Whether you’re an experienced buyer or buying for the first time, it’s important to realize that there are specific steps that should be followed when purchasing a home. Buyers who attempt to purchase a house without a plan in place often experience “home buyers remorse” or even worse, an unsuccessful purchase.
If you’re an experienced buyer, this guide will serve as an excellent refresher. If you’re buying for the first time, this guide may serve as your best resource as you navigate through the process of achieving the dream of home ownership!
Read on to find my specific details on the 14 Step Process to Purchasing a Home. This complete guide to buying a home, I promise, will be helpful. As a Texas REALTOR®, I know from experience that even seasoned home buyers can forget the steps one should follow when purchasing a home.
1. Due Diligence and Start Preparing Well Beforehand
One of the biggest home buying mistakes that’s made even by experienced home buyers is neglecting a proper due diligence. The wealth of information available on the internet today has made it extremely easy for consumers to seek information on virtually any topic. Search credible sources and start researching.
There are many advantages to home ownership, including homestead, tax benefits, and equity buildup. Wealth creation being the most obvious and when done properly, can serve as a benchmark for more then just a house to live in, but a tangible intentional investment. As the saying goes, “If you’re paying rent, you’re most likely paying someone else’s mortgage“. Believe that you can afford to buy and make the decision to buy.
Once you’ve made the decision to buy, the next thing you may want to consider is what type of real estate or real property you would like to buy. Do you want to buy in an urban, suburban, or rural area? A new construction home or a resale? A condo or a house? Do you want to buy a teardown or an unimproved lot and build on site? Perhaps you want to buy a distressed property? As you can see, there are many questions you will have to ask yourself and addressing these early on will save you a lot of time.
Although not as common in our current market; if you’re wondering if buying a distressed home is a good idea or not, be sure to do your due diligence well before you go out and start looking at foreclosures, short sales and real-estate-owned (REOs) as they are distressed sales but different from each other. For example, while many short sales are foreclosures, not all foreclosures are short sales, and not every short sale is in foreclosure. To further complicate matters, REOs are not short sales either, but some intended short sales can end up as an REO. Without specialized knowledge about how to handle the purchase of a foreclose, short sale or REO, you could find yourself in dangerous territory. If you are interested in distressed properties feel to contact me for more info.
Finally, and perhaps the most obvious, it is important to realize that you’ll need to have money saved for a down payment and other closing expenses. Home buyers need to start saving for their down payment and closing costs well before getting out into the market and actively looking for homes.
Buyers who are aware of the best tips for saving for a down payment won’t have to scramble at the very last moment to figure out how they’re going to come up with the necessary monies to purchase their home. This greatly reduces the amount of stress that often comes with purchasing. Contact me if you would like more information about an exclusive loan with zero lender fees and an additional $1,000 towards closing costs.
2. Know Your FICO Score and Review Credit History
It’s important, even for those who aren’t buying a home, to be aware of their current FICO score and credit history. A FICO score is a type of credit score created by the Fair Isaac Corporation. Credit scores are numerical summaries ranging from 350-850 of your credit-worthiness based on information from credit bureaus. Lenders use borrowers’ FICO scores along with other details on borrowers’ credit reports to assess credit risk and determine whether to extend credit.
Yes, a mortgage lender will review your credit score and history, but even before you connect with a local real estate agent or mortgage lender, you should have a solid understanding of your credit health. Generally speaking, most mortgage lenders will require a minimum FICO score of 620-640, depending on the type of mortgage the borrower is attempting to secure.
Checking your FICO score and history is also an excellent opportunity to review for any incomplete or inaccurate information. Under the federal Fair Credit Reporting Act (FCRA) you have the right to know what is in your file. All consumers are entitled to one free disclosure every 12 months upon request from each nationwide credit bureau and from nationwide specialty consumer reporting agencies. See www.ftc.gov/credit for additional information. Order a credit report using annualcreditreport.com (the only site where you can obtain the free credit report guaranteed by federal law).
If you identify information in your file that is incomplete or inaccurate, and report it to the consumer reporting agency, the agency must investigate unless your dispute is frivolous. This allows you to catch these errors and dispute them with the appropriate credit card bureaus so that you can remediate these before a lender brings them to your attention. Consumer reporting agencies must correct or delete inaccurate, incomplete, or unverifiable information, usually within 30 days. The process of investigating and remediation can be time consuming and may take longer to update on your file thus delaying your anticipated closing date.
