Buying your first house is often considered one of the biggest milestones in life. In fact, 70% of Americans consider buying a home an important part of adulthood. Between saving up the funds, getting approved for a mortgage, making offers on homes, and finally getting to closing: the homebuying journey is long and stressful.
To help make the homebuying journey a bit more digestible, we've created this guide to walk you through every step of purchasing a new home. We'll explore the best options available at each stage of the process to help you close the deal on the house of your dreams.
Buying versus renting: the numbers
The first step in the home buying process is determining if it makes sense for you to purchase a home. Buying a home can be a very good financial decision. Historically, homes have appreciated, and a portion of the funds that you pay toward your mortgage becomes equity. However, renting can be the better option depending on your circumstances.
When you rent
- Moving is much easier and faster, giving you more flexibility
- Payments are consistent, but usually increased each year
- The landlord is responsible for repairs and maintenance
- You do not need much money upfront
When you own
- You must pay closing costs to buy the home (1-2% of the purchase price)
- Moving typically requires the sale of your home, removing some flexibility
- Your mortgage payment never changes unless you refinance (with a fixed-rate loan)
- You are personally responsible for all repairs and maintenance
- You need a lot of cash upfront for a down payment
- Part of your monthly payment goes into your own pocket as equity
- Property values typically appreciate over time.
On one hand, renting gives you more flexibility, but will cost you more in the long run. However, buying a home has significant upfront costs. If you only plan on living in an area for 1-4 years, it is typically better to rent. It typically takes 4-6 years for buying a home to be more worthwhile than renting.
You should consider your lifestyle, need for flexibility, and financial situation before committing to buying a home. If it is the right decision for you, the next step is to get pre-approved for a mortgage.
Now that you’re ready to buy, it’s time to find out how much you are able to afford. Here, you will provide some basic financial information, and the lender will determine how much they are willing to loan you.
It’s worth noting that a pre-approval is different than a pre-qualification. A pre-qualification is simply an estimate of what the pre-approval will come out to. Pre-approvals say that as long as there are no unforeseen issues, they are willing to loan you a specific amount at a specific interest rate. It is best to get a pre-approval because you can use it to make a more competitive offer to sellers.
Mortgage providers offer different rates, so you should talk to multiple lenders to find the best rate available to you. If you are a first-time homebuyer or veteran, there are additional loan options available to you.
Pre-approvals are not guaranteed, but they are a good place to start. Each property has slightly different financials (taxes, HOA fees, insurance, etc). When you are ready to make an offer, your agent should contact your lender to determine how much you are able to offer on that property.
Find the right real estate agent
Finding a good real estate agent is a good next step. Agents will walk you through the entire process. They are considered fiduciaries, meaning it is their job to act in your best interest at all times.
Just like with lenders, you should “shop around” for an agent. A good agent will not only be able to explain the entire process of buying a home for you but will help you in each stage of the transaction. A few things that you might want in an agent are:
- They know the area well and can keep you from buying in unsafe areas
- They have references for lenders and contractors
- They answer all of your questions and address your concerns
- They aren’t trying to get you to buy every house you see
- They know the market conditions and what type of offer works best
- You enjoy working with them
Finding a home and making an offer
It’s time for the part you’ve been waiting for. After spending a few weeks finding out your budget and picking an agent, it's time to start finding a home.
Typically, your agent will send you houses based on the criteria you are looking for (bedrooms, bathrooms, special requirements, and price range). You can also look for houses on your own on sites like Zillow or Realtor.com.
Once you find a few homes that you like, you can schedule showings or visit open houses. If the property is out of your range, your realtor can do it for you. When you find a property you are happy with, it’s time to make an offer.
A good real estate agent should help you determine how much money and what terms you should offer. If the home has a lot of interest, you might consider offering more money, a shorter closing period, or fewer contingencies. It’s important to know: contingencies are put in place to protect buyers, and removing them opens you up to risk. We never recommend waiving your inspection contingency.
So, after a long search and multiple offers, you’ve finally had one accepted. Now comes due diligence, the time to make sure that everything is in order before you can grab the keys. The time after you’ve had an offer accepted, and before you close, is called the due diligence (or closing) period. There are a few things that you need to get done here before you commit to purchasing the property.
1. Get an appraisal
Once your offer is accepted, it’s time to turn that pre-approval into a mortgage loan. First, the lender will send an appraiser to assess the value of the property. They want to make sure the home is worth what you paid for it. If the appraisal comes back lower than what you offered, you will need to pay the difference or renegotiate with the seller.
2. Get an inspection
An appraisal will tell the value of the home, but it won’t tell you what is wrong with it. A professional inspector will walk you through the property, and show you all of its defects/issues. This will help you understand the condition of the home (and how many repairs you’ll need to do) before you commit to buying it. If you book an inspection with Inspectify, we’ll also provide you with repair cost estimates for free.
3. Decide on contingencies
Now that you have all of the information on the home, and how much it will cost you, it’s time to decide if you want to go through with the purchase. Based on the info you now have, you can go back to sellers and request a lower price, or choose to proceed. Your current market conditions will play a big role. If it’s a seller's market, it is unlikely that they will budge on the price.
4. Finalize your funding
Here, your loan officer will ask for a bunch of documents from you to verify your financials before they finalize the mortgage. There is a lot that goes on here, but your agent and loan officer will tell you exactly what documents you need to send, and when/where to transfer your funds due at closing.
Congratulations!!! This is the easiest part of the process. Now that you’ve sent over your funds due at closing, you’re (almost) done! At closing, you and your agent will meet up with a notary to sign some final documents.
The notary will explain what each of the documents you sign means, and give you time to read them. Once you’ve signed your documents, you are good to go! You are now a proud homeowner. You’ve done it! Just be sure to keep up with your payments :)