How to Buy a House

Millions of people buy their first home every year, but it can be intimidating if you’ve never gone through the process.

The first thing to know is that each home purchase is unique, so what your friends and family members went through will be similar but not exact to what you’ll face.

However, there is a general framework that all home sales follow, and this is a good place to start before you get down to the nitty-gritty of your particular situation.

Here’s a quick guide on steps to take and what you’ll encounter.

Before You Buy

Check your credit and clean it up if you have blemishes. Your credit score impacts whether you qualify for a mortgage and at what rate.

The higher your score, the less perceived risk you are to a lender, and you’ll get more favorable terms. Get free copies of your credit reports from Experian, Equifax, and TransUnion and dispute errors that could hurt your score.

Also, pay your bills on time, don’t make other major purchases, and keep your credit card balances as low as possible. Don’t open new accounts, and don’t close old ones. Both impact your score.

Know what you can afford. There’s no sense in overextending yourself and putting your purchase in jeopardy down the line. You may want a big and fancy place starting out, but now is when you need to be honest with yourself.

Part of what you can afford depends on how much downpayment you have, your financing terms, and what you think your long-term earning prospects are.

How much down payment do you make?  The larger your down payment, the better house you can afford. It may take you years to scrape together enough for a down payment, or you may get money as a gift or possibly through a down payment assistance program. If you receive a monetary gift from a friend or relative, your lender may require a signed affidavit stating that the money doesn’t need to be repaid.

Start gathering your loan paperwork.  A lot of documentation is needed when you’re borrowing for a home. Start early and focus on financial records that document your income, assets, debts, and other key related paperwork.

Pre-arrange your financing.  Think early about your financing driven by current market conditions, your credit score, and the lending institution and type of loan you pursue. FHA mortgages are attractive for first-timers because the terms are lenient compared to other programs.

For example, the down payment on an FHA loan can be as low as 3%. You can take out two loans to fund your purchase.

Typically, the first mortgage would be for 80% of the amount, and the other would be 10% or more to cover the down payment. That is less than optimal and can put you in a challenging hole if you don’t have adequate resources to cover bumps in the road.

Don’t be bound by loyalty to your current financial institution when seeking pre-approval or searching for a mortgage. Shop aggressively because fees and rates can vary quite a bit in some cases.

Budget for closing costs. They will add several thousand dollars to your purchase and can create a little sticker shock if you’re unprepared for them. Fees and expenses typically range from 2% to 6% of the loan amount.

Often, you can ask the lender to roll these costs into the loan to ease upfront stress but know that you’ll pay a lot more in interest charges over the life of the loan for this privilege. Another option may be to negotiate for the seller’s concessions and have that party pick up part of the costs.

Budget for moving costs. This may be a minor expense if you stay local and have a great group of friends who will help you with beer and pizza. But if you’re moving a long distance and you’ve already acquired a fair amount of belongings, you could be on the hook for $2,000 or more.

During the Process

Choose a great real estate agent at the start of the process. Find someone experienced with first-time homebuyers, with a great track record, who knows the market, and with whom you’re compatible. Get agent referrals from other recent home buyers. Interview at least a few agents and request references.

Consider getting pre-approved for a loan before placing an offer on a home. This is a lender’s offer to loan you a certain amount of money with clearly defined terms. It shows home sellers and real estate agents that you’re a serious buyer and can give you an edge over home shoppers who haven’t taken this step yet.

It also guides you to focus on only what you can afford when you start shopping in earnest.

Get specific on your ideal home and neighborhood. Do the research. Drive the area where you want to live. Talk to people. Look closely at schools, lifestyle amenities, crime rates, property taxes, and more.

Take your time, and don’t succumb to hype or impatience. Play the long game and decide if a starter home or a home you’ll live in for a long time is better for you.

Stick to your budget.  Don’t stretch to the point of stressing yourself out. That’s too much long-term risk that could create a horrible result if you’re unrealistic.

Get knowledgeable through open houses. Online tours are one way to do this, but nothing replaces a physical walk-through of several homes to get a real sense of space, layout, and liveability. Work closely with your agent to find and locate potential properties that fit your desires.

Insist on home inspections. If you’re getting close to making an offer or making one contingent on a home inspection, use it to your advantage.

A pro will spot issues with structural, plumbing, electrical, and mechanical systems. Use any defaults as leverage in your negotiations to compensate for outlays you’ll make if you complete the purchase.

Take time in your negotiations.  Hurrying through this step puts you at a disadvantage. Don’t be swayed by falling in love with the home too soon or the possibility of a multiple-offer situation.

Be methodical and reasonable but aggressive. Rely heavily on your agent, who will use their experience to gauge possible responses to offers.

Your agent will present your offer to the seller’s agent, and the seller will accept your offer or issue a counteroffer. You can then accept or continue to go back and forth until you either reach a deal or decide to move on.

If you reach an agreement, you’ll make a good-faith deposit, and the process will transition into escrow. Escrow is a short period during which the seller takes the house off the market with the contractual expectation that you will buy it if all financing and inspection elements are acceptable.

You’ll work out a closing date to officially transfer ownership to you, and then you’ll start preparing to move in.

After You Buy

Secure your new home.  After you close, you should first change the locks and reprogram alarms, garage doors, and other safety-related systems. Make sure smoke and carbon monoxide detectors are in good working condition.

Also, connect utilities in your name beforehand so the move-in process is smooth, with essential services paving the way.

Buy or review your home warranty. Some homebuyers receive a home warranty from the seller to cover the home’s major systems or appliances. If you received a home warranty, review the specifics to know what’s covered and how to file a claim.

If you didn’t get a home warranty as part of the purchase, consider buying one now to guard against major undiscovered repairs during the home inspection. The price of these plans varies based on the size of the home and the plan selected.

Set aside cash reserves for regular maintenance.  Just like everything else, homes break and wear out over time. Costs can be significant, such as for a new roof or major plumbing or electrical issues.

Plan for them by creating an emergency fund quickly so you’re not hit hard later on. Also, perform regular maintenance, which can decrease your repair costs by fixing problems when they are small and manageable.

Review emergency shut-offs and appliance manuals. The best way to plan for a crisis is to take steps beforehand in cases of earthquakes, floods, broken plumbing, or fires. Spend time to understand how all your new appliances work by reading manuals left behind or by going online to find what you need.

Use your inspection report as a to-do list. Somebody else did the hard work of identifying issues for you in advance. For those things that weren’t handled as part of negotiations, you now have a ready-made to-do list to guide your initial maintenance and repair issues.