Buying a house is the American dream. Some of us want to have a house to call our own, while others see it as an expected financial investment or the ultimate sign of adulthood.
Regardless of your motivation, if you decide to pursue this major purchase, there are a few things you need to know to make your journey as smooth as possible. Most likely, you already know the process can be extremely stressful and lengthy. The truth is there are many challenges when buying a home, and it’s important to know the right way to go about it.
Fortunately, knowledge and understanding empower you to make the best choices and get the greatest deals – saving time, money and a lot of stress. As such, we’ve put together this step-by-step guide, “buying a house for dummies” style. We’ll break down the whole process into small, manageable chunks so that you know exactly what to do and when to do it.
If you’ve already started the home-buying process, use the table below to skip straight to the part that’s of interest to you right now:
- Buying a House – What to Consider Beforehand
- Buying a House – How to Plan Your Budget
- Buying a House – Shopping Around for the Right Everything
- Buying a House – Reaching the Finish Line
- First-Time Homebuyer Mistakes to Avoid
1. Buying a House – What to Consider Beforehand
Buying a house is one of the biggest investments – and one of the most complicated transactions – you’ll ever make. Consequently, you need to be sure you won’t regret it down the line. So, before you start roaming through listing services, ask yourself these key questions:
Why Do You Want to Buy a House?
Contrary to what you might think, not everyone is dreaming of becoming a homeowner; sometimes, renting makes a lot more sense. Therefore, don’t base your decision of homeownership on what others are doing or saying. Think long and hard about the responsibility and implications of owning a home – and whether you’re ready to take such a step.
Being a homeowner is a dream come true. You have a place to call your own, but you also have full responsibility for the house and everything in it. That means that you’ll have to handle regular maintenance, inspections, taxes and more. Think of the things you rely on your landlord for and imagine yourself taking every task upon yourself.
When is the Best Time to Buy a House?
Once you’re set on buying a house for the right reasons, consider the timing of the purchase and start doing your research. Look at mortgage and home price trends in your area and compare them with the past few years. Are they on the rise? Could you take advantage of a buyer’s market and lock in a better price if you move more quickly?
Seasonality also comes into play; spring is typically the start of the homebuying season, as well as the season when the most listings hit the market. That gives you more options to choose from, but it also makes it a more competitive time. Alternatively, you could try your luck in the off-season; when most people aren’t really looking, you may have a better chance of finding a gem.
While these two aspects are important, the decisive factor should still be your own financial stability. Be brutally honest when you ask yourself, “Can I afford it?” Only purchase a house if you have a steady income, some money set aside for a down payment (and closing costs), and good credit. These will all help you secure a better mortgage.
For instance, an extra year of saving for a down payment, paying off debt and boosting your credit score could leave you in a more stable position. So, sometimes it’s wiser not to rush. Evaluate your finances and if you think you’re ready to make your first step toward homeownership, start planning your budget.
2. Buying a House – How to Plan Your Budget
Money might be the primary deal-breaker in the purchase. Thus, budgeting is essential; create a financial plan based on how long it will take you to save up (if you haven’t already), and the timeframe in which you want to complete the transaction.
Additionally, be realistic about the timeframe. Researching and finding an agent can take a couple of weeks. Then, add the average contract-to-closing timeline (30 to 60 days), and you’re already looking at about three months – without even considering the time it takes to find a home. Finally, shopping around for the ideal house can last anywhere between a few days to a few months, depending on the market and your preferences.
Of course, the biggest factor that will influence how long it takes you to become a homeowner is the state of your finances. If you’re lucky enough to have found the golden goose, you can go directly to finding a real estate agent. But, if you’re like most of us, you’ll probably need to get a mortgage loan. And, to get an idea about what kind of mortgage loan you can get, you’ll first need to check your credit score.
About Your Credit Score
You may be familiar with credit scoring. But, if you don’t have an established credit history, it’s good to have a clear understanding of how your credit score is calculated as it will affect the interest rates you can get for a loan.
Your creditworthiness – or your likelihood to pay back a loan – is determined by your credit score and used by banks, credit card companies, insurance companies, landlords, mobile phone companies and more. The score is a cumulative number between 300 (bad) and 850 (exceptional) and is calculated based on the information in your credit report. The most common method of calculating credit scores is the FICO model, which takes into account information from your report, such as payment history, amount owed, the length of your credit history, any new lines of credit and the types of credit you’re currently using.
