The Home Buying Process
Buying a home is one of the largest investments most people make. Details matter in the home buying process, and your REALTOR® and I will work with you to make the process as smooth as possible.
Whether you are a first time home buyer or buying your third house, its always good to review the best steps to take. Below are the 7 Steps to Becoming a Homeowner, tips that will make your home buying journey a happy one.
Download the 7 Steps to Becoming a Homeowner
There are 7 key steps to buying a new home…
1. Do the Research
The “right time” to buy a home is different for everyone, but budget is almost always a leading factor. I can help you find the right mortgage to fit your own personal budget and help you make the best decisions for your future.
You should also be familiar with your financial standing, current budget and credit history. All of these factors will come into play when you’re working with a lender, and they can affect what type of loans you qualify for. It will be beneficial if you write down a list of your assets and monthly expenses, including how much you spend on rent, car payments, credit card and student loan debts, child support, etc. Our mortgage calculators can help you estimate how much home you can afford comfortably.
Can You Qualify for a Mortgage?
The first question I can help you answer is if you qualify for a mortgage. One of the key factors in determining this is your debt-to-income ratio. For example, if a loan program uses a 28/36 qualifying ratio, this means you are allowed to spend no more than 28% of your gross (pre-tax) income on monthly mortgage payments and no more than 36% on total debt. Total debt includes car and school loans, credit cards, child support and alimony. So, if you earn $60,000 per year, your monthly gross income is $5,000. Under the 28/36 guidelines, your maximum monthly mortgage payment should not exceed $1,400 while your total monthly debt should not exceed $1,800.
How Much Home Can You Afford?
Next, you’ll need to calculate how much you can afford. For example, how much of a down payment are you prepared to make? Commonly paid in cash, the down payment is based on a percentage of the home’s selling price and is due at closing. Making a down payment of 20% or more can save you money and enable you to avoid the cost of mortgage insurance. If you are unable to make a 20% down payment, many other affordable mortgage programs exist.
2. Get Prequalified
Getting prequalified is a simple way to help make the home loan process even smoother.
What is Prequalification?
Prequalification is a lender’s estimate of what you likely are able to borrow, based upon information on your income, assets and credit check. I will provide you with an estimate of your loan amount and potential loan program information such are estimated principal and interest payments.
What are the Benefits of Prequalification?
Prequalification provides a range of benefits to home buyers:
- You’ll save time and be able to shop with confidence by only looking at houses within your price range.
- You can make an offer on the same day you find the perfect home.
- The seller can expect fewer delays with your offer, making your offer more attractive.
- Sellers are likely to prefer your offer over a buyer who is not prequalified, giving you negotiating power.
- A real estate agent will move quicker knowing you’re prequalified and ready to buy.
- You can identify credit problems that can be addressed early in the lending process
Other Prequalification Facts
- Prequalification is offered by most lenders, including PrimeLending, at no cost
- The prequalification process is not comprehensive and therefore is not guaranteed, nor is it considered any type of loan commitment. It simply shows that you’ve approached a lender who was serious about helping you determine what you can afford and will walk you through the process
3. Find a House You Love
The next step is the fun part: finding your dream home.
Before you start looking at houses, make a wish list for the qualities you are looking for.
- What features do you want in your home?
- How many bedrooms and bathrooms would your ideal home have?
- Are things like having a large backyard and updated countertops a big priority?
- Would you like a one-story or two-story home?
- Would you like a home office?
- What type of neighborhood would you like to live in? Finding the right neighborhood is often just as important as finding the right house. When considering a neighborhood, ask yourself some key questions. Is it near your office and areas of the city that are important to you and your family? Is it in the school district you desire for your children? Does the neighborhood appear to be a good fit for you and your family today and tomorrow?
- What type of home? There are several types of homes out there, each one providing different options in terms of space, responsibilities, upkeep and ownership. Consider all the differing factors that would make a single-family home, a condominium or a townhome the best choice for you.
- What are some of your deal-breakers?
