How To Buy A House

Want to know how to buy a house? Before you start shopping or comparing options, you need to make sure you're ready to be a homeowner.

As a licensed Realtor and career Banker, I’ve seen first-hand how owning a home can be exciting and scary at the same time. Perhaps you’re a career-driven individual who has built up financial security, investing in real estate is your next venture, or a college grad ready to cut ties with roommates. Whatever your case, seller’s markets can be a financially dangerous terrain for first-time home buyers with little to no awareness of real estate.

With all of the potholes of buying real estate, you can still make an informed decision with the following tips:

1. Get Your Finances in Order

Before making the biggest purchase of a lifetime, get your financial situation in order first to be sure you are safe to apply and get approved for a mortgage. Too many credit inquiries can negatively impact your credit score, so don't apply for a mortgage until your finances are in order:

• Income and Employment Status - Your lender will want to verify your income and confirm how much money you make. They'll typically want to see 2 years of consistent employment history in the same field to make sure your income is stable and consistent. Be ready by preparing your W2s, tax returns, and other verification documentation of non-employment income for 2 years.

• Get Your Credit in Good Shape - A good credit score is essential to buying a home and being able to afford to own a home. Before applying, you should have a credit score of at least 620. Aim to get your credit score above 720 to get the best available rates. Keep in mind, that a small .25% change in your interest rate can change the overall cost of owning a home by tens of thousands of dollars. Learn how to increase your credit score here.

• Work on Your Debt to Income Ratio - Lenders view a debt-to-income ratio under 36% as good, meaning they think you can manage your current debt payments and handle taking on the loan. Some lenders will extend DTI up to 50%, which is not advisable and will come with additional stipulations or higher interest rates.

• Save for Your Down Payment & Closing Costs - Also, have your down payment saved in a bank account for at least two consecutive months before applying for a mortgage. We recommend saving at least 20% for a down payment. While some FHA and other loan options exist for lower down payments, we don't recommend going lower than 20% because you'll be required to pay PMI (Private Mortgage Insurance) and you'll also be susceptible to being upside down on your loan in a housing downturn. Lenders will typically verify funds for the down payment and closing costs using bank statements during the approval process. It's a good idea to save at least 3-6% of the home's price saved for closing costs. The specific closing costs will depend on your lender, your loan type, and where you live. Almost all homebuyers will pay for things like title insurance, appraisal, and inspection fees. Learn how to save for a down payment on a house the right way.

2. Calculate How Much You Can Afford on a House

Deciding how much house you can afford is likely the most important decision that you'll make during your home buying process. Take the process of determining how much house you can afford very seriously.

You've heard the wise words of Benjamin Franklin, "If you fail to plan, you are planning to fail."

Using a mortgage affordability calculator, calculate how much house you can afford.

Do your homework, assess the situation, and keep in mind that you should only buy a house based on your specific budget and needs.

A lender's job ultimate job is to make money by making home loans, not by providing financial advice, so know your number and stick to it!

3. Factor in Additional costs

Too many homeowners attempt to purchase real estate without knowing how much they can spend or how much they can afford for a monthly mortgage payment. That said, even more people fail to understand how much they spend on additional expenses related to their new home. It’s recommended to get on a budget and be intentional about your finances ahead of time.

As a homeowner, you will have to contend with additional expenses, which you might not have had to pay if you were renting, such as property taxes, maintenance, repairs, electric, water, sewer, cable, phone, etc. On top of the new expenses, be sure you can afford your phone service, car insurance, gas, car payments, clothes, groceries, etc.

Don’t forget that many home purchases are followed by “making the home yours,” which includes painting, gardening, and other household goods which add up fast. It’s advisable to know how much you can spend when considering all additional costs and don’t overspend, putting your ability to pay for necessities at risk.

4. Decide When You're Ready to Buy a House

Decide whether you're willing to stay in your area for at least a year and confirm if you've "got your finances together" according to the requirements above. If you're not willing to stay in an area for at least a year, consider whether you would be open to renting out your home should you have to leave the area.

Homeownership is a long-term deal. But, don't buy the lie that you need to be committed for 30 years to buy a home. Owning a home is a proven investment as long as you can afford to consistently make the payment and keep the home in good shape. And if something goes wrong, you can sell as long as your loan amount is lower than the home value. The average time on the market to sell a home is currently 30 days in America, so don't buy the idea that you cannot sell a functional home in a timely manner.

5. Talk to a Mortgage Lender

Don’t go on this journey without quality help! A mortgage loan officer referral with a company specializing in home mortgage lending or a lender from the bank where you do business is ideal. Be very honest in your discussions and never embellish any financial details; the loan officer can only provide accurate guidance if you provide accurate information. Remember the old saying, “garbage in, garbage out?” Be honest and upfront to ensure you get the best possible advice.

After this meeting, you should have gathered ample knowledge to know where you stand. If pre-approved, your lender will provide a dollar amount that you can spend, and then you will be ready with a pre-approval letter to make your offer.