Typically, you can obtain the credit report information from one of the three major credit bureaus: Experian, TransUnion and Equifax. You can contact any of these companies and pay them to send you your credit score. You can also obtain a copy of your credit report from each bureau for free every 12 months by visiting www.annualcreditreport.com.
It’s essential to know your credit score and where you stand. Checking your credit score is commonly referred to as a soft inquiry and has no effect on your credit score. Hard inquiries, however, can lower your score and some lenders even have hard inquiry limits that, if exceeded, will result in your loan being rejected. Hard inquiries occur when a lender checks your credit score as part of the application process for a mortgage, credit card or any other type of loan.
Credit Scores Needed to Buy a House
In general, the higher your credit score, the better the interest rates; most lenders require a credit score of 620 or higher when offering mortgages. For this reason, it’s important to try to raise your credit score as high as possible before applying for a loan to secure the best mortgage options. In fact, a difference of just 20 points can cost or save you hundreds of dollars each year or tens of thousands of dollars throughout the duration of your loan.
However, if you do have a lower score, you can obtain a loan that is backed by the Federal Housing Administration (FHA). For such loans, you need a minimum credit score of 500 with a 10% down payment or 580 with a 3.5% down payment. Visit the official U.S. Department of Housing and Urban Development (HUD) government website to learn more about the homebuying programs in your state and to get in touch with a HUD-approved lender that can help you get an FHA loan.
How to Improve Credit Score
If your credit score is a little lower than you’d like, follow these steps to increase your score before taking out a loan:
- Pay your bills on time.
- Pay off debt and keep a low balance on your credit cards.
- Check for any mistakes on your credit report.
The main factor when calculating your credit score is your payment history, which is a simple record of whether you’ve paid your bills on time. By ensuring you keep up with existing payments, your score will soon inch up.
Another major factor is your current debt-to-income ratio, or utilization ratio, which measures how much of your total credit you’re using. If you’re frequently maxing out your credit, your score will be lower, so try to get into the practice of maintaining a healthy balance. To figure out your average credit utilization ratio, gather your credit card statements from the past 12 years, add the statement balances for each month and divide by 12. A ratio of 30% or less is what you should be aiming for.
It’s also worth checking your credit report for mistakes, which occur surprisingly often. Examples of common mistakes are name misspellings, loan payments applied to the wrong account or applied to the same account twice, incorrect payment statuses and more. If you find an error, simply contact the credit reporting agencies to have them removed.
Besides following these steps, you’ll also need to be patient. Improving your credit score takes time and there aren’t any shortcuts.
How Much House Can I Afford?
Budgeting for a house is a crucial step that can easily be overlooked as most people hone in on the purchasing price without considering all of the hidden costs of buying a house. A housing budget should include your down payment, closing costs, moving and maintenance costs, as well as an emergency fund for any unplanned maintenance that might occur.
A down payment is a payment you make upfront when purchasing an expensive asset, such as a home or a vehicle. It represents a percentage of the full purchase price that you pay out-of-pocket, while a bank or financial institution covers the remainder of the cost through a loan.
The more you can set aside for a down payment, the better; a large down payment will make your monthly mortgage payments lower – and you’re likely to lock in lower rates. An oft-quoted benchmark for down payments is 20% of the purchase price, however, that’s not actually the minimum amount required.
The minimum down payment required depends on the type of loan and on the lender’s requirements. For a conventional mortgage loan, the minimum down payment is 3%, which is even lower than the 3.5% required for an FHA loan. Smaller down payments allow you to get a foot on the property ladder sooner, however, for all down payments under 20%, you will be required to pay private mortgage insurance (PMI).
Besides the down payment, you’ll also need to have some money set aside to cover closing costs.
Closing costs are fees paid at the closing of a real estate transaction when the title of the property is transferred from the seller to the buyer. These fees are incurred by either the buyer or the seller and vary by location, property and loan type. They should definitely factor into your housing budget, as they can add up to between 2% and 5% of a home’s purchase price.
Once you complete your loan application, the lender should provide you with a loan estimate, which includes a breakdown of all of the closing costs involved with the home purchase. (If these costs change, you might receive a revised loan estimate.) Then, three days before closing, you should receive a closing disclosure statement with the closing fees. Check for any changes between the estimates and the final numbers, and ask your lender to clarify any new charges or significant increases.
Meanwhile, shop around for different third-party services. Compare fees between them and don’t settle for the third-party insurance, inspection and title companies that your lender suggests. Instead, see if you can find a better deal with a different vendor. You can also negotiate some of these costs with your lender or appeal to the seller to see if they would be willing to cover part of the costs. A seller who is eager to close as quickly as possible might agree to pitch in.