Once you’re ready to start looking, you’ll want to begin working with a realtor, and be sure to share these preferences with your agent.
Additionally, you’ll want to make sure that your agent and lender are introduced (if they don’t already know each other). They may need to communicate about the house you’re interested in, where you are in the loan process and home buying deadlines.
If you don’t have a realtor, I am happy to introduce you to one.
4. Make an Offer
After searching, you’ve found the perfect home. Now what?
Purchasing a home is a transaction that involves heavy negotiations. A REALTOR® can be a valuable resource to have on your side as you determine the appropriate initial offer to extend. During this part of the process, you’ll want to consider the following:
- To add extra weight to your offer, you’ll want to provide the prequalification letter. Sellers obviously prefer an offer with financial security.
- Make sure all of your negotiations are in writing. This will provide a record of deals and decisions made as well as help clarify any misunderstandings.
- You’ll want to have money ready to use as an earnest money (or “good faith”) deposit. While the amount varies depending on your location, all of it will be placed into an escrow account until the purchase transaction is complete.
After the seller accepts, it’s a good idea to get a professional home inspection. The inspector you hire will take a look at the house and let you know of any possible damage that you may have overlooked, such as electrical wiring issues. If he or she finds any major problems, you can share this information with the seller. If the seller doesn’t want to pay for the repairs, you can try to negotiate a lower price for the house.
5. Initiate the Loan Origination Process
When the seller accepts your offer, you should immediately begin the loan origination process. Hopefully you followed step 2 and you are already pre-qualified, which will speed things up a bit. If not, complete an application. Either way, share the contract with your lender (i.e. me!).
Your lender will supplement your application with the contract information, recommend a loan product (or products) that best meets your needs, and lock in your rate.
From there, you will need to provide several required documents, like copies of your W-2s, bank account statements and more. Having these documents organized and ready to go will help speed up the process.
Within three business days after completing the application, loan selection, and rate lock, you will receive a good faith estimate of the anticipated closing costs, called a Loan Estimate. It will show the estimated costs associated with the loan settlement, including origination fees, mortgage insurance, title insurance, escrow reserves, insurance, the estimated monthly payment. The total cost of all finance charges on the loan is also shown, stated as an annual percentage rate (APR).
Some other key things to understand:
Closing Costs – Although costs vary by lender and location, closing costs generally range from 2 to 7% of the home’s purchase price and include three types of costs:
Prepaid Expenses – Prepaid expenses include homeowner’s insurance, mortgage insurance and the costs to set up an escrow account. An escrow account is when a lender will pay the annual insurance premiums and various taxes on the borrower’s behalf. The amount that goes into this account is based on the first year’s premiums; an additional amount also is included to pay for future premiums. Because they vary based on the type of property and the time of the closing, prepaid expenses are difficult to determine.
Discount Points – A discount point is equal to 1% of the mortgage loan amount and actually helps reduce the loan’s interest rate. For example, depending on prevailing rates, a $100,000 mortgage might be obtained at 7.75% with 2 points, or at 8.25% with no points. Obtaining the lower interest rate would cut the mortgage payment by about $35 a month, but would require $2,000 — or 2 points — up front at closing.
Out-of-Pocket Expenses – Fees for appraisals, attorneys, credit reports, deed recording, tax services, home inspections and appraisals, and other miscellaneous expenses make up the out-of-pocket expenses.
You will be required to sign several documents, including the Loan Estimate before processing can proceed.
6. Processing & Final Approval
During this part of the process, several activities will take place. First, your new house will be appraised. As soon as your option period has expired, your lender will order the appraisal. The appraisal usually takes 5-10 days to be completed, so it is important that it is ordered as soon as possible.
Next, your lender will order the title and tax certificate, a copy of the survey (or order a new survey if needed), and conduct a flood certification.
From there, your lender will send your application and all documents to the underwriting team for final review and approval.
Often the processor or underwriter will ask for additional information or documents during this step. Don’t worry if this happens – it is completely normal.
After everything is approved, your lender will work with your title company to prepare the closing documents.
