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Buying a house can be exciting, but nerve racking.
I can spend a lot of time thinking, comparing and budgeting on a small purchase like a laptop, but a house?
There is never a time in your life you will make such a large dollar purchase so its important to be prepared and know the steps to buying a house and how to navigate the process.
Plus, there are a lot of things that can go wrong. You don’t want to lose out on your dream house because of a simple mistake.
I once heard a story about someone who was going through the closing process on a home.
Naturally excited to be getting a new house, they went out and made a bunch of credit card purchases to buy new furniture before closing.
But that seemingly innocent action cost them the whole deal!
Because of the purchases they made, their debt-to-income ratio was changed, killing their loan approval and making them lose the house!
Below are 6 steps to buying a house and some important tips to help you navigate the process.
Step #1: Save Money for a Down Payment on a house
One of the first steps to buying a house is making sure you have a down payment.
You can’t purchase a house unless you have enough cash for the down payment and closing costs.
The good news is you may not need as much as you think! Did you know you can buy a house with a down payment as low as 3.5%? An FHA loan allows you to do this.
This means you could buy a home that is $150,000 with as little as $5,250.
In addition to knowing the down payment you need to purchase a home, you should also figure out how much of a monthly mortgage payment you can afford.
If you need help, try this article on how much to save each month that tells what your budget breakdown should be.
Before you start the steps to buying a house, you should find out your credit score. If your score is low, see if you can work for a few months to improve it. Learn how to increase your credit score with credit piggybacking!
The better your score is, the better interest rate you will get which will lower your monthly mortgage payment.
Step #2: Apply for a Mortgage Loan
Unless you have a ton of cash just sitting in a bank account, you will need a mortgage loan to purchase a home.
On of the most important steps to buying a house is getting a pre-approval letter for a loan.
Without a pre-approval letter from a bank, you can’t even make an offer on a house. So before you start looking at homes on your Zillow app, you need to have your loan in place.
Not only does it give you the ability to make an offer as soon as your dream house hits the market, it also lets you know what price-range you can look at.
Getting your heart set on a $350,000 house and then finding out you are only approved for $300,000 is disappointing.
The good news is a pre-appproval to purchase a house can take as little as an hour! You will have to answer questions about your income and debt and the your credit score will need to be pulled.
Generally, banks are the ones that provide loans for purchasing a house.
However, it is a good idea to shop around and talk to more than one bank or financial institution. This will let you make sure you are getting the best interest rate, service, and approval amount.
This is one instance where getting more than one credit report pull from a bank won’t lower your score. There is some latitude when it is obvious you are looking for a mortgage.
Once you have a loan pre-approval, find a good real estate agent to help you. Here are some tips on how to find the best agent.
An important point to remember when purchasing a house:
It is important to know that a pre-approval does not 100% mean that you have the loan. It means that they have the request under consideration and it appears to the bank that you might be approved to borrow this amount of money.
Later on in the process they will pull paperwork from you to make sure everything you told them is accurate.
However, if there are things that have changed in your job scenario or debt load it is possible for the pre-approval to not go through.
Keep your financial situation steady when you are house shopping!
Don’t go out and buy a new car, or increase your credit card balance.
Step #3: Make an Offer on a house
Now the fun part! Once you have a loan pre-approval in place you can actually start house shopping.
I highly recommend Redfin.com. They are linked in with the MLS so all the listings are kept instantly up-to-date. Plus, you can set up instantaneous email alerts for new homes that hit the market and match your wish-list. One of the down-sides of sites like Zillow is that they are not linked to the MLS and are therefore not updated.
When you find your dream house, you can decide on what you want to offer the seller.
Your agent will put together the official paperwork for this including any contingencies. (Like if you want to buy their furniture also.)
After the offer on the house is made the seller decides if they want to counter or accept it. If they decide to counter your offer it just means they reply with a different price for you to pay which you can then counter or accept.
Kind of like a stressful back and forth tennis match!
At this point you have to write a check for what is called the “Earnest money.” It is basically a deposit to prove you really want to buy the house and aren’t wasting anyone’s time.
Step #4: Schedule an Inspection and Appraisal
Once you and the seller agree on a price and the paperwork is signs, its time to schedule an inspection of the house.
An inspection usually takes 3-4 hours and will provide you a list of any issues with the house or repairs that need to be made.
The nice thing about the inspection is it gives you another negotiation piece. Now, you can ask the seller to make some of the repairs or take money off the price in exchange for the repairs.
It is also a time when you can pull out of the deal altogether without losing your earnest money.
If something serious is wrong with the house and the seller won’t make repairs, you are allowed to walk away without penalty.
At this point you will also need to schedule an appraisal as required by your mortgage lender. They want to make sure the house is worth the amount it is being sold for. This is another key piece where things can go south.
If the amount of the loan you are receiving is more than what the house is worth, your mortgage lender will say not to the loan!
It isn’t a good financial choice for them to fund a loan that is more than the house value. The good news is that this is a rare ocurrence!
Step #5: Make it through Escrow
Escrow is the period between your offer and the closing. There are a lot of things that happen during the escrow period. This is when your mortgage loan moves from pre-approved to approved.
The bank will ask you for a laundry list of paperwork like bank statements and pay check stubs. Here is a great checklist of what you will need.
You also have to get home insurance in place during this period. This protects not only the house but is also required by your lender.
Remember not to use credit cards or make major purchases during the escrow period!
2-3 days before your scheduled closing date, your mortgage loan bank will pull your credit again to make sure nothing major has changed.
Step #6: Close on the House
This happens on a specific day that was actually specified in the offer. Often times the buyer and the seller come to the same place.
A title company is in charge of making sure all the details line up and will be present as well. Closing day is when you will sign a whole lot of papers! It is the last step of the process and when ownership of the house is officially given to you.
On closing day you will need to bring your cash-to-close amount as specified by the bank.
The cash to close you need includes your down payment, escrow amounts of taxes and insurance on the house for the year, and additional fees required by the lender.
Once you close on the house you have a grace period of one month before your first mortgage payment is due.
The mortgage payment amount has 3 important parts:
- Principle – this is the part of your monthly payment that goes into paying down your loan.
- Interest – this is the part of the monthly payment that goes to the mortgage company for giving you the privilege of borrowing their money.
- Escrow Account Contribution – this is the part that covers your property taxes and homeowner’s insurance.
That’s it in a nutshell! While the process seems scary, the steps to buying a house are simple and the end result is worth it!