As a last resort, you can also opt for a no-closing-cost mortgage, which eliminates all of the fees; however, these usually result in higher interest rates because the closing costs are rolled into your mortgage, which means you would be paying interest on the closing costs, as well. This is why you should factor in closing costs when you come up with a housing budget.
Maintenance & Moving Costs
Other costs you might incur during the homebuying process are closely tied to the state and location of the home you’re buying. For example, you might need to make some repairs before moving in (a home inspection will point out if there are any major repairs needed, and you can either negotiate the purchasing price or have the seller repair the home beforehand). Or, you might want to update the house right after buying it. Either way, be sure to budget for this ahead of time.
Also, if you plan on hiring movers, get a quote so that you know what to expect in terms of moving costs. Depending on how far you’re moving from your current location or how many belongings you’re taking with you (think furniture and large appliances), a moving company might charge you more.
Once you’ve considered the upfront costs of buying a home, review your monthly budget, as well. Take into account the mortgage payment along with your other recurring expenses: utilities, transportation, groceries, entertainment, childcare, credit card debt, savings, etc. Ideally, your mortgage payment should be below 28% of your monthly income and lenders prefer to see your total debt-to-income ratio below 35%.
Suzanne Bartholomae, Assistant Professor and Family Finance Extension State Specialist / Human Development and Family Studies, Iowa State University:
There are several standard ratios that lenders typically use to help decide what percentage of your monthly gross income (before-tax income) can be used for mortgage and debt payments. The monthly mortgage payment should total no more than 28% of your monthly before-tax income, which is sometimes referred to as “front-end ratio.” Some government-assisted programs may go as high as 31%. Your monthly payments on all long-term debts (including mortgage) should total no more than 36% of your monthly before-tax income (sometimes called back-end ratio). Some government-assisted programs may go as high as 43%.
Therefore, be sure to consider paying off any existing debt before taking out a mortgage loan. You want to be able to handle the mortgage payment alongside your other expenses without it putting too much strain on your wallet. While not everyone can improve their finances right away, with some careful planning and by avoiding a loan greater than you can afford, you can escape the long-term financial stress.
Saving for a Down Payment
Now that you’ve figured out your budget, you should have a good idea of how much of a down payment you ought to be working toward, as well as what kind of other fees to expect. Depending on your situation, it can take months or even years to save up, so it’s a good idea to start right away.
Here’s how to save for a down payment:
Get rid of your other debt
Debt will make it more difficult to qualify for a mortgage, so do your best to get your debt under control. As an example, consider refinancing any student loans with high interest rates so you can reduce your payments and put some money aside. Pay off as much credit card debt as you can, too.
Set up a savings account
Set up a savings account to help you keep track of how much you’ve saved so far. This will also prevent you from dipping into the money you’re putting aside for your down payment.
Ask for money as gifts
Friends and family may be willing to lend a hand, as well. For instance, you might consider asking them to forego traditional birthday and/or holiday presents in favor of gifts of money that you can put toward your down payment or savings.
Make coffee at home
The average price of a Starbucks drink is $2.75. And, if you drink at least one cup of coffee every workday, that adds up to around $55 per month, or $660 per year. That’s money you could use to pay some of the closing costs on your loan.
Be smart with groceries
To avoid getting carried away when shopping, prepare a list beforehand and try to stick with it. Be flexible and swap out the heavily advertised brand you’ve seen on TV for the generic store brand.
Pack your lunch
Do you usually order or go out for lunch? Packing your own lunch for work every day will save a lot of money, too. Try meal prepping for an even easier way to figure out lunch for the entire week.
Bring in an extra income
Any extra money you can make is always helpful. Seek out part-time gigs, such as ridesharing, delivery services, dog walking or babysitting. Or, look for freelance opportunities online that fit your skill set.
Cut the cord
How much TV do you watch? Or, better yet, how many channels from your current plan do you rarely, if ever, watch? Save money by opting to replace your TV service with an online streaming service. Plus, you don’t even need a smart TV to cut the cord; just invest in a low-cost streaming device that you can attach to your TV and access the app for the streaming service of your choice.
Save on transportation costs by carpooling and split the costs with your colleagues. By doing so, you’ll help keep one or two cars off the road, improve traffic fluidity and benefit the environment, as well.
