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8 Steps to
Buying a Home
Step 1: Define Your Price Range
Step 2: Shop for a Loan
Step 3: Choose an Agent
Step 4: Home Search
Step 5: Submit an Offer
Step 6: Get a Home Inspection
Step 7: Homeowners Insurance
Step 8: Closing
Step 1:
Define Your Price Range
What you can afford will depend on various factors, including your income, credit rating, current monthly expenses, down-payment and the interest rate. Financial calculators can assist, but it is best to visit a lender/broker to find out for sure.
Step 2:
Shop for a Loan
Before obtaining a loan there are certain costs which must be taken into consideration. The following information is important to discuss with each lender/broker you speak with.
Rates:
What is the current mortgage rate? Is rate fixed or adjustable? If quoted for adjustable-rate loan, ask how rate and loan payment will vary, including if loan payment decreases is rates drop? What is the APR (annual percentage rate) of the loan? The Apr will take into account not only the interest rate, but also, any points, broker fees, and other credit charges that you may need to pay.
Points:
These are fees paid to either the broker or lender, which are often linked to the interest rate. Usually, the more points paid the lower the rate. Ask for points to be quoted in a dollar amount, rather than just as a number of points, so you will actually know what you have to pay.
Fees:
A home loan will involve many fees, such as loan origination or underwriting fees, broker fees, and transaction, settlement, and closing costs. Some fees are paid when applying for loan, such as application and appraisal fees, and others are paid at closing. Ask for an estimate of all fees and what is included in each fee. Ask for an explanation of any fee you don not understand.
Down-Payments and Private Mortgage Insurance (PMI):
Lenders may require a down-payment, which is a percentage of the total purchase price. Some lenders may require 20% as down-payment, while other may only require 5%, or even 0% down. This rate will vary from lender to lender. Lenders may require the buyer to obtain private mortgage insurance (PMI) to protect the lender when they buyer is unable to pay. Ask a lender, what are their requirements for a down payment, including what you will need to do to verify funds for the down payment are available. If PMI is required, ask what the total cost of the insurance will be, what will the monthly payment be, including the PMI premium, and how long you will be required to carry PMI.
Step 3: Choose an Agent
When beginning your home search, having the right real estate agent can make all the difference. You will want to make sure that your agent is a REALTOR®. The term "REALTOR®" is a registered collective membership mark that identifies a real estate professional who is a member of the NATIONAL ASSOCIATION OF REALTORS®, the world's largest professional association, and abides by its strict Code of Ethics.
The Code of Ethics establishes time-honored and baseline principles that come from the collective experiences of REALTORS® since the Code of Ethics was first established in 1913. Those principles can be loosely defined as:
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Loyalty to clients;
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Fiduciary (legal) duty to clients;
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Cooperation with competitors;
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Truthfulness in statements and advertising; and non-interference in exclusive relationships that other REALTORS® have with their clients.
Step 4: Home Search
Based on your wants and needs, your agent will begin to set up showings of homes meeting your criteria. After touring each home, you should write down what you liked and didn't like. Develop a rating system, which will help you narrow the field down to the house that's the best for you.
Step 5: Submit an Offer
When you find an acceptable house, it is time to submit an offer. Real estate purchase contract forms are not "standard"; each one is unique, so just because something is pre-printed on a purchase contract doesn't mean you must accept it. Either cross it out or modify and initial the change to meet your wishes. Don't hesitate to take the form to your attorney; preferably an experienced real estate attorney for advice. It is crucially important to make sure that all of your bases are touched and all of your intentions made clear in the offer--it can become a binding contract in the blink of an eye and a stroke of the seller's pen.
Items that need to be addressed in an offer are:
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Names of buyer(s) and seller(s).
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Property description (street address, legal description, tax assessor's parcel number or other description of the property).
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The proposed selling price (your offer) and exact terms of sale.
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The amount of earnest money (your deposit) that is being tendered with the offer.
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A clear definition of precisely what is to be included in the sale, including any and all personal property. Don't simply assume that items such as porch swings, fireplace doors and refrigerators are included. Doing so usually causes some unpleasant surprises on moving day. If there is any question, be specific!
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Any financing contingencies (for example, subject to you being able to obtain a satisfactory mortgage. You can go as far as to state maximum interest rates, specific terms, etc.).
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Any home inspection contingencies (for example, subject to an acceptable whole house inspection report).
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Any concessions you desire the seller to make.
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Specific time for acceptance of your purchase offer.
Step 6: Get a Home Inspection
Appearances can be deceiving; that's why it's important to hire a trained set of eyes to help you uncover problems that might otherwise go unnoticed. A home inspection is an evaluation of a home’s condition by a trained expert. During a home inspection, a qualified inspector takes an in-depth and impartial look at the property you plan to buy.
The inspector will:
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Evaluate the physical condition: the structure, construction and mechanical systems.
