As a real estate agent or broker, you’ve been through the home-buying process a million times. Perhaps you already have a brochure or diagram that clearly outlines this process for prospective clients; but if not, having a cheat sheet ready to hand out to wary clients as yet uneducated about the process can make all the difference. Feel free to use our example below as a guide!
10 Easy-to-follow Steps in the Home-Buying Process
Step 1: Make a Budget
Before you start on your journey to buying a house, you should be certain you can afford it. As a rule of thumb, you want to shop for a home that costs no more than 3x your annual income. Another way to measure an ideally priced home is to make sure the price does not exceed about 30% of your monthly income.
Do keep in mind: this number should be adjusted according to your individual situation. Are you putting kids through college? Do you have an expensive car payment or a high monthly health insurance premium? Perhaps the 30% figure should come down. Also, generally speaking, you should save up about 20% of your down payment before shopping for mortgage lenders to avoid the lenders tacking on private mortgage insurance.
Finally, you’ll need about another 3-5% for closing costs. Please note: there are always additional costs of owning a home, such as money required for repairs, moving costs, decorating, upgrades to your new property, remodeling, furniture, etc.
Never plan on using your emergency fund for such purchases! Be sure to save up enough cash before you even begin the buying process.
Pro Tip: Make sure you research and understand your credit score before you start as well. Lenders will use your credit score to determine your loan amount and interest rates. They’ll also review your debt-to-income ratio (which refers to your monthly debts divided by your monthly income) to ensure that it is no higher than about 40%.
Step 2: Research
Once you decide on a budget and start saving, you’ll need to research other aspects of home buying. First, you’ll need to research a mortgage lender who is honest, has integrity, provides great customer service, and has a history of closing on time.
Be sure to ask potential mortgage lenders all your questions about the home buying process. If the lender can or won’t answer them, it’s time to consider a new lender. Also consider the types of mortgages offered: fixed-rate vs. adjustable rate mortgages, and a 15- vs. 30-year loan term. Decide beforehand which mortgage is best for you!
Also, consider testing the budget you made in step 1. You can do so by adding up the cost of your potential mortgage payment, your projected tax and insurance amounts, your possible HOA fees, and any home repairs, upgrades, or maintenance costs. If number is higher than your housing costs where you currently reside, subtract your rent.
This new number is the amount you’ll be paying on top of your current rent price. Try sticking back this amount on top of your rent for a few months, as though you were making a house payment. If you can easily afford the extra loss, you will easily afford a new house. Otherwise, if you miss the extra money and start to fall behind or become strapped without it, a house purchase may not yet be a good idea.
At this point, you’ll also want to research homeowner’s insurance. Your lender will require the name of your home insurance company, so shop for the best quote before the house hunting process. This will also help refine your budget number!
Consider what kind of insurance you’ll need: fire, theft, storm damage and liability are the usual suspects, but you should consider other types of insurance, such as flood insurance, depending on where you live.
Step 3: Get Pre-approved
After you’ve chosen a lender, the bank will evaluate your financial information to determine your interest rate and a maximum loan amount they’re willing to offer you.
This gives you a number to work with. It also makes you a “qualified buyer” and signals your seriousness to sellers. Remember: the number you get from the bank may be higher than the number you established for yourself.
Don’t be tempted to buy more house than you can afford! Stick to your own budget, regardless of the bank’s tempting offer to owe them more money. Usually, the bank will require you to provide your pay stubs, tax returns, and bank statements to determine your eligibility for a mortgage loan.
Pro Tip: Don’t look for a home until you’re pre-approved! Otherwise, you’ll doubtless fall in love with a house you can’t afford… and this is dangerous!
Step 4: List Features You Want and Need in Your Ideal House
Perhaps you don’t need designer fixtures, brand name, newly upgraded appliances, a spiral staircase, or a wrap-around porch. But perhaps you decide you do need a large backyard, an open kitchen, and 4 bedrooms.
Before you actually look for houses, you should determine what you want. Determine where you want to live, including specific neighborhoods. Consider school districts, and proximity to work, church, the arts, shopping and entertainment.
Pro Tip : Not sure what features you can and can’t live without. We say: if you can add it, repair it, upgrade it, or install it yourself, it may not be critical to the purchase. Put such features on your “want it” list!
Step 5: Decide on a Broker (or Agent)
An agent knows more about the real estate business than you. Thus, she can likely find houses before they’re on the market, or find houses using other avenues than are available or known to you. She can negotiate for a better price with the listing agent. She can also provide advice and support throughout your search, streamlining the process and mitigating stress.
Also, an agent can set up viewings. We recommend you make sure you are using a buyer’s agent, not an agent representing the buyer and seller! You want someone working exclusively for your interests. And don’t worry too much about the price of a buyer’s agent.
Usually, the seller’s commission to their agent also pays the buying agent’s commission! Do double check this with your own agent. However, no matter the commission, the amount an agent can save you on a new home often makes an agent worth her weight in gold.
Step 6: House-Hunt
Aw, the best part! When it comes to house-hunting, browse online resources like Trulia or Zillow for what’s available in your chosen neighborhood. See as many homes in your price range as possible (but ONLY look at homes in your price range!) When you’re in a home, test EVERYTHING. Test the plumbing and electrical features.
Consider how close the house is to traffic or noisy neighbors. Test doors, windows, appliances. Try to think of everything, including whether or not headlights will constantly be pointed at your windows, or whether or not the sun’s position at noon heats up the living room to furnace temperatures.
The pickier you are at this stage, the less likely you are to be unpleasantly surprised after purchasing the home.
Step 7: Make an Offer
You don’t want to pay more than you should (or more than you have to). However, you don’t want to blow your shot at your dream home with an insulting low-ball offer.
To arrive at a fair and reasonable offer price, consider the values of the surrounding properties. How much are homes in the same neighborhood selling? Also, factors like how long the house has been on the market, how keen the seller is to sell, and the history of the housing market in your area all affect how much you should offer.
Step 8: Have the Home Inspected
After you’ve made an offer and the seller accepts it, you are often required to have the home inspected by a third party to determine if there are any serious defects with the house, such as a faulty roof or leaking pipes.
You then have the option of asking the seller to make repairs, asking for a lower price to cover the cost of repairs, or, for dangerous defects, backing out of the sale. An inspection could run you as much as $500 or more, so make sure to include this in your budget!
Step 9: Pick a Mortgage and Have the Home Appraised
After both parties are satisfied with the inspection terms, you’ll submit a mortgage application to your lender. After it’s approved, you should review closing costs, which may include fees such as an attorney’s fee, a fee for the title insurance, and a portion of your property taxes.
Pro Tip: carefully consider the contract BEFORE you sign! The contingencies will outline at what points you can and can’t back out of the purchase. This is critical information in case something goes wrong.
Step 10: Close the Sale
Re-review the paperwork. Do a walk-through to make sure repairs negotiated after the inspection were addressed and fixed. Make sure you have money needed to close ready to transfer. Bring your ID and all paperwork to the closing, sign the paperwork, and be sure to keep a copy.
Once you’ve signed, you get the keys. Congratulations—you’re now the owner of a new home!