Expert Advice on Buying a House – Finances
Suzanne Bartholomae, Assistant Professor and Family Finance Extension State Specialist / Human Development and Family Studies, Iowa State University:
You should scrutinize your financial standing and estimate what price home you can afford, before you begin looking for a house in earnest. Make certain you determine your budget before you start looking. Then, only look at houses that are in your price range. Don’t look at homes that are too expensive for your budget. Remember, too, that just because you are prequalified for a certain loan amount or priced home, you do not have to purchase a home that expensive.
3. Buying a House – Shopping Around for the Right Everything
Now that you have a healthy lump sum stashed away (and hopefully a great credit score, too), you’re in a strong position to approach mortgage lenders and real estate agents.
Shopping Around for a Mortgage
It’s worth shopping around for a mortgage lender as some may offer better products than others. A common mistake is to stick with your regular bank; contrary to popular belief, loyalty is not always rewarded. Use a mortgage broker to help you find the best deal, or speak with at least three different lenders to see what they offer. Also, bear in mind that there are several different types of mortgages available with varying rates, benefits and penalties.
A fixed-rate mortgage means the interest rate will remain the same for the duration of the term. This is a good choice if interest rates are rising because it locks in your rate for the entire loan. Additionally, a fixed-rate mortgage is a safer, more predictable option, as your monthly payments will remain the same throughout the duration of your term. However, fixed-rate mortgages usually have higher rates than variable-rate mortgages.
With a variable-rate mortgage, the interest rate fluctuates with the market; if interest rates drop, so will your monthly payments. However, it goes both ways; if market rates rise, so, too, will your payments. Conversely, variable-rate mortgages are great if interest rates are trending downward, in which case you will typically enjoy lower rates than fixed-rate mortgages.
An adjustable-rate mortgage is a type of variable-rate mortgage and works in a similar fashion. The interest rates you pay will rise and fall alongside market rates, but this only happens after a period of repayment at a fixed introductory rate – which is usually very appealing to the borrower.
Other Types of Loans
Federal Housing Administration (FHA) Loan
With an FHA loan, you can get a mortgage with as little as 3.5% down. But, you’ll also have to pay a mortgage insurance premium, and that’s money that doesn’t go toward paying off your mortgage.
Veterans Affairs (VA) Loan
A VA loan allows veterans to buy a home with no down payment and, as of January 2020, these zero down payment loans are no longer capped, so veterans can borrow any amount of money as long as they qualify.
U.S. Department of Agriculture (USDA) Loan
A USDA home loan is a zero-down-payment mortgage for qualifying rural and suburban homebuyers. USDA loans are available to buyers with low to average income for their areas. Income limits vary by county and can be viewed here.
When deciding what type of mortgage loan to choose, it’s important to consider the mortgage term, as well. Your monthly payments will be lower on a 30-year mortgage, but the interest you’ll pay over all those years will be a lot more than the interest you would pay on a shorter mortgage term. On the other hand, a shorter term equates to higher monthly payments, so it really depends on your personal financial situation. Discussing your options with a lender will give you a better idea of what will work best for you.
Alex Lofton, Co-Founder of Landed and Stanford Graduate School of Business Alumni:
Homeownership assistance programs can help boost your buying power, but they aren’t one-size-fits-all. Finding the one that is right for you can make your dream of owning a home a reality. A federal, city, or county program can be a good fit if you have less than 10% to put down and meet specific criteria (i.e., your combined household income is less than 140% area median income) and you’re focusing your home search within a specific city or county.
A pre-approval letter from a lender signals to sellers that you’re a serious buyer. To obtain a pre-approval, your lender will verify your financial information and submit your loan for preliminary underwriting. Pre-approval also gives you a good idea of what your monthly payments will be and ensures that you only search for homes that fall within your budget.
Expert Advice on Buying a House – Mortgages
Ryan B. Dietz– Professor of Practice in the Master of Real Estate Development program (MRED) / Clemson University:
Mortgage lenders’ goals are to close the loan and sell the loan on the “secondary” mortgage market. In theory, this makes mortgages a commodity, and all mortgage rates quoted should be competitive; however, rates, fees, and other terms can vary heavily. Negotiate with your preferred lender and look to establish a relationship with them. Because of the strenuous process of locking in a loan rate, some buyers are tempted to say “whatever it takes” to the rate that is quoted because they’re in a hurry and time until closing is bearing down on them. Also, take some time to understand how real estate finance and specifically, mortgage payments, work. More interest is paid than principal in the first years of the loan, and the total interest paid over the term of the mortgage can exceed the purchase price of the home. This is normal, and good to understand.
Hiring a Real Estate Agent
If you’ve made it this far, you’ve likely discovered that buying a home is no walk in the park. Fortunately, you can ask for help and now that you’ve laid the foundations, you can enlist an agent to help you find your dream home.