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Identify items that should be repaired or replaced.
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Estimate the remaining useful life of the major systems (such as electrical, plumbing, heating, air conditioning), equipment, structure and finishes.
Before hiring an inspector, be sure to ask about their length of experience and credentials. Two of the largest national organizations that certify home inspectors are American Society of Home Inspectors (ASHI) and National Association of Home Inspectors (NAHI). You may also ask to see a copy of a recent report he or she has prepared on a similar property. Read the fine print carefully to determine what (if any) warrantees are being made and what matters will be excluded from the report.
If a home inspection discloses structural issues or other specialized concerns, you may wish to obtain additional inspections or professional advice. It's important that you understand the exact nature and extent of any serious problem, before you buy!
Step 7: Homeowners Insurance
Now that you have your house, you will need to protect it (and your belongings). There are several types of insurance available, and how much coverage you need depends largely on the house's location and your financial situation. The most common type of insurance and the one many mortgage companies require, is homeowner's insurance. Homeowner's insurance covers your house, its surrounding property, its belongings and any liabilities resulting from fire, wind or other destructive force.
Homeowner's insurance comes in two main forms:
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Actual cash value: coverage is limited to a specific amount, regardless of whether the value of the house rises or falls. For example, a $70,000 actual cash value policy would cover only $70,000 in damages, even if the value of the house rises to $100,000.
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Replacement cost: policy covers the costs of replacing any damages. For example, a replacement cost policy would cover the cost of replacing a $100,000 house, regardless of whether the house rose or fell in value.
You may be able to save hundreds of dollars a year on homeowners insurance by shopping around for insurance.
You can also save money with these tips:
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Consider a higher deductible. Increasing your deductible by just a few hundred dollars can make a big difference to your premium.
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Ask your insurance agent about discounts. You may be able get a lower premium if your home has safety features such as dead-bolt locks, smoke detectors, an alarm system, storm shutters or fire retardant roofing material. Persons over 55 years of age or long-term customers may also be offered discounts.
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Insure your house NOT the land under it. After a disaster, the land is still there. If you don’t subtract the value of the land when deciding how much homeowner’s insurance to buy, you will pay more than you should.
Don’t wait till you have a loss to find out if you have the right type and amount of insurance:
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Make certain you purchase enough coverage to replace what is insured. “Replacement” coverage gives you the money to rebuild your home and replace its contents. An “Actual Cash Value” policy is cheaper but pays only what your property is worth at the time of loss—your cost minus depreciation for age and wear.
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Ask about special coverage you might need. You may have to pay extra for computers, cameras, jewelry, art, antiques, musical instruments, stamp collections, etc.
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Remember that flood and earthquake damage are not covered by a standard homeowners policy.
Step 8: Closing
You've found an affordable house you like, you've signed the sales contract and you've called the movers. You think the hard part is over, right? Not necessarily. The closing, typically held at a title and trust company, is the final hurdle to calling the house your home. The buyer and seller meet with brokers and lawyers to sign more documents than most first-time buyers have seen in their lives. When all goes well, the buyer leaves with house keys and a folder full of paperwork. It can be more complicated than you might expect. But thorough preparation can minimize your chances of a rocky closing.
Some helpful tips for closing:
- Know what's included:
Make sure you know exactly what is included with the house's purchase price. The buyer and lawyers should clearly spell out in the sales contract "conditions and content" of the property. A good rule-of-thumb for a buyer is: Assume nothing. Bookshelves, drapes, custom lighting fixtures, fireplace screens, garden ornaments, outdoor barbecues and backyard play equipment are among the items that the seller will likely remove unless otherwise specified. The parties should resolve these details when they first sign the sales contract. A final walk-through can end in havoc if a buyer wrongly assumes that the dining room chandelier comes with the house. Other issues that should be agreed upon in advance include accurate information on real estate taxes, survey fees, possession date and homeowner's insurance.
- Satisfy loan conditions before closing:
Be sure to satisfy any conditions attached to a loan approval before the closing. Banks sometimes issue a preliminary approval pending the various credit, debt and resource checks. An unresolved late payment on a credit report could forestall the loan approval and delay the closing.
- Know your fees:
Know what fees are expected at the closing, and in what form they must be presented. Typically, title companies require certified or cashier's checks, rather than personal checks, for any additional costs that may be due at the closing. An unprepared buyer might have to run to the bank to cash or certify a personal check, in the middle of closing. If the seller refuses to wait, both sides may sign all the documents and then delay the closing. Then the buyer can later produce the funds and take possession of the deed without assembling the other participants.
- Agents and Attorneys:
Choose your real estate agent and attorney carefully. They are responsible for the details of the deal, and the more meticulous they are, the smoother your closing will be. Some real estate attorneys request that other parties fax them necessary documents to make sure they've been executed properly prior to the closing.
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