7. Final Inspection, Closing & Funding
About 7-10 days before your closing day, you will receive a “Closing Disclosure” from your lender. This document outlines the details of the transaction, listing out all the fees you are responsible for and your “Cash to Close”. Usually the first copy of this will be close, but not 100% accurate. This is an opportunity for you to review the details and provide input on anything about the transaction that your lender may not be aware of. You will need to sign (eSignature in most cases is preferred) this Closing Disclosure to keep the process moving. At least 1 day prior to closing your will receive the Final Closing Disclosure, which will be 100% accurate.
The day before closing (or at least three hours before your closing appointment), have your bank wire your “Cash to Close” amount to the title company. Instructions will be provided by your lender or your title company.
Usually a day or two before closing on your new home, you’ll return to the property for a final walk through to make sure everything is still in good condition and that the seller has fixed anything that was agreed to in the sales contract.
On closing day, you’ll bring your ID to the title company you’re working with and sign the paperwork. (For more details, check out What to Expect on Closing Day.)
Whether you are purchasing or refinancing a home, closing day can be a whirlwind. Everything moves fast and there are a lot of papers to sign. It’s a good idea to review what will happen ahead of time, so you can feel prepared and close your loan with confidence.
Who Will Be at the Closing Table
The number of people who will attend your closing depends on many factors, including the state where the property is located, the property type and more. At the closing, in addition to you, the people attending may include:
- Your attorney (if you have one)
- The seller(s) (if you are buying a home)
- The seller’s attorney (if they have one)
- Both real estate professionals (yours and the seller’s, if you are buying a home)
- The builder’s representative (if a brand-new home is involved)
- The closing agent (which could be a representative from the title company or a real estate attorney)
- A notary public
Steps in the Closing Process
The closing can be held at the title company’s office, your lender’s office, a real estate attorney’s office or other agreed upon location, depending on the circumstances.
Here’s a review of what will happen at closing:
1. You’ll review and sign all of your loan documents. Make sure that each document is explained clearly and that you understand the term to which you are agreeing. If something is different than what you expected or agreed to, don’t sign until the issue is resolved to your satisfaction.
2. You’ll give a certified, wire or cashier’s check to cover your down payment (if applicable), closing costs, prepaid interest, taxes and insurance.
3. Your lender will distribute (wire) the funds covering your home loan amount to the closing agent.
4. Depending on your loan terms, you may also be required to set up a new escrow (or impound) account with your lender, so you can pay your property taxes and homeowners insurance along with your monthly mortgage payment.
The main focus at a closing is to sign the final paperwork. The three main items to review and/or sign during closing are:
HUD-1 Settlement Statement
The itemized list of the final credits and charges, for both you and the seller, based on the terms of the contract. You should receive a copy of the HUD-1 at least one day prior to the closing for your review.
Deed of Trust or Mortgage
The documents in which you agree to a lien on your property, as security for repayment of your home loan.
The mortgage promissory note is a legal “IOU” that represents your promise to pay the lender according to the agreed terms, including the dates on which you must make your mortgage payments and where they must be sent.
If you are uncertain about what to do at any point of the loan process, please contact me for guidance or to answer any questions.
Once we have funded your loan – usually about 2 hours after the paperwork is completed – the title company will give you your keys, and you can move in!
- Moving takes planning and patience. My Moving Checklist can help.
- Have pets? Moving can be hard on them. Check out Make Moving Easy on Pets for tips that will help ease the transition.
- Notify people of your move. Check out Who to Notify When You Move.
- Services such as Shutterfly offer great options for creating and mailing “I’ve moved” cards to friends and family.
- Your lender or realtor may have recommendations on movers and other service providers if you need them – just ask.
- While you will likely need a few items to make your home livable and comfortable, I recommend that you put off buying any significant furniture items until you’ve lived in your new home for at least a few weeks – find out what works / doesn’t work and how you are using your new space (or want to use it).
- Domino and Houzz are great places for design and décor inspiration
- Lastly and most importantly, enjoy your dream home!