Be sure to do your research when hiring a real estate agent:
Ask your family and friends for recommendations of real estate agents they’ve had good experiences with. Make sure you’re only considering certified real estate agents.
Check their online presence
The internet is a great place to look for a real estate professional in your area. When you find some local agents, look at their websites and social media pages to see what kind of public reviews they have from previous clients.
Interview potential candidates
Similar to a lender, don’t settle for the first person you talk to – unless, of course, there’s a perfect match. Interview at least three real estate agents to get an idea of their availability and preferred ways of communicating. As an example, if you prefer text messages over phone calls, you’ll want someone who works the same way.
It’s essential to find a real estate agent you can trust because they can help you in many ways. Specifically, real estate agents:
- Know your local market and can advise you as to whether your budget is realistic.
- Can access more listings than you can and help you visit homes that may not be officially on the market yet.
- Negotiate with the seller on your behalf.
- Have contacts in the industry, such as home inspectors, solicitors, etc.
- Know the home-buying process inside out, and can guide and advise you each step of the way.
Finding Your Dream Home
With the help of your agent, you can now arrange to view some homes.
Seeing a home in person is essential. That’s because when you visit a home, you’ll have a better idea of the space, how it flows and whether it works for you. Additionally, walking through a home is also an opportunity to check to make sure everything is in order.
If possible, keep an open schedule so that you can visit newly listed homes as they come on the market, and be sure to attend as many open houses as you can. Bear in mind that it’s unlikely that you’ll find a house that checks all of your boxes, so compromise is key.
House Hunting Tips
- Make a list of needs and wants. This will make it easier when you compare listings.
- Don’t skimp on location. A great home far from work is not the way to go. While you might save on the purchase price, you’ll make up for it in gas money. A good tip is to buy property in a good school district. Even if you don’t have kids, this is often an important factor if you ever plan to sell your home.
- Check out the neighborhood. You also don’t want to buy a home in a bad neighborhood. Make sure you take a good look at the neighborhood and the surroundings when visiting homes.
- Take notes. Details can become a little blurry after five or six viewings.
- Look past the minor flaws. You can get rid of ugly cabinets or change the paint color later. Rather, focus on whether the home is well-built and if it has the space you need and the layout you prefer.
- Revisit the ones you like. A neighborhood can look completely different on a weekday morning as opposed to a weekend evening. Visit the homes at different times or on different days to get the full picture.
- Keep a top three. Finding a home will take forever if you keep a never-ending list of favorites. Instead, after you visit a few homes, rank your top three and judge the other ones you visit against these. Are any newer homes you’ve seen good enough to knock out one of your top choices? This strategy will help you narrow down your options and make your final decision easier.
Presently, it’s important to also look beyond the traditional features one needs in a house. Experts who study the patterning of environmentally impactful behaviors and their associations with other features of social life, advise homebuyers to also consider energy-efficient homes as well as the environmental quality of their location.
According to Chelsea Schelly, Associate Director of the Sustainable Futures Institute of Michigan Technological University, “the most important things to consider when buying a house include things like its orientation (is it a passive solar house, where residents get the benefit of lighting and thermal comfort free from the sun?), the rules governing residential life (do HOA or local zoning rules allow you to grow a front yard garden, have solar panels, put up a clothesline, or have backyard composting?) to its social and spatial embeddedness (can you build community with your neighbors or walk to any amenities?), and its environmental quality (can you drink the tap water, leave the windows open, and grow food in the soil?).”
For homebuyers who are already concerned about sustainability and utility costs, David W. Watkins, Professor of Civil & Environmental Engineering at Michigan Technological University, advises them to “consider the age of the home (older homes are generally not as well insulated), appliances including the furnace, AC, and water heater (new appliances may be much more energy and water efficient), and the setting (shade can greatly reduce cooling costs in summer, passive solar can reduce heating costs in winter). Some other sustainability-related questions are the landscaping and outdoor maintenance (is it dependent on irrigation? […] is a lot of snow plowing needed?), and driving distances to workplaces, shopping areas, schools/daycare, etc. Combined, these living costs could be significant relative to a monthly mortgage payment.”
A few ways of reducing monthly utility bills would be to do some simple upgrades around the house, such as LED light bulbs and efficient water fixtures.
