How to buy a house

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A house could be ordered from the Sears catalog in the 1930s for about $2,000 (about $38,000 in 2024 money). The majority of the labor was included in the price, and the Sears homes were built to such a high standard that many of them are still on the market today.

Compare that to the present day, when most homebuyers require a loan in the hundreds of thousands of dollars for a mortgage, and mortgage interest rates have skyrocketed as a result of inflation and increases in Federal Reserve interest rates.

Even though buying almost everything else has become easier due to the rise of internet retailers, the largest of which is Amazon, buying a house has become more difficult. These days, the process involves a good dozen macro-steps and an infinite number of micro-steps, ranging from choosing the perfect agent to figuring out how much earnest money you can afford to put down.

Long yet doesn’t always equate to complex. The process of getting the right house at the right price may be surprisingly simple and very fulfilling, as long as you pay close attention to every step along the way.

Now, let’s talk about purchasing a home without using a Sears catalog.

1. Assess the timing of your house purchase.

Shakespearean in nature, this is the first inquiry you should ask before buying a house:

Should one purchase or not?

Several personal, financial, and market-related considerations can be used to determine if the moment is right for you to purchase a home:

  • Personal factors
    • Are you prepared to make a permanent move?
    • If you have a cosigner, are you emotionally ready to live with them?
    • Are you prepared to take on the standard housekeeping duties, such as yard work, HOA meetings, and DIY maintenance?
  • Financial factors
    • Do you have a steady income and strong credit (670+)?
    • Does your cosigner have a steady job and a solid credit history?
    • Have the two of you saved up enough money to pay for a down payment, closing costs, and continuing monthly bills like utilities, insurance, and maintenance?
  • Market factors
    • Is now a favorable time to buy, according to reliable measurements like the Fannie Mae Home Purchase Sentiment Index (HPSI)?
    • Are interest rates on mortgages going up?
    • Are you thrilled with what you can afford, and can you afford a home in your neighborhood?

Answering “no” to any of these straightforward gut checks could indicate that it’s advisable to hold off and continue saving for the time being.

However, if everything appears to be in order, let’s go to step No. 2.

2. Make sure your cosigner, funds, and credit are prepared.

The “final exam” of personal finance is purchasing a home. Your lender will thoroughly examine every aspect of your financial history, including:

  • Credit score
  • Credit history
  • Cash reserves
  • Investment accounts
  • Assets
  • Debt-to-income ratio (DTI)
  • Existing types of debt

This also applies to your cosigner, when determining your loan terms for a joint mortgage, most lenders base their decision on your cosigner’s “lower middle” credit score. In other words, if your spouse has credit scores of 583, 601, and 570 but yours are 801, 793, and 804 with Equifax, Experian, and TransUnion, respectively, the lender may list 583 on your application and refuse to provide you a loan altogether.

Because of this, you and your cosigner must discuss money, debt, and credit history openly from the start. It’s better to have a conversation now and begin fixing any issues with your “financial house” before moving forward because the truth will ultimately come to light.

But now that you both have reliable sources of income, savings, and credit, it’s time to proceed to step number three.

3. Determine how much you can pay for a house

Allowing the amount for which you are prequalified to determine your budget is a frequent error made when purchasing a property. However, prequalification for a larger home than you can afford is a common practice among lenders, which contributed significantly to the Great Recession of 2008.

It’s preferable to use a real home affordability calculator to assist you in creating a prudent spending plan. You can get a fast indication from both Zillow and Freddie Mac with their helpful tools. For more information, see our story on How much house can you afford.

4. Start by physically window shopping

I disagree slightly with the majority of guidelines such as this one, which advises against shopping until you have received pre-approval for a loan. It doesn’t hurt, in my opinion, to spend an hour or two looking around Zillow and Redfin to see what properties are within your budget after you’ve established a general one.

You may conclude that the houses you can currently afford satisfy every need. Alternatively, you can determine that it’s preferable to put off saving for a little while longer to avoid having to deal with a fixer-upper or make a space compromise.

5. Prepare a sizable down payment

A down payment for a home is typically 20% of the asking price. However, this figure dates back to a period when living standards were far lower than they are now.

With today’s $420,800 median home price, a 20% down payment would come out to almost $85,000. If you include in an extra 5% of the loan amount for closing fees, the total amount of cash you’ll need at closing can approach $100,000.

