are borrowing money to purchase a home. You can take out a loan for just part or even all of the total cost of a home — depending on your needs.There are many types of home purchase loans to consider though, so it is best to do your research on each one, to see which is better for you. The main types of home purchase loans are Conventional loans, Adjustable Rate Mortgage (ARM) loans, Interest-Only loans, Jumbo loans, Balloon loans, Combo loans, Federal Housing Administration (FHA) loans, and Veterans Affairs (VA) loans.
Mortgages
Mortgage loans, aka a mortgage, are a specific arrangement in which you pay off the home and are allowed to occupy it as you do so. However, a mortgage, similar to a home equity loan, uses the house as collateral. Because of this, you will lose the house if you don't pay or don't pay on time.A big different to a home equity loan, though, is that when you take out a home equity loan, you already own the home, but with a mortgage, you don't fully own the home until the last completed payment is made.
Rent-to-Own Home Agreements
If you don't have the best credit, then maybe a Rent-to-Own Home Agreement could be a better option for you. The two main types of Rent-to-Own Agreements are Lease-option vs Lease-purchase. In Lease-option, you have the option — but not the obligation — to purchase the home in the end. On the upside, this allows you more flexibility. On the downside, if you do decide to not purchase in the end, then you will also be walking away from non-refundable upfront fees.
Savings
You probably won't be able to save enough money to buy the house from only your savings — unless of course, you have an inheritance or other big source of income; however, it is a good idea to save as much as you can to pay off as much as possible at the beginning. You want to save at least enough to pay your down payment, which may be at least 10-20% of the total house price — quite a lot of money, I know. But if you think about it, that's a lot of money you won't have to pay interest on later.
10. Close the deal
Now it's time to close the deal! If everything looks good and you've asked all the necessary questions, then it's time to dot the i's and cross the t's.
You'll probably be required to show proof of homeowner's insurance before you can officially close the deal. Just make sure to do this before signing the final contract. Then you'll just need to sign all the paperwork, hand over the money, receive the deed, and move into your dream home!
Documents to Secure Financing
There are many documents that you will need during the home buying process. While some of the documents you end up needing will vary, make sure to collect and organize the following documents before starting the home buying process:
- Pay Stubs
- Proof of Employment
- Employer Contact Information
- Tax Documents
- Bank Statements
- Business Documents
- Debt Information
- Confirmation of Property
- Residental History
- Proof of Additional Income
- Stocks, Bonds and Savings Statements
- Earnest Money Source
These documents will show whether or not you have a stable job — and thus stable income, how much debt you have, and how much income you have to offset your debts. If you have a lot of debt but also can show a history of making the payments on your debt on time, then the lender will see that they can trust you to pay them back on this new debt.
Documents to Hand in with the Paperwork for Buying a House
Before you are able to complete your paperwork for buying a house, you will need to provide some additional documents as well.
One of the important ones is the Title Search. You can find a title by going through public records. The title search will verify whether or not the seller has the legal right to sell the property and will protect you from a fraudulent sale. A Home Appraisal and a Property Survey are also good to have. The home appraisal will determine the value of the property and will verify whether or not how much you agreed to pay is appropriate. If you agreed to pay way more than the home appraisal amount, then you can use this document to negotiate a more appropriate price. A property survey, on the other hand, will verify the legal boundaries of the property, which may come in handy if there is ever a land or boundaries dispute.
Further Help
If you're looking for further help regarding the home buying process, then look no further. Goalry and the Accury Store can help. The Accury Store is a store of free tools, which can help you find accurate real estate values. They also provide a range of videos and blog articles to help you find any information you need about buying or selling property.
The Accury Store is just one of many helpful Stores within Goalry, your Financial Goal Mall. Goalry allows you to reach your financial goals and comparison shop for any money matter — all in one place. Goalry does this by connecting your accounts, allowing you to more easily review your financial accounts and overall personal finances. Whether your financial goals have to do with reviewing and managing your debts (The Debtry Store), finding the right loan for you (The Loanry Store), or getting information about taxes and comparing tax offers (The Taxry Store), Goalry can help. Goalry even has an app — which adds convenience and efficiency to your budget management.
Conclusion
Now that you know how to buy property, it's time to start searching for your dream home! Just remember to stay organized, keep your documents in one place, and be persistent. You can do this!