Expert Advice on Buying a House – Overcoming Stress
Alex Lofton, Co-Founder of Landed and Stanford Graduate School of Business Alumni:
Finding housing and beginning the homebuying journey can be full of stressors. When you’re able to see your dream – a particular type of home, the perfect neighborhood, and your future life playing out there – but your finances do not match up, this mismatch between desire and reality can cause a lot of stress. The best way to help mitigate your homebuying stress is to be prepared. Know what you want, know what you can afford, and know what to expect. If you’re stressed about moving to a new neighborhood, try the commute for a day or two. And if buying will mean that you’re downsizing square footage, try only using a portion of your apartment for the next few days to test how that change will impact your day-to-day life.
4. Buying a House – Reaching the Finish Line
When you find the home that ticks all the right boxes, it’s time to enter the end zone. The first step is making the right offer.
Submitting an Offer
Making an offer is a delicate balance: offer too much and you’ve overspent; offer too little and you run the risk of your offer being rejected.
Once you’ve decided on a sum with your real estate agent, your agent will help you draft an offer and send it to the agent representing the seller. The offer typically contains the following:
- Legal address
- Purchase price and terms: Terms can include whether appliances and furniture are to be included in the sale.
- Earnest money amount: This is usually between 1% and 3% of the sale price of the house, which you deposit into an escrow account as a means of showing you’re serious about buying the house.
- Down payment amount
- Preapproval letter
- Breakdown of closing costs: This section should also mention who is paying for each fee – the buyer or the seller.
- Date and time of the offer’s expiration
- Projected loan closing date
- Contingencies: Detailed below.
- A personal note from the buyer: Adding a handwritten touch could help you stand out in a competitive market.
- Other state-required provisions and disclosures: For example, in New York, it is a requirement to have a licensed attorney approve the offer letter.
Ryan B. Dietz– Professor of Practice in the Master of Real Estate Development program (MRED) / Clemson University:
My advice would be for a buyer to understand exactly what their maximum budget is and stay well below that when making an offer on their first home. Make sure the budget includes not only the purchase price, but the cash needed for capital improvements (big repairs) and regular maintenance (small repairs) during the first year. Don’t forget that future property taxes will rise as the purchase price rises.
Contingencies & Disclosures
Contingencies are conditions that the seller may agree to if they accept the offer. Typical contingencies include making the house available for a home inspection or stating that the deal can only proceed if you obtain financing within a specified amount of time.
Contingencies protect the buyer, but having too many of them can actually be a roadblock and prevent the deal from moving forward. In a seller’s market, there will be fewer contingencies accepted and in a buyer’s market, the opposite. For example, in case of a bidding war, a seller would have the luxury to reject any mortgage contingency.
Seller disclosures refer to information about the property that the owner is aware of and might affect its value. These are usually required by law and could include things like information about natural hazards, structural issues or other major defects.
After You Make an Offer
Upon receiving your offer, the seller has three choices. They can:
- Accept it as it is.
- Reject it.
- Make a counteroffer.
Typically, the offer allows the seller 24 hours to respond. If they choose to make a counteroffer, they might negotiate the price, terms or any contingencies. Once the seller accepts your offer, you’ll need to sign a purchase agreement and pay the earnest money deposit.
Negotiating the Contract
“After the offer has been accepted, the seller’s attorney drafts a contract (usually a form contract with a rider) and the buyer’s attorney reviews both, discusses the open issues with their client, and then prepares a buyer’s rider that will modify the form contract and seller’s rider” according to Richard J. Sobelsohn, Lecturer in Law at Columbia Law School. He also mentions the most common items negotiated on the buyer’s behalf:
- The condition of the property (not the overall condition, but [specifically] appliances in good working order, no leaks into or out from the property within the prior x months, no termites, bedbugs, etc.).
- No alterations made without necessary required approvals.
- Access to the property is whatever the buyer needs that is reasonable.
- No violations known by the seller.
- If a condo or coop, no prior complaints to the manager of noise, smells, smoke, mold, etc.
- No litigation (existing or threatened) against seller or property.
- Seller to represent that they have not filed for bankruptcy, nor defaulted under a mortgage.
- No liens against the property.
- If seller damages property on move-out, it is the seller’s liability to repair.
- Death of buyer will terminate the contract.
Getting a Home Inspection
A home inspection is a non-invasive examination of the condition of a home, not to be confused with a real estate appraisal. A home inspector determines the condition of a house, while the appraiser determines the value of a property.
If you’ve included the home inspection as a contingency in your offer letter, this can help you decide how to move forward with closing the deal. For example, if the home inspector finds an issue, you could ask the seller to make the repairs, reduce the purchase price to cover the costs of repairs, or simply back out of the deal.
