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If only buying a home was as easy as clicking your heels three times.
In fact, buying a home takes some work. While touring houses can be fun, you also have to make sure you get all of your financial and logistical ducks in a row — one of the keys to a sound and relatively painless process. Let’s go over what the steps for buying a house look like — from setting a budget and getting preapproved to navigating appraisals and inspections. Once you know the steps to buying a home, you can begin your search with greater confidence.
- Review your finances and credit
- Determine your down payment
- Find a real estate agent and determine your target area
- Get prequalified and preapproved
- Make an offer and formally apply for your mortgage
- Navigate your home appraisal and inspections
- Get your home and mortgage insurance set
- Close on your home
1. Review your finances and credit
Before you head out the door to begin home-shopping, you’ll want to get your financial life in order. That way, when you do find a place you love, you’ll know if it’s financially possible to purchase the home. Let’s look at some different areas of your finances that you should check on before you start house hunting.
Credit scores and reports
Your credit scores and reports can play a big factor in the type of loan terms, including interest rates, that you’ll qualify for. Review your credit reports to make sure you’re aware of all the info in them — and whether there are any mistakes.
Mistakes on your credit reports could negatively affect your credit scores. If you find any errors, be sure to dispute them. You’ll want to get a copy of your credit reports from each of the three major consumer credit-reporting companies. You can get a free copy of your credit report from Equifax, Experian and TransUnion once every 12 months at annualcreditreport.com.
If your credit isn’t great, you may want to hold off on buying a home so you have more time to work on your credit, which might help you get a better interest rate on a mortgage.
Create a new budget
Even though you haven’t purchased a home yet, you’ll want to start thinking about what your budget would look like after buying a home. Assess your current spending habits and how much room you have in your budget to take on new expenses, including the mortgage, homeowners insurance, property taxes and periodic home maintenance costs. Buying a home that you can comfortably afford is ideal.
2. Determine your down payment
Once you have an idea of how much you can afford to spend on your home each month, sit down and figure out how much of your savings you want to allocate towards a down payment. Here are a few things to keep in mind when determining how much of a down payment you can afford.
- To find out what your total available funds are, tally up your savings and any investments you’re willing to sell, considering tax and other potential consequences.
- Add up your estimated costs for moving, renovations, furniture and other financial goals and then subtract that amount from the total funds available.
- You may want to subtract even more money from that number to ensure you have an emergency fund ready in the event of a job loss or if unexpected expenses arise. Being able to cover three to six months of living expenses is a good idea.
- Estimate how much it’ll cost to close on the home (including fees) and subtract that number from your total.
- The amount that’s left is the maximum available for your down payment.
3. Find a real estate agent and determine your target area
To make the homebuying experience as stress free as possible, it can be helpful to find a great real estate agent to work with and represent your interests. Your real estate agent should not only be able to help you find a home but also arrange for your mortgage preapproval, and help you negotiate price and provide you with key background information about the neighborhoods you’re considering. If you’re new to the area or aren’t sure which neighborhood is right for you, a real estate agent might help you find the right fit.
Before choosing a real estate agent to work with, chat with a few different agents to get a sense of their different styles and to learn more about their experience.
4. Getting prequalified and preapproved
Preapproval and prequalifcation generally represent different stages of the homebuying process. Typically, you’ll pursue prequalifcation from a lender before the preapproval stage. For prequalification, in most cases the lender does a basic review of your credit and finances to determine if you’re likely to be eligible for a mortgage.
Generally, when you work with a lender to obtain preapproval, you’ll have to share more personal and financial documentation with them. While documentation and other requirements may vary somewhat between lenders, with preapproval you’ll usually get a conditional offer for a mortgage in a specific amount.
It’s a good idea to get a few offers from different lenders so you can zero in on a mortgage with the best potential interest rates and terms you can get. Paying less in interest over the years can mean more money in your budget to invest in things like repairs, landscaping or decorating your home.
5. Make an offer and formally apply for your mortgage
You’ve found your dream home and made an offer — and the seller accepted it. Congratulations! Now it’s time to formally apply for your mortgage. This process involves giving the lender documentation and completing other paperwork to validate the information you gave when you applied for prequalification and/or preapproval.
6. Navigate your home appraisal and inspections
After your offer has been accepted, the lender will typically require a home inspection and an appraisal. The purpose of a home inspection is to alert you to any major problems that the home has, so you can negotiate with the seller about fixing the issues or decide if you want to walk away from the sale. The appraisal is an independent assessment that determines how much a property is worth in its local market, which is something lenders typically want to confirm before issuing your mortgage.
7. Get your home and mortgage insurance set
Homeowners insurance is a type of property insurance that covers losses and damage to a residence. Most lenders will require you to have this type of insurance in place, and may even specify the minimum coverage you must get. Like choosing a mortgage, you’ll want to shop around for the best homeowners insurance policy. Once you pick your policy, you’ll alert your lender and share any necessary insurance details with them.
You may also need to get mortgage insurance. Mortgage insurance is designed to protect the lender in case you don’t make your mortgage payments. With certain types of nonconventional loans, or if you can’t provide a substantial down payment (usually 20%), a lender may require you to take out a mortgage insurance policy to help reduce its risk. If you don’t make your mortgage payments, the insurer will pay the lender.
8. Close on your home
With all home loan documentation in place, you should be ready to close on the home. Your lender and real estate agent will walk you through this process.
Once you sign your closing documents, the home is yours! It takes a lot of work to tackle the steps to buying a house, but now you can finally focus on making the home your own and enjoying the fruits of your labor. If you’re planning on doing any renovations, you may want to start researching home improvement loans.