How to Buy a House

How to Buy a House
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A home purchase is one of the most important of your life, so it’s no wonder the process can be stressful at times. But the right real estate agent and lender can make all the difference. Whether you’re a first-time homebuyer or you’re trading your current home in for your dream home, this guide will help you navigate the home-buying process.

Know What You Can Afford

When you buy a home, you’re adding a monthly payment to your budget. It’s important to know exactly how much you can afford for that payment since that will decide your ideal purchase price. Take a look at your monthly expenses and see if there’s wiggle room to pay more or less than what you’re currently spending on housing.

Keep in mind that in most cases, you need a down payment to take out a loan. If you can qualify for an FHA loan, you could get by with only paying ​3.5 percent​ down. But with conventional loans, you have to put down at least put ​5 percent​. If you can't afford the minimum down payment for the specific loan you take, you'll need to pay private mortgage insurance (PMI), which will be added to your payment each month.

Get Prequalified by a Lender

Once you have your down payment saved and your budget lined up, your next step should be to meet with a lender. Your credit report will play an important part in how much money you’ll be able to borrow. If a lender will only loan you ​$200,000​, for instance, you’ll know right off the bat to narrow your search to properties below that price point.

There’s another good reason to make a lender your first stop. When you can tell your real estate agent you’ve been preapproved for a certain amount, the agent has more leverage when putting an offer on a house since there’s less of risk that the contract will fall through. Some lenders even provide preapproval letters to show that you’ve been prequalified.

Considerations for First-Time Homebuyers

If this is your first home, you can approach the process differently than someone who already owns a home. First, you won’t have a home to sell, which means you won’t have a big check from the sale of your home to help you make the payments on your new place. You also need to make sure your credit score is fairly strong before you start shopping.

One advantage you have as a newcomer is access to first-time homebuyer programs. HUD has several of these programs, but there are also programs specific to various states. You can check for currently available first-time homebuyer programs on the HUD website.

Budgeting for Other Fees

Before you start budgeting for your new home, you need to know the full extent of the costs.

Here are the expenses that are typically part of the home-buying process. Many of these fees are due at closing when you complete the legal paperwork, but if you can’t pay cash, there are ways your lender can build them into your home loan.

  • Earnest money: When you place an offer on a house, your real estate agent typically requires a deposit that shows you’re serious about buying. This is basically a deposit of at least a few hundred dollars that you lose if you back out of the offer. The money is put in an escrow account, and it's returned to you if your offer is declined or when you close on the house.
  • Appraisal fee​: Your lender wants to make sure that the home is worth what you’re paying. But even if you're paying cash for the home, you should set up an appraisal to protect your own investment. The appraisal fee is typically between ​$300 and $1,000​.
  • Home inspection​: Another way your lender protects its investment is by requiring a home inspection. This identifies any issues with the house that you can then require the seller to fix before closing. Expect to pay between ​$300 to $500​ out of pocket for this expense.
  • Administrative fees​: There are various administrative fees built into your closing costs. Each one is minimal, about ​$30-$100​, but the costs can add up. They include fees for running a credit check, preparing documents, originating the loan and transferring the title.
  • HOA fees​: If your new property is in a neighborhood with a homeowners association, you’ll have monthly dues to pay. In some cases, you have to pay ​one or more​ months of HOA fees when you move in.
  • Property taxes​: At closing, you usually have to pay ​two months​ of property taxes.
  • Private mortgage insurance​: Unless you can make a ​20 percent​ down payment, you’ll be responsible for something called private mortgage insurance. Designed to protect your lender in case you stop paying, this insurance premium is built into your monthly mortgage payment. You can usually cancel PMI once you’ve paid off more than ​20 percent​ of the loan.

In some cases, you’ll see charges like application fees and mortgage rate lock fees. Make sure to get a list of all fees up front and ask questions. In some cases, you may be able to negotiate these extras.

Find a House

The best part of buying a house is shopping. Although you can search available properties online, a real estate agent has resources that aren’t available to everyday consumers, including advance knowledge of properties going on the market. If competition is fierce for available homes, you definitely want an agent to help you get your offer in quickly.

But not all real estate agents are equal. Make sure you choose one that knows your market. Check current listings and note the agents who are attached to various properties. Open houses can also be a great way to meet real estate agents. Research any agent before choosing one to make sure they’re licensed and have a strong history of real estate sales in the area.

Make an Offer

Once all your house hunting pays off and you find a house you like, it’s time to make an offer. This is where a real estate agent really comes in handy. An experienced agent can pull something called “comps,” which gives information on the money sellers in the area have gotten for comparable homes. This helps you determine whether there’s room to negotiate.