As a buyer, you’re responsible for hiring and paying the home inspector. While your real estate agent will most likely recommend a certified home inspector they’ve worked with before, it’s a good idea to check out some other options and compare fees and reviews.
Once you’ve settled on a home inspector, they’ll spend two to three hours examining the exterior and interior of the home and then provide you with a written report of their findings. You or your real estate agent can join the inspection to discuss and ask questions in person.
Home Inspection Checklist
A home inspector will typically check everything from items like the roof, foundation, garage/carport, downspouts/gutters, balconies/decks/porches to plumbing, electrical equipment, boiler, HVAC, interior doors, windows, walls and more.
It’s important to look at your home inspector’s checklist to understand what is covered, as they generally won’t look for components that are not easily accessible. For instance, issues such as pests, landscaping and airborne hazards are generally not included. However, some inspectors do offer these as additional services with their own additional fees.
Among the items that should be added to a home inspection checklist, especially in the case of older houses, Byungik Chang, Associate Professor of Civil Engineering at the University of New Haven, recommends adding the following:
- Mold – A toxic mold should be dealt with right away.
- Radon – The level of radon must be reduced or remediated to safe levels before you move in.
- Pests and Insects – Termites [is an] example that can lead to a major problem with your house (e.g., attic area).
- Lead paint – Some old house contain lead paint which all sellers should disclose to a home buyer.
- Well water and groundwater quality – This can easily be checked using a water test kit. A buyer should also check if there are appropriate filtering systems in the house if underground water is a primary water source. Water softener systems, sediment filtering systems, and water neutralizers are such examples.
- Septic system – A buyer may check this by running water when they visit the house. Also, a buyer may be interested in checking the last day the septic system was inspected or at least cleaned out.
Once the inspection is complete, you’ll have a fairly good idea of the mechanical and structural integrity of the home. If repairs are necessary, you have several choices:
- Choose to continue with the original offer and consider completing the repairs yourself in the future.
- Make a new offer requesting that the seller completes the repairs themselves.
- Make a new offer requesting that the seller lowers the price or offers a cash-back credit to help fund the repairs.
- Walk away from the deal and search elsewhere.
An experienced agent can help you with these negotiations. Generally, minor issues shouldn’t cause too much trouble, and you might even be able to repair them yourself after moving in. However, major issues – such as a leaky roof or structural damage – are worth sorting out before you move in.
Ryan B. Dietz– Professor of Practice in the Master of Real Estate Development program (MRED) / Clemson University:
If the home inspector suggests that major repairs items are needed, call contractors of the appropriate trade (e.g., plumbers, roofers) to examine each item further and provide you with a quote for repair. Once you have these quotes for repair, you can better negotiate with the seller. If the seller does not want to do the repairs, make sure you account for these costs in your total budget, as you will likely have to do them anyway. If managing the repair yourself, add 10-20% “contingency” to the estimate, as often estimates are low, and you don’t want to accidentally exceed your budget.
Securing Your Financing
Once negotiations are complete and everyone is happy, it’s time to sign the purchase agreement. In doing so, you’re locking yourself into a legal obligation, so make sure you’re happy with everything and that your finances are in order.
During this step, you’ll finalize the details with your lender and provide additional documentation as they finish underwriting your loan. This process typically takes up to a month to complete, and you’ll probably be asked to provide bank statements, tax returns, proof of income and written statements regarding any large deposits into your bank account. To avoid delays, be sure to respond to requests quickly, and ensure you provide the lender with the exact documents they need.
At this time, it’s important that your financial situation remains stable and your credit remains healthy. Now is not the time to take on additional debt, miss payments or quit your job. A pre-approval isn’t a guarantee of a loan, and only when you’ve been given the final stamp of approval can you be sure that the funds will be transferred.
In my experience, the purchase agreement is finalized soon after an offer, and then the final financing is secured and the inspections are done simultaneously. This may vary market to market. Financing and inspections are common contingencies in the purchase agreement. The financing takes the longest to secure and is difficult to negotiate after the purchase agreement, so it might be a good idea to find the best financing deal possible before starting the search for a home. With agreement between buyer and seller, all sorts of addendums can later be added to a purchase agreement based on the home inspection and the timing of financing.
Before closing the deal, visit your future home one more time for a final walkthrough. It’s best to go with your real estate agent, who can act as a third party and bear witness to any questions and answers.
If the seller agreed to complete repairs before closing, this is the time to check that the repairs have been made. Bring your home inspection checklist and make sure everything is as it should be. Request proof of work (such as invoices and receipts) and ensure that the home is ready for you to move in.