Thankfully, depending on the sort of loan you qualify for (we’ll talk about that later), your down payment may be as little as 3% or even 0%. However, 20% is still an excellent target to aim for, since it can significantly lower your monthly mortgage payment and spare you from the additional expense of paying $30 to $70 per month for each $100,000 borrowed for private mortgage insurance.

6. The ideal real estate agent for you can be found

To be really honest, there is a good deal of discussion about which should come first: finding a mortgage lender or a real estate agent. For one simple reason, I personally lean toward the former group: while it’s not always the case, a great agent can help you find a terrific lender.

However, that is only based on my own experience.

In either case, networking is frequently the key to selecting the ideal real estate agent. You can find out if friends, family, or coworkers who recently purchased in your price range and/or neighborhood liked dealing with their agent. After you establish a connection with a few, you should ask them important questions such as:

  • Do you have weekend and night shifts?
  • Are you experts at assisting first-time homebuyers?
  • Have you already purchased homes in our target or budgetary zip codes?
  • Do you prefer working with a certain lender?

It goes without saying that a full-time real estate agent with a wealth of knowledge who also happens to have a solid relationship with a lender has a lot higher chance of producing positive results than a part-time novice.

Oh, and in case you were wondering how a real estate agent differs from a REALTOR—yes, that word is capitalized—the latter is a member of a trade group known as NAR, or the National Association of REALTORs.

In addition to being bound by the NAR’s Code of Ethics, REALTORS have access to other resources and databases. Don’t worry, though, if you find a fantastic real estate agent that you trust and click with—even if they aren’t a REALTOR.

After you make contact with a qualified real estate agent, they will assist you in refining your budget, selecting your criteria for the search, estimating the amount of property you can afford, arranging showings, creating offers, and guiding you through the entire process until closing.

Additionally, as was already said, your agent can assist you in making the correct lender connection—one of the most important and delicate aspects in the process.

7. Choose the best lender and loan kind.

Generally speaking, a good mortgage lender meets three requirements:

  • They provide fair costs together with a competitive interest rate.
  • They communicate and reply promptly, and they are available on weekends and evenings.
  • Compared to the average lender, they can close in less than 30 days.

Your real estate agent is the best person to inquire about lenders who match this golden trifecta. It’s likely that they have amassed a network of reliable lenders over the years that their previous consumers have found pleasure in dealing with.

However, the procedure for locating a lender is much the same if you don’t yet have an agent: ask your friends, family, and coworkers for recommendations.

In addition, a reputable lender will advise you on the best kind of loan for your circumstances. Although most purchasers choose a conventional loan, you might be eligible for a loan from the Veterans Affairs (VA) or the Federal Housing Administration (FHA), which have lower interest rates and less down payment requirements.

After establishing contact with several lenders, it’s time to apply for preapproval.

8. Do more than just get prequalified—get preapproved.

If you’ve started looking into mortgages, you’ve undoubtedly heard the terms “prequalified” and “preapproved” used frequently. So let’s start by defining those.

  • “Preapproval lite” is what prequalification is like. Your lender essentially gives you a rough idea of how much you might be preapproved for by taking a broad look at your income, credit score, and overall financial situation.
  • Preapproval entails completing a comprehensive mortgage application (which should take one to two hours on average) and sending it to your lender to receive a conditional loan approval. After that, you’ll receive an official “preapproval letter,” which is typically required by home sellers before accepting any bids.

Obtaining preapproval from two or three lenders is worthwhile merely to compare interest rates. If Lender B provides the better rate and you feel that Lender A offers the greatest deal, you can ask Lender A to match and, if they agree, you might save thousands of dollars throughout the loan.

It’s time for the (mainly) exciting part now that you’ve organized your money, located an agent, been preapproved by the ideal lender, and created a budget.

9. Go shopping (this time, for real)

You might be amazed at how your list of requirements and preferences shifts as you begin looking through and visiting properties.

My boyfriend and I had intended to buy an older house in the neighborhood where I grew up, but after seeing how pricey they were and how the neighborhood was gradually being taken over by nature, we started searching for newer homes a little further out in the suburbs.

In addition, she had the brilliant notion to search for houses that were situated near the highway, making the 25-mile drive to the city center take only roughly twenty-five minutes. Our alternatives significantly increased as we altered our search parameters to include proximity to I-285 rather than downtown itself.

In any case, my parting piece of advise during the shopping phase is to avoid letting exhaustion and burnout impede your judgment and push you into a house you don’t like. Because Holly and I were eager to get the process over with, we almost closed on a house that was only a 6/10 at best. Fortunately, though, we were able to withdraw out and have a two-week vacation from house shopping in its place, which helped us to relax and had a much happy conclusion.

