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The Start-to-Finish Guide to Buying a Home
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| 1. Determine What You Can Truly Afford
Your first step in the home-buying process is to determine your budget, just as you'd likely do for any other major financial decision.
"As a general rule of thumb, you should be looking at home prices that are two to three times your annual income," "This helps ensure that you're not taking on a larger mortgage commitment than you can afford."
Once you've defined your budget, it's time to look at your cash reserves. You'll also want to make sure you have enough savings left over to help pay for any home improvements, decorations or miscellaneous moving and maintenance costs that may pop up—in full. Translation: You should not be using your emergency fund to cover these costs.
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| | 2. Figure out Which Mortgage is Right for You—and Get Pre-Approved
Now that you've nailed down your numbers, it's time to start shopping for a mortgage lender with a reputation for good customer service and timely closings.
Next, decide which mortgage makes the most sense for you. Choosing one of the most common two: a fixed-rate mortgage, in which your interest rate remains steady for the duration of the loan, or an adjustable rate mortgage (ARM), in which your rate fluctuates to reflect market changes.
Next up on your to-do list: Apply for a pre-approval, the process in which a lender reviews your financial information—like your credit report, W2s and bank statements—and commits to giving you a mortagage for a specified interest.
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| | 3. Consider a Financial Trial Run
Start by totaling up all of the monthly costs associated with a home purchase, including your projected mortgage payment, tax and insurance estimates, HOA fees and home maintenance costs. And don't worry if you don't have concrete numbers—the point is to see if you can afford a ballpark amount.
If the sum of the expenses equals more than what you're paying for housing now, then subtract your rent from the total. The difference is what you should consider transferring to your savings account for a few months to simulate what you'd be paying out to cover your monthly new-home costs.If you can comfortably pull this off, then rest assured that you can probably handle the typical expenses of being a homeowner.
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| 4. Start House-Hunting, and Decide If You Need a Real-Estate Agent
Now for the fun part: house hunting! Browsing online resources for available homes in your neighborhood is a good place to start.
This is also a prime time to decide whether you'll hire a real estate agent, if you haven't already. While you're under no obligation to do so, there are several potential benefits to working with one. First of all, an agent can provide access to more home options than you'll likely find yourself, as well as set up viewing appointments. Since home-buying can be an emotional process, an agent can also act as a mediator between you and the seller.
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| 5. Research Homeowner's Insurance
Your lender will likely require the name of the agency providing you with home insurance, which is why you should shop around for a quote while you're still house hunting.
Basic insurance typically covers fire, theft, storm damage and liability should someone get injured on your property and sue you. But you can also add on riders for things like expensive jewelry, furniture and home office equipment, as well as choose to get additional flood insurance if your home is in a flood-prone region.
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| | 6. Put in an Offer
So you've fallen in love with a property that meets all of your needs and some of your wants—and it's within your price range. Let's make an offer!
But here's where it can get tricky: You don't want to low-ball your offer, and risk losing the home to another buyer or insult the seller—but you also don't want to pay more than is necessary. So how do you land on the ideal number?
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| | 7. Review the Contract and Submit Your Mortgage Application
The seller accepted your offer—congrats! But before you sign on the dotted line, you should make sure to review the contract thoroughly and understand every single clause.
Pay special attention to contingencies in the contract, which spell out situations when you can back out of the sale to help protect yourself in case something goes wrong.
Speaking of defects, now is also the time when you'll get the home inspected.Once your inspector confirms that there are no big defects that could affect the home's value, you'll submit a mortgage application.
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| 8. Sign the Papers
Before the big day, you're entitled to a walk-through to confirm that nothing has changed since the inspection. After that, make sure you have all the money required for the closing wired into the correct account.
Ask the settlement agent for copies of all the paperwork you'll sign before closing, including the HUD-1 settlement statement, which details all of the costs related to the home sale; the Final Truth-in-Lending Act statement, which outlines the cost of the loan and the interest rate; and your final mortgage paperwork.
On closing day, bring your photo I.D., as well as any paperwork you received throughout the home-buying process, including insurance and home inspection certificates.
Once you've signed the paperwork, you'll be handed the keys… and you'll officially become a homeowner!
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