Closing the Deal
Finally, after all that hard work, the end is near! Closing the deal is the final step in buying a house. As soon as all of the conditions of the offer have been met, you can sign the paperwork and grab the keys.
Three days before the closing date, you’ll receive a closing disclosure from your lender, which details the conditions of your loan, including monthly payments, interest rate, type of loan and how much money you need to bring to closing.
At closing, you’ll have to sign legal documents and pay the closing costs and escrow items. Typically, you can pay funds either through a cashier’s check made to the escrow company or via a wire transfer to the banking institution. Besides you (the buyer), the other participants in the closing are the seller, your real estate agents, an attorney, a closing agent, a title company representative and the mortgage lender.
Carefully review all of the documents you sign, make sure everything is in order (check for misspellings of names, as well), ask for clarification if needed, and make sure you receive all house keys, entry codes and garage door openers, if applicable.
That’s it! With the paperwork signed, the funds transferred and the keys in your pocket, your dream home is finally yours!
Congratulations! You did it. Enjoy your new home!
5. First-Time Homebuyer Mistakes to Avoid
Buying a home is likely the largest purchase you’ll ever make. When dealing with such large amounts of money and loans that can last up to 30 years, there’s really no room for error. Accordingly, here are some common mistakes to avoid when buying a house:
Not knowing your budget
Looking for homes before knowing what you can afford is a recipe for disappointment as you may end up falling in love with a home outside of your budget. To prevent this, get pre-approved before you start house hunting. That way, you’ll know exactly what the lender can offer and what you should budget for.
Not exploring your options
This applies to finding a lender, a mortgage type, a real estate agent, a home inspector and more. Don’t simply settle for the first one that seems okay. Instead, research and compare reviews and rates for each vendor. You can save a lot of money by going with a different home inspector than the one recommended by the real estate agent.
Holding out for the perfect house
Many buyers pass up on great homes because they don’t tick all of the boxes. Rather, be flexible and prepared to make compromises. This is where having a list of needs and wants comes in handy. Make sure the home meets important needs – such as location and size – but be prepared to overlook cosmetic imperfections that can be addressed later.
Falling for a scam
Big money attracts opportunists, and it’s scary just how many scams there are in the world of real estate. One of the most common scams involves hackers accessing the email accounts of real estate agents. The hackers monitor correspondence, often for weeks, before reaching out to a buyer and asking them to send the down payment or closing costs to their bank account. Never do anything without first confirming it with your agent or a legal representative.
Emptying your savings
Everything can look perfect during the home inspection … and then break a month after you’ve moved into your new home. Unexpected maintenance costs can arise at any time, so make sure you budget for them so you’re not caught off guard when something does happen.
Not asking for a home inspection
A home inspection is crucial before buying a home; you wouldn’t want to close a deal and then discover that the house has major structural issues. Sellers expect a home inspection to be included as a contingency in the offer letter, so make sure you don’t skip this step – no matter how sure you are that the house is the one for you.
Not checking the neighborhood
Don’t settle on a home before examining the neighborhood a bit, as well. Make sure it’s the right location (you don’t want a long commute), check out the levels of noise pollution, research the area and try to find out more about your neighbors.
Not getting everything in writing
Professor Dietz also advises prospective buyers to make sure everything they get is in writing: “If the seller or seller’s agent promises you something during a walk-through inspection, make sure they memorialize it in an email or handwritten note, as memories quickly fade sometimes. Make sure you understand what is and is not a “fixture” in the home. Sometimes bookshelves that look like “built-ins” will suddenly slide out on the day of closing. Make sure your lender memorializes their promises in writing as well.”
Follow the “better safe, than sorry” motto and be patient during this process. In the end, you’ll find the perfect place to call your own and enjoy life as a homeowner!
Point2 would like to extend a special ‘thank you’ for their insights to the following experts who contributed to this guide:
- Suzanne Bartholomae – Assistant Professor and Family Finance Extension State Specialist, Human Development and Family Studies / Iowa State University
- Byungik Chang – Associate Professor of Civil Engineering / University of New Haven
- Ryan B. Dietz– Professor of Practice in the Master of Real Estate Development program (MRED) / Clemson University
- Alex Lofton – Co-Founder of Landed / Stanford Graduate School of Business Alumni
- Chelsea Schelly – Associate Director of the Sustainable Futures Institute / Michigan Technological University
- Richard J. Sobelsohn – Lecturer in Law / Columbia Law School
- David W. Watkins – Professor of Civil & Environmental Engineering / Michigan Technological University
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