10. Offer to buy the house you’ve always wanted

You will notify your realtor when you’re prepared to submit an offer once you’ve located a property you like. You will talk about the three main components of the offer itself together:

  • The sum of the offer. Together with your real estate agent, you will determine the precise amount to offer by taking into account the length of time the property has been listed, comparable properties (often known as “comps”) in the neighborhood, the perceived level of competition, the property’s condition, and, of course, your budget.
  • Deposit money. A tiny portion of the entire home price (around 2–3%), known as the “good faith deposit” or earnest money, is what you commit to keep in escrow until closing. The seller will keep your earnest money if you back out of the agreement before closing and there is no contingency protecting your reason for doing so. Your earnest money should be used for your down payment if you decide to proceed with the transaction.
  • A backup plan. The buyer may withdraw from the agreement before closing and keep their earnest money by following these stipulations in the contract. You can include stipulations that let you back out if the home inspection goes poorly, the appraisal is too low, you can’t get enough financing in time, or you didn’t sell your current house quickly enough. Naturally, offers with few or no contingencies attached are preferred by sellers.

A seller has three options after receiving your offer: they can accept it, reject it, or counter it. If the latter, you should assign your real estate agent the responsibility of identifying the seller’s pain points; perhaps all they’re asking for is a reduction in contingencies or a larger earnest money deposit; in that case, you might be delighted to work with them to reach a compromise.

11. Do your research and make a deal

Due diligence begins when a seller accepts your offer and lasts for around 10 to 14 days. This is the time that you and your agent/lender partner will complete all of the assignments, inspections, and general preparation required to close on the house and complete the transaction.

Usually, due diligence entails the following:

  • The home inspection is a two-hour process that involves a qualified inspector spending time on the property to evaluate its general condition and look for any warning signs, such as mold or a malfunctioning HVAC system.
  • The home evaluation, in which the actual market worth of the house is determined by an impartial appraiser. If the appraisal values are significantly less than the purchase price that was agreed upon, you might have to renegotiate, find a way to pay the difference between the loan amount and the sale price, or withdraw (if you have an appraisal contingency).
  • A title search to make sure the property you might inherit, should you decide to become the owner, is free of liens or active legal proceedings.
  • A land survey to determine the exact borders of the property and ensure that your grass is not being cut through by the neighbor’s fence, or the other way around.
  • Seller disclosures, often known as formal documents, are a list of known problems with the house that the seller has disclosed (e.g. mold, foundation difficulties, mysterious death in the home).
  • The Closing Disclosure is a legal document that details your loan amount, interest rate, and specific closing expenses. It is delivered by your lender at least three days before closing.
  • Obtaining house insurance, as the majority of lenders will demand that you obtain coverage before closing. Although your lender and agent might be able to recommend some providers, you should obtain at least five quotes for home insurance and choose the most affordable one from a reputable company because it’s quick and simple to do so.
  • Preparing funds for closing, which usually entails depositing a sizeable sum of money into an escrow account under your lender’s instructions.

That may sound like a lot, but all you need to do is follow the precise directions that an expert agent and lender will provide you as they guide you through your due diligence phase.

You’ll reach the home stretch (pun intended) when your real estate agent sets up a meeting with the seller’s real estate attorney after you have everything in order.

12. Shut down your house and dance

The seller’s real estate attorney will bring an almost comical stack of documents for you and your cosigner(s) to sign during your closing meeting. I seem to remember that Holly’s and mine were around the same height.

The buyer’s agent, the seller’s agent, your lender, and other parties involved in the title transfer may attend the one- to two-hour closing sessions. However, most of the 90 minutes will be spent with the real estate lawyer shoving papers in your direction, summarizing their contents, and directing you to sign them.

Typical closing paperwork consists of, but is not restricted to:

  • Loan approximation
  • finalized and updated mortgage application
  • Final Disclosure
  • evidence of homeowner’s insurance
  • Documentation for deeds
  • Title documentation
  • Statements and documentation for escrow accounts
  • Statement of settlement
  • Occupancy certificate

And after that. Since you might be writing by hand for the first time since high school, bring some Bengay for pain relief.

The real estate lawyer will eventually just say, “Congratulations,” while glancing at you and your cosigner.

The takeaway

As mentioned before, purchasing a home may be a very drawn-out and difficult process, but it doesn’t have to be scary or difficult. If you take the above actions in the correct order, it should be rather simple and result in a satisfying ending.

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