There are several websites and resources that can help consumers monitor their credit score and history. One of the best resources, which also happens to be free, is Credit Karma. Credit Karma allows consumers to monitor their credit score, number of recent credit inquires, number of total credit accounts, and other pertinent information related to their overall credit health.
Why is your FICO score and history important when purchasing a home? First and foremost, credit scores affect mortgage eligibility. If a buyer has poor credit the is lower than the mortgage guidelines, they won’t be able to secure a mortgage.
Credit scores and history also make an impact on the mortgage interest rate a buyer is able to secure. A buyer who has an 760 FICO score is likely to get a better mortgage interest rate than a buyer who has a 620 FICO score.
The bottom line, being aware of your FICO score and history is important, even if purchasing a home isn’t a priority at the moment. Furthermore, a less-than-perfect credit score will not necessarily disqualify you. Contact me if you would like a free consultation with one of my trusted credit repair specialists.
3. Find a Top Local REALTOR®
The third step to purchasing a home, which will play a huge role in the overall success of the process, is finding and hiring a top local REALTOR® to represent you as your buyers agent.
It is also important to understand the difference between a “real estate agent” and a REALTOR®. The term “REALTOR®” is a registered collective membership mark that identifies a real estate professional who is a member of the National Association of REALTORS® and pledged to a strict Code of Ethics and Standards of Practice.
There are a lot of important reasons to hire a buyers agent when purchasing a home. The most obvious is because in almost every scenario the service is at no cost to a buyer. Hiring a top buyers agent can make the entire process of buying a home seem relatively simple. Your buyers agent is there to assist you with securing financing (if needed), help you negotiate the best price and terms, and also to be your trusted advisor throughout the process.
Below are the Top 10 Reasons to Hire a Buyers Agent
- Hiring a Buyers Agent is Free!
- A Buyers Agent knows what to look for when viewing Homes.
- Understands the local real estate market and can educate you.
- Can help you secure financing.
- Will analyze your wants and needs to find homes that fit your criteria and coordinates home viewings.
- Understands real estate contracts.
- Coordinates the work of other needed professionals.
- Deemed to be a fiduciary and negotiates on your behalf.
- Keeps the transaction on schedule for a successful close.
- Can be your emotional filter.
Many buyers don’t know how to find a top local buyers agent. One of the most important tips to help ensure you hire a top buyers agent is to understand how to interview them when hiring a REALTOR®.
If you know what questions to ask during the interview, you will greatly improve the chances of hiring the right buyers agent. Some of the most important questions to consider asking prospective agents include:
- Why did you become a real estate agent?
- Do you sell real estate full time or part time?
- Do you work as a solo agent? Or with a team?
- What do you do better than other real estate agents?
- What methods of communication do you prefer?
- How many buyers do you generally work with at one time?
- How many homes, on average, do you sell per year while representing a buyer?
- What are the most common things that go wrong in a transaction and how would you handle them?
- What other professionals do you suggest we work with and what are their credentials?
- Can you provide recent testimonials?
- Would any of your recent clients who you’ve sold a home to be willing to talk with me about their experience?
- Why should I work with you?
Unfortunately, many of these questions are never asked by buyers when talking with a prospective real estate professional. Buyers who decide to skip the interview process when purchasing a home often end up regretting it if they end up hiring an agent who is inexperienced. Not asking the right questions can end up costing you time, money, and lead to an exorbitant amount of unnecessary frustration and stress.
It’s important that you know what to expect from a REALTOR® when purchasing a home. Things such as frequent communication, professionalism, honesty, and a proven track record are just a few of the most important things that you must expect from your buyers agent!
4. Get Pre-Approved for a Mortgage by a Mortgage Lender
The next step to purchasing a home is to get pre-approved by a mortgage lender. Preferably a local one who is familiar with the local buying process and quick access to various programs offered in that area.
Now you’ll notice that this step mentions getting pre-approved for a mortgage, not pre-qualified. Yes, there is a major difference between a mortgage “pre-approval” and a “pre-qualification”. A mortgage pre-approval is much more desired when comparing it to a mortgage pre-qualification.
Buyers who have a pre-approval have an advantage over other home buyers who may only have obtained a mortgage pre-qualification. Experienced real estate agents are going to urge a buyer to take the extra time and effort to get a pre-approval because it could be the difference between securing their dream home or not, in the event there is a multiple offer situation.
