If you haven’t purchased property before, becoming a homeowner can seem like a complicated process full of mortgage applications and loan docs and counter offers and inspections. How do you know where to start? How do you know what to expect?
Today, we’re going to breakdown the process of becoming a homeowner into 9 manageable steps.
It’s important to note that each step may contain a few smaller steps. Most real estate transactions have a lot of moving parts and some of the steps may overlap, however these 9 steps serve as a solid overview of the basic process of becoming a homeowner.
Most importantly, don’t forget your real estate agent will be there with you every step of the way to help you navigate micro these steps and moving parts!
Let’s take a look together at the 9 steps that will take you from house hunter to homeowner.
Step 1: Prepare Finances
How much house can you afford?
Mortgage lenders recommend you do not stretch yourself beyond buying a home that is more than 3 to 5 times your annual household income. If you are not purchasing a home with cash, you will need a mortgage pre-approval provided by your mortgage lender. A lender will work with you to get a loan that meets your needs. Some buyers are concerned with keeping their monthly payments as low as possible, while others want to make sure that their monthly payments never increase.
Check your credit – you can review what is on your credit report for free at www.annualcreditreport.com.
A mortgage requires a good credit score. A good credit score is partially determined by how much money you owe, whether or not you make your payments on time and how you handle your finances in general.
Save cash for a down payment and other expenses.
In order to make your dream of buying a home a reality, you will need to save cash for your down payment, earnest money, closing costs & home inspection.
- A down payment is typically between 3.5% & 20% of the purchase price. There are even programs that require no down payment, be sure to ask your lender to see if you qualify.
- Earnest Money is money you put down to show you’re serious about purchasing a home. It’s also known as a good faith deposit. This money will go towards your down payment at closing.
- Closing Costs and Pre-Paid Expenses / Escrow Set-Up for the buyer can run between 2% & 5% of the loan amount.
- A home Inspection costs $300 to $500.
Step 2: Get Pre-Approved for a Loan
Most buyers are surprised to learn that searching home listings online isn’t the first step on the journey to becoming a homeowner.
Before you even look at a listing, you should get pre-approved for a loan. There are two main reasons to put this step first:
- It will give you an idea of your total buying power so you can ensure you’re looking at the correct price point. Many buyers start their search in a price range they think they can afford, only to learn later that they can’t get approved for a large enough loan to purchase homes in that range. It’s a disheartening step back when they have to adjust their standards from the higher-priced homes to the lower-priced homes. Make sure you understand how much home you can afford, based on how much you can secure in total financing, before you fall in love with any listings.
2. It will help you make a strong offer when you find your home.
Having your pre-approval letter in hand when you find the right home will greatly increase the chances of having your offer accepted. When sellers accept your offer, they have to take their home off the market. If you were unable to get financing approved, those sellers have to start back at square one having lost weeks of potential buyers touring the house. Sellers (and their Agent) know this, so they are much more likely to accept an offer from a buyer who is already pre-approved for a loan.
Quick side note: some lenders offer “pre-qualification” in addition to pre-approval.
Pre-qualification doesn’t carry the same weight as pre-approval. Pre-qualification is just a lender asking you questions about how much you make and how much you have saved and then estimating a price range for you. It won’t mean as much to the seller when you make an offer, so be a savvy buyer and skip the pre-qualification and go straight for the pre-approval.
How to Get Pre-Approved
To get pre-approved, you simply have a mortgage lender review your finances, credit, and employment to determine how much they are willing to lend you. You’ll need to complete an application, provide all financial account statements and pay stubs for the last two months, and authorize a credit check.
It’s typically a good idea to find the lender you’d like to stay with for your home loan, and get your pre-approval from that lender. It’s just less paperwork for you than if you received pre-approval from one lender, and then decided to go with a different lender for the actual loan.
Unless you have special circumstances (like poor credit or low income) that would require special considerations, the most important criteria for choosing your lender is the interest rate they offer. Generally speaking, the lower the interest rate, the better. A lower rate means you’ll pay less over the full term of your mortgage.
If you have questions about how to choose a lender, contact me! I know the process can be a little intimidating and I’m here to help you walk through every step of it.
Step 3: Start Your Search
With your pre-approval in hand, get online and start browsing!
This step is all about you and your priorities. Perhaps you have your heart set on a specific neighborhood or maybe you have a completely open mind and you’re just waiting for something to catch your eye.
Wherever you are with your search, here are a couple helpful tips from someone who’s worked with scores of buyers:
- Get a Realtor® involved early. New listings come on the market every day and your Agent knows about upcoming listings before they even hit the Internet. If your Agent knows what you’re looking for, he or she can make sure you’re among the very first buyers to learn about it.
- The saying “a picture is worth a thousand words” is true most of the time, however online photos don’t always tell the whole story. Some listing photos are gorgeous and make a not so nice house look like a work of art. Other listing photos are terrible and make a property with amazing potential look like something you wouldn’t go near. Real estate takes a little legwork. Set aside an afternoon to drive around and see what those houses (and neighborhoods!) look like in real life. This is another good reason to get a Realtor® involved early. We know the neighborhoods and we often tour new listings immediately, so we can help you decide if a house is worth your time.
- Check out the little details of each house. Does it have all the must haves? How well has the house been maintained? Are there obvious repairs that will need to be completed right away? Are there upgrades you would want to do right away or is it perfect just the way it is?
- Always keep in mind – houses are meant to be blessings, not burdens. You don’t have to buy a house for the entire amount you qualify for. Instead, buy one that speaks to you with a monthly payment—including insurance and taxes—that fits into your monthly budget.
Step 4: Make an Offer
When you find a home you love, it’s time to make an offer!
Congrats, you have found THE house!! In today’s market, when the demand is higher than the number of properties available, it is important to act fast!
