Whether it's your first home or your fifth, the homebuying process can be daunting. Here's what you need to know to get from start to finish in your home purchase.
Whether it’s your first home or your fifth, the homebuying process can be daunting. Not only does the housing market change from season to season, but the process of searching for a house, making an offer and working toward closing evolves over time.
For any homebuyer, you first need to account for your current financial situation, needs in a new home and what features and amenities you hope to have at your fingertips. Before you start touring houses, study your local real estate market to get a better grasp of what’s available and within your budget.
With home prices rising across the U.S. and many markets reporting few homes available for sale compared to the number of buyers, it can be easy to get discouraged. It may take a little extra time to wait for the right house, or it may take some work to improve your credit and save for a higher-priced house, but either way, buying your next home is possible.
Here’s what you need to know to get from start to finish in your home purchase.
How to Pay for Your Home
The biggest determining factor in your ability to buy a home, of course, is your ability to pay for it. While some people can liquidate assets and pay for a house in cash, most opt for mortgage programs through a bank, credit union or other type of lender to leverage the total cost of the property.
The first steps to buying a house always revolve around the financial side of the deal — how much you can afford and how you plan to pay for it.
Getting a mortgage. Financing through a mortgage is the most common, and often the most attainable, way to buy a house or condo. In fact, 88 percent of all buyers financed their homes in 2017, according to the National Association of Realtors.
To avoid being shocked if a bank turns you down for a loan or approves a far lower maximum price than expected, it’s important to know how your credit history and current financial status measure up. Joe Zeibert, senior director products, pricing and credit for Ally Financial Inc., explains that the interest rate or amount you pay upfront to the lender (points) is all connected to how attractive a borrower you appear on paper: “How much you can afford also ties into what your future cash flow looks like, and that then ties into rates and points.”
It’s free to receive your credit report once a year through annualcreditreport.com, where you can access reports from the three major credit bureaus, which will provide you with all the information a lender will see about your financial history.
Also take a look at your current financial situation, including the amount of money you have in savings, gross income, recurring expenses and how much you’re able to put toward savings on a regular basis. From this, you should be able to determine how much you can comfortably spend on monthly mortgage payments.
Next, it’s time to shop around for lender and mortgage program options. The most common type of mortgage is a 30-year, fixed-rate mortgage, which typically comes with a slightly higher interest rate in exchange for the guarantee that the payment amount won’t change for the life of the loan.
The interest rate is typically the most-discussed aspect of a mortgage, as it can differ from lender to lender and program to program. But Brian Simmons, founder and CEO of Ask a Lender, an online platform to help consumers shop lenders and loans and get financial advice, stresses that the interest rate offered to you based on your financial situation can be completely different from what’s in a mortgage rate table.
“That’s why the interest rates advertised online are worthless,” he says. “If the lender doesn’t know essential information such as your credit score, your debt-to-income ratio or the size of your down payment, it’s impossible to provide you with an accurate rate quote.”
Buying a home with no money down. If you’re lacking the savings needed for a down payment, you may not be out of the running to buy a home just yet. Active members of the military and veterans can apply for a VA loan through the U.S. Department of Veterans Affairs, which requires a small additional monthly cost in lieu of a down payment, but otherwise requires zero percent down.
There are plenty of other low down payment options — as low as 2 or 3 percent — available to first-time homebuyers, buyers with nontraditional credit histories or those who have recovered their credit over time, among other situations, with additional regular fees. Keep in mind, however, that the less you put down, the more you’ll be required to pay each month.
Buying a house with bad credit. A blemish or two on your credit report can be a problem when it comes to getting approved for some mortgage programs. But fortunately there are options aimed at homebuyers who don’t have a perfect credit history. For example, if you’re a borrower with a credit score of at least 580, you may be considered for an FHA loan through the Federal Housing Administration.
Bad credit doesn’t have to keep you from homeownership. Lenders are more likely to look past a low credit score if you’re planning to make a high down payment or have solid proof of a high income that will be consistent for a long time, for example.
But that doesn’t mean you don’t have to get your financials in order ahead of time. “The way a cash buyer can be prepared is to be willing and able to show proof of funds, whether it’s stock they’re going to liquidate or cash that’s already in the bank,” says Gannon Forrester, an associate broker with Warburg Realty in New York City.
Additional costs of buying a home. The costs don’t stop at the agreed-upon purchase price and interest to the lender when applicable. Homebuyers should prepared for other costs leading up to and at closing, plus they should have some cash remaining in savings afterward for unexpected repairs to the house.
— Property appraisal
— Attorney’s fees, points paid to lender and other fees required at closing
Home sellers and buyers alike favor spring as the ideal time for homes on the market. If you’re looking for the widest variety of home options, this is often the best time to start your search. Early fall also often sees a surge in buyers and sellers looking to strike a deal before the weather turns cold.
However, there are also benefits to shopping for a home in the off-season, when there are fewer buyers to compete with. You’ll have fewer houses to choose from, but you may be less likely to find yourself in a multiple-offer situation, which can make it easier to get a seller to take a serious look at your offer.