Ultimately, though, you have the final say on the offer amount. Once you’ve come up with a number, your agent drafts an offer letter and sends it to the agent representing the current homeowners. Your offer will either be accepted, rejected or countered with another figure, and you can decide whether you’re willing to pay what the seller is willing to accept.

Notify Your Lender

Unless you’re paying cash at closing, you need to finalize your application with your chosen lender. Even if you were preapproved, you can look around to make sure you’re getting the best deal. A small amount saved on an interest rate can pay off over the many years you’ll make mortgage payments.

During the application process, you need to make sure the mortgage rates you’re quoted are “locked in.” This means that even if mortgage rates increase before your closing, you’ll still get the rate you were initially promised. This lock-in agreement should be in writing.

Gather Your Documentation

When your offer on a house is accepted, typically you’re given a closing date, typically around ​30 to 45 days​ from the date your offer is accepted. In the meantime, your mortgage lender starts the work of finalizing your loan application and lining up your financing.

Your lender will need documentation to go with the information you’ve provided on your application. This includes proof of income, like paystubs, as well as bank statements. If there are any large, unaccounted for deposits on your bank statement, your lender needs proof of where those came from, whether it’s funds from a side gig or a friend repaying you after borrowing some cash.

Preparing for Closing

As your closing date approaches, you may have some last-minute requests for information from your mortgage lender. The lender is trying to get the paperwork in order during this time and may realize some things have been left out. On the day of closing, you need to arrange to have the funds for closing costs and your down payment wired from your account to the mortgage lender.

On the day of closing, you need to bring the following:

  • A cashier’s check to pay the closing costs and down payment or proof that the funds have been wired;
  • Your spouse or other co-borrower;
  • Your checkbook to pay for expenses that aren’t covered by the cashier’s check or wire transfer;
  • Your driver’s license or other photo ID.

Considerations for Current Homeowners

If you already own a home, home buying won’t be your only concern. You also have to sell your current house. The timing of this can be tricky, especially if you don’t want to be stuck with two mortgage payments until your current house sells.

There is another option, though. Once you’ve found a house you like in your desired price range, you can place what’s known as a “contingency contract” on the new home. This means your contract is contingent on the sale of your existing home. The only problem with this is that if someone else comes along with an offer that doesn’t include a contingency, the seller can choose that contract over yours.

Seller’s Agent Versus Buyer’s Agent

Another complication, if you’re moving from one house to another, is finding a real estate agent. Once you’ve gotten preapproval and saved up for your down payment, this is an important next step. But as the seller, your real estate agent plays a completely different role in the process, which means it’s sometimes best to have ​two​ separate agents to handle the deal.

A seller’s agent represents a seller by suggesting a good asking price, putting the house on the market, publicizing it and working with buyer's agents to manage showings. You, as the homeowner, will likely need to vacate the house and take any pets with you while interested buyers take a look at it. When offers come in, the seller’s agent negotiates on your behalf.

Both buyer’s and seller’s agents need to be good negotiators. But they should also be plugged into the local market. That means unless you’re moving within the same neighborhood, a buyer’s agent that regularly represents homes in the area where you’re buying may be a better partner.

What’s Included in Mortgage Payments?

Once you’ve moved in, you’ll have a due date for your first mortgage payment. Each monthly payment will include the following:

  • Principal​: This is the amount the lender loaned you. It will be divided into monthly payments based on the number of months you’ve agreed to pay, known as the loan term.
  • Interest​: You were quoted an interest rate when you took out the loan. This interest will be applied to your monthly mortgage payment.
  • Homeowners insurance​: Your lender will handle paying your homeowners insurance for you. The amount of your monthly premiums will be included in your mortgage payment.
  • Property taxes​: Local property taxes will also be collected by your mortgage lender and paid directly to the city or county. If you ever pay off your loan, you’ll have to start paying homeowners insurance and property taxes yourself.
  • PMI​: If you didn’t put at least ​20 percent​ down, you’ll have to pay private mortgage insurance. This will be included in your mortgage payment.

Your homeowners insurance and property taxes go into an escrow account held by the lender. At the end of each year, your lender pays for both expenses. If there isn’t enough in the account at that time, you receive a bill for the shortfall. If there’s too much, you’re sent a check for the overpayment.

Buying a home is a big move, but if you have your resources lined up, it can flow seamlessly. A good real estate agent and mortgage broker can walk you through the process, from preapproval to shopping to making an offer. It’s important to pay close attention to your budget to make sure any monthly mortgage payment you commit to will be affordable long after the day you move in.