The Home Buying Process
Published on: January 4, 2025
How to Buy a Home—Step-by-Step Guide for Home Buyers
Home buying is a multi-step process that requires brainstorming and proper planning. The objectives and priorities also differ. For example, a first-time buyer will have different goals than parents who want to downsize when children leave. However, whether you are looking to upgrade or buying your first-ever home, here is a step-by-step guide on how to buy a home.
1. Determine Why Do You Want to Buy a House
Buying a home is a big decision, and it is necessary to be sure about it. If you are unsure about what you want, you might regret your choice later.
Thus, start by identifying your personal and financial goals. Think about the features you want in a home, like location and amenities, and how long it might take to save for a down payment. Also,
· Make a list of what matters most to you.
· Check if buying is financially possible or if renting a bit longer is better.
· Prepare for the costs of home maintenance.
2. Understand How Much Can You Afford
Determining your budget is one of the initial steps in the buying process. You can start by adding up your monthly income and subtracting your non-housing expenses. The remaining amount can go toward your down payment, though you may need to save more.
Then, calculate your debt-to-income ratio by dividing your monthly debt by your income. If it is above 45%, lenders may see you as a high-risk borrower. This could affect your loan approval or interest rate.
Also, make sure you account for additional costs such as mortgage payments, taxes, HOA fees, insurance, and maintenance.
3. Check Your Credit Score
Credit score is vital in deciding your loan options. Lenders use it to set loan terms and interest rates. A higher score means a lower interest rate, while a lower score leads to higher mortgage costs. A credit score of 670 or more is considered good.
You can get your credit score for free once a year from the three main agencies: Equifax, Experian, and TransUnion. Some credit card companies and banks may give free access. If you find any errors, report them to the agencies.
4. Prepare for Down Payment and Apply for a Mortgage
A down payment is the amount of money you pay upfront when buying a home. The larger the down payment, the less debt you have. Most lenders prefer at least 20% down.
If you cannot afford 20%, some lenders may allow a smaller down payment but will require private mortgage insurance (PMI) and a higher interest rate. PMI is added to your monthly payment until you own 20% of your home.
You can explore government-backed loans like FHA, VA, or USDA for lower down payment requirements. Conventional loans may require just 3% down, and local or state programs could offer further assistance.
5. Start Your Home Search and Explore as Many Options as You Can
You can start your home search by researching neighborhoods, attending open houses, and browsing online listings. Understand your needs and the available options within your budget. This will help you find the right home.
It is better to consider working with a real estate agent to guide you through the process and negotiations. Ask friends or family for recommendations, tour multiple homes to compare prices, and get a feel for different neighborhoods to make an informed decision.
6. Make Your Offer
Consider the local market trends before you make an offer. In a competitive market, you may need to offer more, while in a less competitive market, a lower bid might work. Your realtor can be helpful with the negotiation.
In case of offer acceptance, you will be under contract. This means the seller cannot accept other offers while you complete inspections and appraisals.
You may also need to provide earnest money, typically 1-2% of the sale price. This money goes into an escrow account and can be applied toward your home purchase.
7. Home Inspection
After the seller accepts your offer and you deposit earnest money in escrow, schedule a professional home inspection. The inspector will check areas like electrical systems, plumbing, roof, and more.
They will also look for issues like structural damage or termite infestation. Ask the inspector for a list of problems that you can use to either negotiate a lower price or fix after closing.
8. Finalize Your Loan
After the offer acceptance, work with your lender to finalize the mortgage. You will need to provide documents such as tax returns, pay stubs, and homeowners insurance proof. The lender will review your income and confirm your eligibility for the loan. Make sure you have your insurance in place before closing.
9. Home Appraisal
Your lender will also go for an independent appraisal of the home to ensure its value matches the sale price. Remember that you have to pay the appraisal fee. If the home appraises for less than the agreed price, you may be able to back out of the deal if an appraisal contingency is included in your offer.
10. Negotiations
After the inspection and appraisal, you can request the seller to do the repairs or reduce the price. The seller is not obligated to make changes, but they may lower the price to allow you to handle the repairs. It is also possible that the seller might not agree to the repairs, so keep your next move in order.
11. Closing the Sale
Once everything is finalized, you can close the sale, typically 45 days after the offer is accepted. Bring all necessary documents on the closing day. These documents may include proof of your insurance, contract, and ID. You will meet with the seller and an attorney to complete the process. Afterward, you will receive the keys to your new home.
Summing it up
So, this was our detailed guide on how to buy a home. Apart from the above-mentioned steps, there is something else you may consider. The down payment is usually the biggest expense when buying a home because it is a big upfront cost.
However, homeownership comes with many other expenses. Therefore, before finalizing the purchase, you need to have enough saved to cover closing costs. These costs can differ depending on the state and the specific transaction, but they typically amount to thousands of dollars. Make sure you are prepared for these additional costs before you close.