I get requests for all types of posts, and I’m happy to oblige most of them. Filling a specific need someone has helps not only them but everyone else who may have the same question, but didn’t ask.
Following my recent flurry of posts on home buying, a few of you have asked for a more comprehensive guide to the process. Let’s recount some of the things I already covered in detail:
- How to save money for a house
- How much you’ll need to buy a house
- How to find the perfect house
- Why taxes, insurance and PMI are huge wildcards these days
- The financial components of home buying
As you may remember, we tried and failed to buy a home in 2008, and by the time we went looking again, we were glad it happened. The recession hit, and our bottom lines were hit as hard as the housing market continued its decline.
These days, we’re back in the early stages of house-hunting again, so this is not only a good resource for you, it’s a great refresher for me. We’re going to look at, step by step, how to buy a house from scratch.
First, a word of warning–buying a house is a lot like getting married–you’re pretty sure you want to do it, but you have no idea what you’re really getting into. You just have to figure some things out along the way and make the best choices you can with what you know.
Unlike getting married though, there’s a good bit of prep work that can be done. After all, millions have gone through the same process, and while complicated, it’s at least teachable. This is a simple guide to the most direct steps in going from a renter with no savings to a happy and satisfied home owner.
Pre-planning consists of answering some basic questions:
- Is buying a home the right thing for me?
- What kind of home do I want? (at least the basics–where, what type)
- How will a house fit within my budget? Can I realistically save the cash required for closing?
- What is my price range based on my budget?
Pre-planning is a critical step because it asks, at a point when you’re not yet invested in the process, whether owning a home is a worthwhile goal for you, and if you’re willing to put forward the sacrifice and effort to make it happen. It’s also a time to make basic decisions about your future home that will affect how you attack subsequent phases of the process.
Throughout this post, I’ll make recommendations for further reading from my personal finance colleagues on each topic. Many of them are from fellow Yakezie challenge members. These are awesome posts you can read about pre-planning:
- Adjusting my Monthly Budget to Account for Home Ownership
- How We Chose to Buy a House
- Buying a Home
- Buying vs Renting Detailed Comparison
- Reasons I Am Looking to Buy
- The City Versus Rural Debate
Once you’ve established basic parameters for your house (location, type, price range, and cash required), it’s time to get your finances in order. This might consist of:
- Saving enough money for the down payment and closing costs
- Paying off debt that might reduce your income-to-debt ratios
- Taking steps to improve your credit score
- Asking for a raise to boost your regular income
- Improving your income stability by becoming invaluable at work or creating additional income streams
Getting mortgage approval these days means having your financial house in pristine order, with very few ways around it. Chances are you already know what to do–now it’s time to execute. Here are a few other posts to get you started:
- First Time Homebuyer–Saving for a Down Payment
- Save for a Down Payment
- Expenses Not to Forget When Buying a New House
- A closer look at mortgage closing costs
- The 15 Year Millionaire Plan: Year 2
- The Cost of Making Your House a Home
While house-hunting before you’re ready to buy is a helpful motivational tool, it’s still kind of pointless because you can’t act on any good finds. This might lead you to frustration and resentment instead, which isn’t the desired result.
More preferably, you’d start searching for homes when you are almost or completely ready to buy. A house search could consist of:
- Visualizing your perfect home
- Getting pre-approval from a bank for your budget range
- Working with a Realtor to browse houses
- Using online tools like Realtor.com or Zillow to find local homes for sale
- Visiting, photographing, and cataloging select homes until you short-list or find the perfect one
The goal of a house search is fairly simple–find the home you want to buy. Don’t beat around the bush and don’t be afraid to make tough decisions that narrow the field, or you’ll spend forever in this stage. Additional resources for the house-hunting process:
- Mortgage Prequalification vs. Preapproval
- 6 Must-Have Characteristics to Look For When Buying a Home
- Not All Cheap Houses are True Bargain Homes
Negotiations & Contract
Once a house is in your crosshairs, it’s time to work with a Realtor to put in an offer. Some things you might expect include:
- A requirement to put down an small earnest deposit to show you’re serious.
- Further negotiations if the seller is unwilling to take your offer or there are others bidding on the same home.
- A lot of waiting while the bank reviews your offer if the house is a short sale.
- Contingencies in the offer that allow you to break the contract if the home inspection or other factors are not to your liking.
One important thing to remember during negotiations is to not get caught up in the heat of the moment. It took a lot of effort to get to that point, and you’re excited about the purchase, but it’s very possible you’ll need to put in offers on multiple houses before one sticks and gets to closing. Further reading on negotiating and contracts:
- Seller Concessions & Buyer Bargains
- 6 Things to Negotiate When Buying a House
- Mortgage Short Sale: Tips for Buying and Selling
I would argue that due diligence is the most important step of buying a house, and one that many people are willing to skip in all the excitement building up to closing. You should:
- Pay for a thorough inspection of the house, and negotiate over discovered defects for price reductions or having the work completed before closing.
- Carefully re-evaluate your own finances. Losing the earnest deposit might be peanuts compared to buying when you’re not ready.
- Verify that anything which looks like an addition or renovation was properly permitted and all fees were paid.
- Run the property against court records, property appraiser records, tax records, and anything else publicly available you can get your hands on. Look for any red flags.
- Get a survey, appraisal, and title search (your bank will probably handle these).
- Visit the property at night, on the weekends, during the workday, talk to neighbors, and pull up crime statistics for the neighborhood.
- Calculate or test the commute time to work and/or potential future work locations from your new house.
If you play your cards right, your might be in your new home for decades to come. There’s no reason that it should be a nightmare because of something you could have noticed before you bought the house. Do your homework going in, and you can’t say “I should have…” later. More reading on due diligence:
- Types of Mortgage Loans
- Buying a House? Put in the Legwork First
- Understanding Your Home Appraisal
- Getting a Home Inspection
- The Home Loan Process Explained
- Inspect Your Home Inspector
There’s not much I can say about closing because I’ve never been through it. My only suggestions would be to:
- Find out exactly what you need to bring to closing and don’t wait until the last minute to line it up.
- Request the paperwork ahead of time and read through it carefully.
- Hire an attorney if unsure about anything. It’s better to spend a few hundred dollars now than deal with heartache later.
Much more complete resources about closing on a house:
- The Home Closing Process
- Ten Steps to Closing on a Home
- Your Credit Report May Be Re-Checked Just Before Your Closing
- What is a Mortgage Escrow Account?
Buying a home can be exciting, rewarding, and a lot of fun. Make sure you go into the process well-prepared, flexible, and patient, and you’ll see the results of your hard work in no time.
Some of the resources in this guide will get you started on your way. Use your local resources, too–Realtors, friends and family, colleagues and neighbors to find out the best practices in your area. Good luck!
Photo by ansik