Blog Posts, Home Buyers, Resources

5 Steps to Home Buying

Buying a home is exciting! You’ve already started looking at available homes online, and you’re ready to go see them in person. But are you really ready to start home shopping? What if you find “the one” and want to make an offer? Are you prepared to do so? While home buying is exciting, it’s also one of the most important decisions and biggest purchases you’ll ever make. There are dozens of moving parts and A LOT of paperwork with a real estate transaction, which can make it seem daunting when you get started.

Just a heads-up, I’m about to drop a lot of information on you. Buying a house is not a simple transaction. I have attempted to simplify the process into 5 basic steps. Most “Steps to Home Buying” guides are too simplified and leave out many important facets of the process. Unfortunately, home buying is not just (1) shop for homes, (2) make an offer, and then {voila!} (3) get the keys.

This list is meant to be fairly detailed and comprehensive to give you a good understanding of what all is involved with buying a house. You may feel overwhelmed while reading this, and that’s okay because you’re going to work with a Realtor. This is why there’s no need to get stressed out by the thought of buying a home. Your Realtor’s job is to guide you through the home buying process while making everything as simple and smooth as possible. So without further ado…here are the 5 steps to home buying:

Secure Financing

1) Secure Financing

This might not seem like it should be the initial step, but first, you’ll want to make sure you’re in a financial position to be able to buy a house. You need to make sure you’ll qualify for a home loan (mortgage), and you’ll need to know how much of a loan you’ll qualify for before you start home shopping.

  1. Check your credit report and score. Free credit websites, such as CreditKarma.com are a good resource to get an idea of your credit score and track your credit without taking a hit to your score.  Keep in mind though that they may not be accurate as they use a consumer credit report, whereas mortgage credit reports weigh things differently and use a FICO score. If your scores are lower than where they need to be, start working on building and/or repairing your credit. Here are the standard credit score requirements based on the type of loan:
    • Conventional = 620
    • FHA = 580 (but can go as low as 500 with a larger down payment of 10% rather than the standard 3.5%)
    • VA = 500
  2. Look at your finances. How much money do you have in your bank account to be able to use for a down payment and other costs involved with buying a house? This is generally how much you’ll need for a down payment based on the type of loan:
    • Conventional = 5% (example: a $300,000 house will require a down payment of $15,000)
    • FHA = 3.5% (example: a $300,000 house will require a down payment of $10,500) or 10% (example: a $300,000 house will require a down payment of $30,000)
    • VA = 0% (you can get 100% financing if you qualify for a VA loan)
  3. Get Pre-Qualified. Contact a mortgage lender to review your current financial and credit situations as well as to discuss your loan and down payment options. You can use a direct lender, such as a bank, or a mortgage broker who works with many different lenders. If you need a referral for a lender and have already been in contact with a Realtor, they should be able to provide you with a recommendation. You can shop around with multiple mortgage lenders to determine the best rate, terms, and options for you. Based on your discussion and the initial information you provide, the lender will determine whether or not you’ll qualify for a home loan. If you are pre-qualified, the lender will tell you how much of a loan you’ll qualify for and provide you with a pre-qualification letter to give to your Realtor and include with your offer(s). Knowing the amount of loan you can obtain and how much of a down payment you’ll need or can afford will determine your budget.

 

Realtor

2) Find a Realtor

Once you know that you qualify to buy a house and you know how much house you can afford, you’ll need to find a Realtor to work with. Make sure they are professional, responsive and available to assist you. You’ll sign an agreement with your Realtor along with some disclosures for them to be able to represent you and negotiate on your behalf. The agreement will also outline the Realtor’s duties and responsibilities to you as your agent. There are numerous documents your Realtor will create, such as contracts, disclosures, amendments, addendums, etc. There are also many dates they will need to stay on top of to keep everything on track and make sure important deadlines are not missed. Your Realtor will also coordinate your home buying transaction with the other parties involved, including the seller’s agent, your lender, the title company, and more. They will guide you through the home buying process from start to finish to get you into your new home.