You and your Agent will sit down and look at recent sales and current buyer activity in the area, as well as the value of the property in its current condition. Based on of all this information, you will determine the price that you would like to offer.
The seller may accept your offer as-is, or they may make a counter-offer and the negotiations begin.
As with any negotiation, you need to be armed with information in order to be effective. Your Realtor® gathers market information constantly, so make good use of their knowledge and negotiation skills.
You’ll need to put up a relatively small amount of money at this step of the process. This money is called the Earnest Money Deposit, as in, “I’m so serious about possibly purchasing this property that I will give you money if I back out without a good reason.”
The amount varies, but it’s often somewhere between 1-3% of the offered purchase price. In a competitive market a larger deposit shows how serious you are. You can still get this money back if the deal falls through because of the inspection or an unforeseeable problem with financing. Ideally, the deal will proceed as planned and the earnest money deposit will go toward your down payment.
Step 5: Enter Escrow
Once you and the sellers come to an agreement on the offer, you have entered escrow!
Escrow is the name for the period when ownership of the property is in the process of transferring from the seller to you. It usually lasts between 30 and 60 days and there’s a lot happening during this timeframe.
The remaining 4 steps all occur during the escrow period (and several more steps are happening behind the scenes!).
Escrow is a time to inspect the property, secure your financing, sign a mountain of paperwork and transfer money.
Your transaction will be assigned a closing attorney to make sure everything is moving along as scheduled. As your Realtor®, I’ll be working closely with both your lender and the closing attorney to make sure the process goes as smoothly as possible.
Step 6: Get a Home Inspection
The home inspection is among the first tasks to be completed during the due diligence time period. You have the opportunity to hire a certified home inspector to assess the property and notify you of any potential problems. The home inspection will cost you a few hundred dollars and it’s worth every penny.
Most often, inspections bring up relatively minor issues, just to make sure you know what you’re getting into. The water heater is 10 years old and should be replaced sometime soon? Good to know so now you can plan for it.
However, sometimes inspection reports contain serious safety issues or code violations that may reopen negotiations. For instance, the inspector finds faulty electrical work in need of immediate repair. Depending on the unique circumstances of the transaction, you might want to ask the seller to correct any issues, contribute the funds needed to correct the issues, or to help pay for closing costs so you will have the money to have the repairs done yourself once you have purchased the property.
In rare situations, the inspection could be a deal-breaker. If you find you’ll need to pay $10,000+ out of pocket to make the structure habitable, you may want to walk away from the deal. The few hundred dollars spent on the inspection just saved you from buying a money pit!
It’s important that you understand that the home inspection will be extensive and will list many minor things that don’t even need to be addressed. The inspection can be scary for first-time buyers because it comes with a laundry list of recommended fixes, however most of those recommended fixes are entirely optional and could be merely cosmetic in nature.
Most importantly, it helps to have an experienced Realtor® on your side. An agent who’s seen dozens of inspection reports can help you determine which items are a priority and which are only listed because the inspector did a thorough job.
Step 7: Secure Your Loan
Throughout escrow, you’ll be working with your Loan Officer to secure your financing and they will order an appraisal of the property.
Also during this timeframe they check and double-check everything, so expect to answer the same questions repeatedly. You may need to write a letter explaining situations regarding your employment history or your residential history. For example, “I worked here from this date until this date” or “I lived at this address from this date until this date.”
Throughout escrow, they may ask for updated bank statements and pay stubs as you receive them and they will likely call your employer multiple times to make sure you are still employed.
Any major financial or life changes that occur during escrow could completely disrupt the process. Here is a list of things to avoid during the escrow process:
- Job changes (changing jobs, reducing working hours or demotions).
- New loans: don’t apply for any other loan until your home loan is secure.
- Big purchases: wait until you close escrow to buy furniture or that new car you always wanted.
- Large debt payments: it might sound like a good idea to pay down a large chunk of your student loans before taking on a mortgage, however this large transfer of cash will change your financial ratios, so wait until after escrow closes.
The loan won’t be 100% secure until all loan docs are processed, which happens at the closing and makes the house officially yours. Until closing, keep working with your loan officer and maintain steady finances until you have the keys!
Step 8: Sign a Mountain of Paperwork
So. Much. Paperwork.
There is absolutely no getting around the mountain of paperwork required to get a home loan and take possession of a property.
Your closing will be held at a real estate attorney’s office and you will have a stack of loan docs to be a signed in order to secure the loan and transfer the title of your new home to you. .Be sure to give your hand plenty of the rest the day before.
If you would like an opportunity to read all of the paperwork prior to closing, be sure to let your Realtor® know a few days ahead of your close date. This will give you a chance to clarify any details and ask any last-minute questions of your loan officer before the signing.
Also, be sure you have a couple forms of ID with you at the signing so the notary can confirm your identity.
Then flip and sign…and flip and sign…and flip and sign…
Step 9: Pay Your Closing Costs and Get Your Keys
Last step! Pay your down payment and closing costs and get your keys!
You’ll need to wire the amount of your down payment and closing costs the day before the scheduled close of escrow. This requires a trip to your bank with the instructions from the attorney’s office for wiring funds. You’ll pay a small fee for the wire transfer–(check with your bank to determine the cost as each bank differs). The closing attorney collects the funds from both the lender and the buyer and then distributes the funds, as appropriate, to all parties involved (seller, real estate agents, title companies, etc).
Then you get the keys to your new home!!
Now the fun really starts: painting, moving, decorating and some new home photos! I’m getting excited for you just thinking about it.
I truly hope you found this overview of the process of becoming a homeowner helpful.
When you’re ready to start your search, please contact me. I love helping buyers find their new homes and would be honored to walk you through the intricacies of each of these 9 steps!