The reason why getting pre-approved for a mortgage is the step after finding a top local REALTOR® is because your agent can be a valuable resource in finding a reputable mortgage lender. Many buyers aren’t sure where to get a mortgage or who they should talk with, but an experienced buyers agent will have several recommendations to lenders they’ve had excellent experiences with.
As mentioned above, it’s important to ask the right questions of prospective real estate agents, and it’s no different for prospective mortgage lenders. Being aware of the right questions to ask a mortgage lender will help you ensure you’ve hired the right company. The mortgage lender you select to use for your home financing will be involved throughout the entire process of buying a home, so it’s critical you feel comfortable with the company and consultant you choose.
5. Learn About the Local Market
Anytime a expensive purchase is made, learning about the product or item is an absolute must. Purchasing a home is one of the most expensive purchases that you’ll ever make. It only makes perfect sense that you should learn about the market before looking.
Understanding what your money can purchase, how competitive a market is, how much homes sell for in a particular area, and about the different neighborhoods are just a few things you should want to learn about pertaining to your local market. Since real estate markets are different from one another, even if they’re close in proximity, you need to learn about each market you’re interested in.
Many buyers don’t know where to start to learn about the local real estate market. It can actually be pretty simple if you’ve hired a seasoned buyers agent. A good buyers agent will be able to provide information or places where you can get the information or places where you can get the information you’re looking for on the local real estate market.
Below are a few of the most important pieces of information you should learn about relating to the markets that you’re interested in.
- What is the current state of the market? Is it a buyers’ market or a sellers’ market?
- What is the inventory like for you your preferred home type?
- What is the absorption rate in the local market?
- What are the real estate property tax rates for the local market?
- Are the homes of interest located within a Municipal Utility District (MUD) or Public Utility Distrcit (PUD)?
Again, anytime you’re buying something as expensive as a house, you need learn about the product as much as possible. Learning about the local real estate market goes a long way to ensure you’re comfortable and confident with the home you are going to buy.
6. Begin Shopping Online for Homes
The next step in the process of purchasing a home is perhaps the most exiting. Once you’ve completed steps 1-5, you’re now ready to begin shopping and visiting homes that are for sale. The internet has made it extremely easy to shop for houses.
While the internet has made it easy, it also provides a lot of information that is unreliable. While shopping for homes for sale, it’s extremely important you’re using the right resources and websites.
Some of the most popular real estate websites today include Zillow and Trulia, which use Automated Valuation Models, or AVM’s to produce estimates or “Zestimates” as we all know through Zillow. However, it’s important to realize the information on these websites if often inaccurate. A standard AVM (such as Zillow) uses public record data; for an AVM to work, the data has to be correct. It will not pick up the difference between some sales and comps, or closings costs. There are new processes being rolled out concerning AVMs that may prevent people from getting appraisals done. Home values on Zillow have been known to be off as much as 20% or more, so be cautious when reviewing real estate information.
The best resource to utilize when shopping for homes is your REALTOR®. A top agent will be able to setup a customized website that is tied directly into the local multiple listing service (MLS) which is a database and cooperative tool between brokers. Or they may have an accurate home search on their website like you have available to you here on my site. For example, buyers who are looking for homes for sale in Houston are able to use my website, which has a home search feature which is updated form the local MLS every 15 minutes.
As you’re shopping for homes and deciding which homes you want to visit, always keep in mind what you actually need in a home and what you would like in a home. If you need a home that has a least 4 bedrooms, viewing homes with 3 bedrooms doesn’t make much sense.
7. Go Out and Find the Perfect Home
When purchasing a home, the ultimate goal is to find the perfect home. While it’s unlikely that the home you purchase will be the “perfect” home, it should be close.
What you may consider a perfect home is probably different than the next buyer, so understanding what you’d consider a perfect home is important. By determining what you need in a home and what you want in a home during step number 6, you can quickly identify properties that will not work.
If you’re looking for a house with solid mechanics, such as a newer roof, newer HVAC system, and new windows, a home that’ll need a new roof in the next couple of years likely won’t be what you consider a perfect house. As you’re on the search for your perfect home, make a checklist that you an bring to each showing. As you walk through a home, check off the absolute necessities that are on your list and if several are missing, you haven’t found that perfect home just yet.
Always keep in mind as you’re viewing properties what some of the most common red flags to look for when viewing a properties are. Red flags such as freshly painted areas on a ceiling, amateur workmanship, odors, and structural issues are a few to watch for.