 

Home Shopping

3) Start Home Shopping

Figure out your “must-haves” versus your “would-love-to-haves” and communicate them to your Realtor, so they can set up a home search for you based on your criteria. You can conduct your own home search online as well, but keep in mind that websites such as Zillow and Trulia don’t always have up-to-date listings and many of the properties shown are no longer available. You can search current active listings for the Denver Metro area here.  However, your Realtor will have access to the most current homes available in the Multiple Listing Service (MLS), and they can set up auto emails to alert you when new properties come on the market that match your search. They’ll also be able to set-up showings for homes that interest you, so you can see them in person. As you look at properties, you may develop a better understanding of what you want and don’t want. If your criteria change, be sure to let your Realtor know, so everyone’s on the same page, and they can adjust your search accordingly.

 

Make an Offer

4) Make an Offer

You’ll need to decide how much you want to offer for the price of the property along with what you’re willing to pay for and what you want to ask the seller to pay for. Everything is negotiable. Keep in mind that the more you offer to pay for, the stronger your offer will be. When it comes to making your offer stronger, here are some Tips for Home Buyers in a Seller’s Market. These are some of the primary costs you’ll need to decide on and specify in your offer whose responsibility it will be to pay for them:

  • Owner’s Title Insurance Policy = $1,000-$2,500 (The cost varies and can be more or less depending on the amount of the insurance, which is usually based on the purchase price of the property.  The average cost is usually somewhere around $1,500-$2,000.  This insurance protects the buyer’s future homeownership rights against property loss or damage due to liens, encumbrances or defects in the title to the property.  It’s also the seller’s guarantee that they, in fact, own the property and have the right to sell it.  Therefore, the seller generally pays for it.)
    • Lender’s Title Insurance Policy = $300-$500 (Be aware that the lender will also require this separate title insurance policy to protect them.  This is the buyer’s responsibility to pay for).
  • Appraisal = $550-$700 (The cost of appraisals has increased due to the shortage of appraisers.  Appraisals are also taking much longer for this same reason, and there is sometimes an option to rush the appraisal for an extra fee.  An appraisal will be required by the lender and is therefore usually the responsibility of the buyer.)
  • Closing Services Fee = $300-$400 (Don’t confuse this with the buyer’s closing costs.  The Closing Services Fee is a separate fee charged by the title, escrow or closing company to coordinate the closing, handle the paperwork and money involved in the transaction, and disburse the payments to the appropriate parties.  This fee is typically split equally between the buyer and seller.)

When making an offer and being involved in a real estate transaction, be prepared for a lot of paperwork and signatures! Your “offer” is actually a “Contract to Buy and Sell Real Estate”, which will be roughly 20 pages on its own.  These are the items your Realtor will need to submit your offer:

  1. Lender Pre-Qualification Letter (or Proof of Funds if you’re paying cash)
  2. Contract to Buy and Sell Real Estate (this is the purchase contract, which is the offer itself) – the seller can accept your offer by signing the contract, or they may counter or reject it
  3. Lead-Based Paint Disclosure (only required for homes built in 1978 or earlier, must be signed before offer)
  4. You may also need to include Proof of Funds (if paying cash) or a Copy of your Earnest Money Deposit check (you only need to submit the actual check if/when your offer is accepted)

 

Offer Accepted

5) Your Offer was Accepted! Now What?

What happens once your offer is accepted? Now comes time for more paperwork and signatures! There are also numerous deadlines you’ll need to be aware of. Your Realtor should help you stay on top of your deadlines and keep your real estate transaction on track. Here are the 10 Steps to Get Your Home Purchase to the Finish Line:

  1. Earnest Money Deposit. You’ll need to submit your earnest money deposit, which is usually in the form of a personal check, cashier’s check or money order and will go towards your down payment and/or closing costs. Be aware though that the funds must be readily available as your earnest money will be deposited into an account and held by the title, closing or escrow company and then applied at closing. You will not have access to this money prior to closing.
  2. Loan Application. Notify your mortgage lender that you are under contract, and complete your loan application if you haven’t already done so. The lender will need certain documentation from you, such as your identification, bank statements, paycheck stubs, W-2’s, and possibly more depending on your situation (i.e. tax returns if self-employed). Be sure to provide the requested documents as soon as possible so as not to hold up the process. During the transaction, make sure you do not do anything that will affect your credit or debt-to-income ratio and ultimately your loan qualification, such as changing jobs, applying for a credit card, or making any large purchases on credit (i.e. buying a car, appliances, furniture, etc.). You might think it’s a good idea to plan ahead by buying new furniture before you close on your new house. However, if you do that, you may no longer qualify for a loan, and therefore may not be able to buy the house you just bought all the furniture for.
  3. Home Inspection. The purpose of a home inspection is to determine whether or not there are any health, safety or structural issues with the property. You should have a professional home inspection done to know what you’re getting yourself into. And since you’re paying for the inspection, you should be there to see the results first hand. This is also a good opportunity for you to ask questions and learn more about the property along with its systems. Based on the age and location of the property, you may want to have other inspections done as well, such as a sewer scope and/or a radon test. Here are the average costs of each:
    • Home Inspection = $300-$400 (depending on the age and size of the property)
    • Sewer Scope = $100-$150
    • Radon Test = $100-$150
  4. Title Commitment. The title company will provide a preliminary title commitment for you to review, which will list anything that has been recorded with the county for the property, such as liens, encumbrances or encroachments on the property. It is your responsibility to read through the commitment and understand what you’re reading. Title is not a Realtor’s area of expertise, so you should contact the title company directly for any questions or clarification.
  5. Homeowner’s Insurance. You’ll need to research homeowner’s insurance policies for the property and get quotes to find out the cost along with any special requirements (i.e. flood insurance, etc.).  You’ll work with your lender on the homeowner’s insurance policy to make sure you have enough coverage.  When you contact insurance companies for a quote, they’ll need to know the property address along with the purchase price and your loan amount, so be sure to have that information handy.  Usually bundling your homeowner’s with your car insurance will get you the best deal.  Once you decide which insurance company, agent, and policy you want to go with, you’ll need to give your lender the information for your insurance agent.  Your lender should contact your agent to obtain your Evidence of Insurance (i.e. Insurance Declaration Page).  The lender will need this for your loan file to submit it to underwriting.
  6. Appraisal. Since the property is the collateral for your home loan, the lender will require an appraisal to be done to determine the value of the property and make sure it’s not less than the amount they’re lending on. The appraisal will be ordered by the lender through an Appraisal Management Company (AMC). The AMC will then find the next available appraiser and schedule the appraisal with the seller’s agent.
  7. Utilities. Prior to moving in, you’ll need to transfer and/or set up utilities for the property, such as power, gas, trash removal, recycling, cable/internet, etc. You can usually find information for the utility providers on the city’s website, or ask your Realtor. The title company will transfer the water and sewer for you.  You’ll also want to transfer your mail with the Post Office.
  8. Walk-Through. Prior to closing (usually within a day or 2), you’ll want to do a walk-through of the property to ensure that the property is still in the same condition as when you went under contract, any items that were included in the sale are still there, any items that were excluded from the sale have been removed, and any agreed upon repairs have been completed.
  9. Closing. The closing is when you sign all the final paperwork and officially take ownership of the property.  Typically, all parties will be present at the closing to sign documents. Whoever is going to be on the loan and/or title will need to be at the closing to sign and will need to have identification. You’ll also need to bring a cashier’s check or send a wire transfer to the title company for your “cash to closing” (i.e. your remaining down payment, additional closing costs, etc.). You’ll receive the final numbers from your mortgage lender in your Closing Disclosure (CD) at least 3 days prior to your closing. Talk to your mortgage lender about the costs involved with the closing so you know what to expect. Your closing costs will likely include (but are not limited to) your remaining down payment, title fees, taxes, insurance, interest, etc. Once the funds from the lender have cleared and the deed has been delivered (“Upon Delivery of Deed and Funding”), the property is yours! Unless your contract specifies otherwise, you should get the keys to the property at your closing.
  10. Move In! You did it! You made it to the end of the transaction and through your closing. You’re officially a homeowner! Get the locks changed, and start moving into your new home. Use a Moving Checklist to help keep your move on track.

Keys to New Home

Congratulations! You survived the home buying process and are now a homeowner! Enjoy your new home!

 


* Please keep in mind that this blog post was written for Colorado (specifically the Denver Metro area) in December 2016. This information may vary in time as well as in other states and/or real estate markets.

© Briana Nickas and www.briananickas.com, 2016. Unauthorized use and/or duplication of this material without express and written permission from this site’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Briana Nickas and www.briananickas.com with appropriate and specific direction to the original content.

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