Either way, if you live in a market currently low on housing inventory, don’t expect a sizable price difference from season to season. Sellers can wait a few extra days or weeks if a lowball offer doesn’t appeal to them, so keep your offer realistic for what you think a home is worth.
The absolute best time to start shopping for a house, however, is when you’re ready, both financially and personally. If you have children, for example, closing on a house during the summer months is ideal because you don’t have to worry about packing up while kids are doing homework or making a rough adjustment due to midyear school transfers.
The most important rule of thumb is to wait to start house hunting until you’re actually in a position to make an offer. “If you do that beforehand … you’ll end up finding the house of your dreams, you won’t be ready, and someone else will buy it,” says Amin Dabit, director of advisory service for Personal Capital, an online financial advisory and wealth management company.
Where to Start House Hunting
Once you know your budget and how you intend to fund your purchase, you can start looking for the right house to buy. You can begin your search online by searching consumer-facing listing sites like Zillow, Trulia or Redfin, which can help you get a feel for which neighborhoods and houses fall inside your budget.
You’ll also want to interview several real estate agents before you start working with one. It’s important to trust your agent to advocate for you in the deal, so you shouldn’t feel you have to withhold details about the reason you’re moving or what’s included in the right home for you. Ask about the agent or Realtor’s schedule and experience and who you’ll be working with most often, and see if the answers meet your expectations as a client.
Be ready to answer questions from your real estate agent about how many bedrooms you need, your preferred neighborhoods — whether that’s based on public schools, access to public transportation or proximity to shops and restaurants — and anything else that’s nonnegotiable for you in a home purchase.
Especially in markets where housing inventory is low, your agent may have to discuss compromising on your vision of your dream home to help ensure that you have enough properties to tour in your price range. Zeibert notes many homebuyers are becoming more willing to sacrifice some square footage or a bedroom for the chance to live in the neighborhood they want: “The house is not the end-all, be-all. While super important, it is the neighborhood and the lifestyle that they are trying to purchase by going out and buying that house.”
How to Win Over a Seller
When you do find that right home in the right neighborhood, it’s time to put in an offer. And in a popular neighborhood, you may have to work fast. It’s important to start the house hunting process with your financial information on hand so you and your agent can put together a formal offer quickly.
Included in that financial information is a preapproval letter from your lender that notes the company’s willingness to work with you to purchase the home. A prequalification letter is also an option, though preapproval tells the seller that the lender has already done a deep dive into your finances and hasn’t found any surprises.
“A preapproval letter will give the buyer an edge when they put an offer in on a house, showing the seller they’re serious and have a good chance of obtaining a mortgage,” Simmons says.
Writing a personal letter to accompany the offer can also provide some additional insight to sway the seller, since people like to hear their house is going to someone planning to make memories in it. Especially if the seller has lived in the house for a long time, sharing your plans to raise a family in the house could make him feel comfortable selling the house to someone looking to make similar memories.
However, Forrester says it’s not always necessary and can occasionally backfire by leaving room for discrimination — intentional or not — and muddling an offer when a seller is focused on the financial details. There are also scenarios when a personal letter won’t have much of an impact. “Sometimes personal things can sway someone, but a lot of times in New York it’s a financial thing,” Forrester says.
Appealing to the seller is important, but don’t get caught up in the heat of a bidding war or negotiations — any agreed-upon price shouldn’t leave you skimping on meals for the next three years or otherwise make it difficult for you going forward. Forrester says buyers can have trouble making the connection between the purchase price in negotiations and actually paying the money when it’s time to close the deal: “They don’t realize they actually have to come up with the cash or be happy signing that down payment check.”
It may take a few tries with different houses or it may require a little back-and-forth negotiation, but eventually the right seller will accept your offer. Now under contract, you feel like you’re in a whirlwind of activity working toward the day you close on the property.
You’ll need to schedule an inspection on the house, which helps to find any code violations or maintenance issues that you should be aware of. The inspection is key to catching any existing problems the seller may not know about or hasn’t yet disclosed, and it’s often a required step by the lender. Depending on the results of the report, you may need to renegotiate with the seller about needed repairs, a change in price due to the needed fixes or if you’re now questioning the purchase entirely.
Meanwhile, your lender will be working through the formal loan application process, which includes an appraisal on the property to ensure the lender feels comfortable with the sale price. If the appraisal comes up short, you may have to negotiate again with the seller to see if you can lower the price, or you may have to come up with the difference in cash to follow through with the deal.
Combined with fees for your real estate attorney and title insurance that are a part of the process on closing day, you should expect to pay an additional 2 percent to 5 percent of the purchase price.
The homebuying process may be done once closing is completed, but your expenses certainly haven’t stopped. “Make sure that even after the down payment and closing costs, you still have close to six months of expenses,” Dabit says. “[It’s] something that is very important because there is a lot of unexpected cost that pops up when you first move into a home.”