An experienced buyers agent will be able to point out potential issues within a home that they may see while viewing homes, which is yet another reason why hiring a top agent is so critical when purchasing a home. Once you find a property that has met all of your necessities, you’ve found he perfect one.
8. Make an Offer
Now that you’ve found the perfect home, it’s time to make an offer and if accepted, pay your Option Fee and put down your Earnest Money deposit.
Making an offer may seem simple on the surface but there are actually many decisions that’ll be made. If you happen to be making an offer on an overpriced home, it can become even more tricky.
One of the most important decisions that’s made while making an offer is how much to offer for the property. No home buyer wants to pay more than they have to for a home, but it’s virtually impossible to know how little a seller is willing to take for their house. There is a fine line between making a strong purchase offer and an insulting purchase offer, so being cautious is important when determining the price.
It’s recommended that as you’re determining how much to offer for a property, you lean heavily on your agent’s expertise. Ask your agent to perform a comparative market analysis (CMA) on the house, which is a comparison of the recent sales, competing listings, and expireds in the area that are similar to your subject property. This report can be a huge help while determining the price you’re going to offer.
The price a buyer decides to offer for a house is not the only decision that’ll be made while making an offer. There are many terms and deadlines that you’ll also include in your purchase offer.
- What will the target closing date be?
- How large of a deposit should you make?
- How much Earnest Money should you put up front?
- What common real estate contingencies will you include? Inspections? Sale and transfer of title? Etc…?
- Will you request the seller to provide permits?
- Do you need to ask for seller concessions?
- When will you receive a written mortgage commitment by?
The Option Fee is a negotiable amount but typically ranges between $150-$250. This is paid and made out directly to the seller upon execution of the contract and grants the buyer the unrestricted right to cancel the contract during a specified time period typically 7-10 days. During this period known as your Termination Option, you would have any formal inspections completed.
The Earnest Money, also known as a “good faith deposit“ is also a negotiable amount but typically begins at at least 1% of the asking price. Think of this as a small preliminary down payment. This is paid and made out to the title company or law office administering the owner’s policy of title insurance and is credited towards the sales price and deducted from your down payment. The primary purpose of this deposit is to show a seller you are serious about purchasing their home. The higher the earnest money, the more serious the buyer.
The price that a buyer offers is obviously very important to a seller, but the terms and deadlines can also make of break a deal. It’s critical that as you’re making your offer that you fully understand what each section of the offer means.
An experienced agent will have shared with you the Texas Association of REALTORS® General Information and Notice to Buyer upon your initial meeting. When making an offer, this is another important stage of buyer a home when you’ll want to lean on the expertise of your REALTOR®.
9. Complete Pre-Purchase Inspections that Apply
The immediate step after making an offer and having it accepted is to complete any inspections that the offer was continent upon. If one of the contingencies was a home inspection, there’s a certain number of days you will have to complete the home inspection after acceptance of the offer. When purchasing a property, there are a dozens of reasons why having a property inspection is a good idea, even on new construction! Just because a new home builder is not required to provide a Texas Association of REALTORS® Seller’s Disclosure Notice doesn’t mean you don’t need an inspection.
10. Complete Formal Mortgage Application and Work Closely with Lender and Escrow Agent
After the inspection period is completed and any necessary negotiations are made, the next step to purchasing a home is to complete the formal mortgage application with the lender as well as the escrow agent administering the transaction. During this period you’re going to need to provide many important documents including your previous two years tax returns, recent bank statements, recent pay stubs, and also details of your employer so a verification can be completed.
During the formal application stage, you can expect to pay for the bank appraisal, which is one of the upcoming steps to purchasing a home. During a this step, you’re also going to have the opportunity to lock in your interest rate and shop for your homeowners insurance. You will also select a home warranty, if applicable.
Many buyers don’t understand the importance of the mortgage rate lock and skipping it can potentially be a big mistake. Make sure that you ask you lender about rate locks and understand what it means to you as the borrower if the lender doesn’t explain it to you.
Once you’ve formally applied for you mortgage, don’t expect to be done interacting with your lender. Over the next month or so, your lender is going to request specific documents to ratify conditions that your mortgage commitment is contingent on.
It’s fairly common for mortgage lenders to request updated bank statements, updated pay stubs, and letters of explanation on items that may appear on a credit report or large deposits in a bank account.
It’s extremely important that buyers stay in constant contact with their lender to make sure they have all the documentation they need and also to make sure they provide any requested documentation to the lender in a timely fashion. Not providing documentation in a timely fashion may delay the closing on your home.
11. Bank Appraisal and Underwriting is Completed
While formally applying for the mortgage, a buyer will provide payment for the bank appraisal. A bank appraisal is performed by a third party that’s hired by the lender to perform an evaluation of the subject property.
A bank appraiser’s responsibility is to determine that the sale price that the buyer and seller have agreed to is fair for the current market and also to ensure there are no safety related concerns with the property.
There are a couple of ways that an appraiser can determine the value of the property with the most common being the comparison approach. This is similar to a real estate agent completing a comparative market analysis. The comparison approach compares the subject property to at least three recent sales in the area, while making adjustments if necessary. The comparison approach typically only uses properties sold within the past 12 months which provides an up-to-date picture of the current market.
As for the safety issues, an appraiser will be on the lookout for things such as peeling paint, broken windows, missing handrails, roofs in poor condition, and a handful of other potential safety problems. “Lender Required Repairs” resulting from the appraisal must be completed and re-inspected prior in order to satisfy the lender’s underwriting requirements for the loan.
Properties appraising for less than the sale price and appraiser cited safety issues are the two most common issues resulting from a bank appraisal.
12. Perform a Final Walk Through
Once a closing date and time is set, the next step to buying a home is to perform your final walk through. This is a step that some buyers decide to skip, which is not a wise idea.
The final walk through in real estate should not be confused with a home inspection. The final walk through is the buyers right to walk through the house one last time to ensure things are like they were when they wrote the purchase offer.
The final walk through also provides you the opportunity to make sure any repairs that were agreed upon from any inspections have been completed. At the time of the final walk through, an experienced buyers agent is going to recommend testing the HVAC systems, plumbing, lighting, and also take final meter readings for utilities just in case there are any discrepancies after the closing.
If something at your final walk through is not satisfactory, it’s critical you inform your attorney immediately so that a resolution can be made before the closing date and time. If there are issues at the final walk through, it’s fairly common so see a credit given to a buyer so that the closing can still take place.
13. Go to Closing and Obtain the Keys to Your New Home
Closing day is here, congratulations! Purchasing a home is one of the most exiting events in life and closing day is when you’ll receive the keys to your new home.
At closing, you will pay your down payment and closings costs and sign the documents that finalize the sale of your new home. In Texas, closings may take place at a title company or at an attorney’s office depending on where the owner’s policy of title insurance is administered. If you did not arrange for a wire transfer beforehand, than you will also need to bring your down payment and or closing costs in the form of a cashier’s check. If you wish to wire your down payment and closing costs, inform your escrow agent so that they may assist you i making arrangements. NEVER SEND YOUR WIRING ACCOUNT INFORMATION VIA EMAIL. Supply wiring instructions in person or on the telephone.
Understanding what to expect at a real estate closing is a good idea and can make the closing seem much less stressful. Make sure before closing that you understand exactly what documentation and identification you’ll be required to provide. At closing, you will be required to furnish a current and active government-issued picture ID.
Once all the documents are signed and the banks have funded, if the purchase offer indicated that you would receive possession at closing, than you will receive all the keys to the property. Again, congratulations, you’ve completed the purchase of your new home
14. Move In and Consider Various Post Closing Tasks
Now that you’re the proud owner of a new home, it’s time to move in. To be honest, moving is not a fun activity that people look forward to. Moving can be much easier though if you prepare properly and follow the best tips for moving. If you’re moving and have children, keep in mind, the tips for moving with kids are much different than moving without. The same can be said if you have to move with your furry friends as well.
Once you get settled into your new home, there are a handful of tasks that you should consider completing. Below are some of the best post closing tasks to think about.
- Change the locks and update security system and or gate codes.
- Store your closing papers in a safe and secure place.
- Update address with an the Official USPS® Change of Address form.
- Update address with the IRS using Form 8822.
- Inform employers, schools, medical health care providers and other important establishments of your new address.
- Meet the neighbors.
Purchasing a home, as you can see, involves a lot of preparation, work, and execution. It is worth every bit of time and effort you’ll put into the process.
By following the 14 steps to purchasing a home that are discussed here, the purchase of your home will actually seem relatively easy.