After shopping your preferred lender/s, it’s best to shop out three lenders to get the best terms available. It’s best to go with your bank, a referral, and a mortgage broker. Most banks sell in-house loan products, but you can also benefit from shopping with a mortgage broker because they typically have multiple loan products from different lenders on offer. As for comparing lenders, you may want to stick to 14 days (between the first and last hard inquiries) to do your comparison shopping so that the credit bureaus only report the multiple inquiries as one. This strategy will help minimize the impact of shopping for a mortgage on your credit score.

6. Hire a Real Estate Agent

Having someone with great expertise to help with all the real estate lingo is a necessity if you’re serious about buying a quality home that matches your needs. Real estate agents are trained to understand the complexities of your real estate market. With an agent, you get authentic, relevant, and timely information. A real estate agent can help you schedule a tour and negotiate a good and safe deal. Again, these experts are obligated to abide by ethical rules, which are important to you as the buyer.

So, what should you look out for when hiring a real estate agent?

That’s a great question, and so many answers apply. The first thing is to ensure that your real estate agent is a Realtor®. with the National Association of Realtors®. Realtors® are held to a higher standard and a strict code of ethics, and they have access to MLS, which is where real estate listings are stored. They are licensed, so beware if the agent is not registered.

Secondly, look for an agent that you have a good rapport with and who can give you a listening ear. There are situations where real estate agents keep taking clients to similar homes, even when the buyer has shown their intent to see other types of homes. If your agent doesn't listen to you then find another agent who does. There are expert real estate agents available in any market, and they should have your best interests at heart, even if your best interests are not aligned with theirs.

Along the same lines, it’s critical to look for an honest agent. Do you get an honest opinion about a property from your agent? Both the good and the bad. Does your agent play devil’s advocate, or do they try to talk you into buying every home that’s available even when it doesn’t match your taste or needs? Though it may cost your agent the sale, they should be working to help you get your choice of home within your budget. They should take a long-term approach since purchasing a home is typically a long-term decision. If your agent cannot play this role objectively, then you should look elsewhere.

Let me draw your attention to one of the most crucial points. Never sign a Buyer Agency Agreement unless you have spent significant time getting to know your real estate agent. You might get told that it's a company policy and that it’s required that you do so, but do not sign it unless you are sure you can trust your agent for the long haul. If you sign a buyer agency agreement and then move on to another agent, you could still owe the agent a commission that you signed the buyer agency agreement with if they helped you find the deal. Make sure you read the fine print.

So many real estate agents have strong backgrounds in home inspections, home construction, home design, etc. A strong real estate agent is a secret weapon when it comes to buying a new home, and best of all, the seller pays the buyer's agent commission which averages 6% split 50/50 between the buyers and sellers' agents. There is no rule pertaining to a realtor's commission but this is a good place to start with an average. There are many answers to the above question, but the ones we mention here are the most important and can help you land that great relationship when you finally decide to hire an agent.

7. Keep Expectations In-Check

Let’s say you want to own a mansion with marble floors glistening for everyone who enters to behold, but the truth remains, you need to focus on what you can afford both now and in the future.

Having big expectations that your wallet cannot afford is a recipe for financial disaster, especially when most people finance the purchase of a home. Don’t look at properties you can’t afford. Setting unrealistic expectations leads to more time on the market, missing out on good value, and settling down the road.

Don't look at properties you can't afford! Taking this approach, you can tame your expectations, keep yourself in check from spending more than planned, and ultimately avoid major financial trouble down the road.

Properties you can afford should be the first and only options on your mind.

8. Research Everything You Can

Go dig for the facts because you can’t predict the future. When you sign the contract, the house is not the only thing you have to invest in, the surrounding area is also an important factor to be considered because it does affect the future value of your home. To this end, research the future development plans, the value of the neighboring area, and the zoning laws.

Here are some things you want to consider when shopping for a house:

• Price

• Number of bedrooms

• Square footage

• Zoning and use restrictions

• Home condition and repairs needed

• Access to public transportation

• Number of bathrooms

• Access to health care facilities

• Backyard/swimming pool

• Local school district ranking

• Property/real estate taxes

• Property value trends

• Local entertainment options

Furthermore, carry out your research on essentials like good school districts, parks, crime rate, utilities, etc. Remember, buying a home is a long-term decision for most and many factors in your life will change in the future, so plan ahead.

9. Make an Offer on a House

When you find the home that checks all your boxes, you have a licensed realtor in your corner and you have either the cash or pre-approval needed to buy a home, it's time to make an offer.

There are a few tips and rules to follow:

• Your offer is required to be in writing and must include the basic makeup of a legal contract in your state. Using your local realtor's contract is usually the best way to stay in compliance with local laws. Your real estate agent will write the contract on your behalf and send it to you for signatures. Your job is to be sure to review all information for accuracy because once both parties sign it is a legally binding contract.

• The earnest money deposit is essentially a buyer's way of showing skin in the game on an offer. Typically, you should expect to put 1-2% of the purchase price in earnest money into your offer. If you cancel the deal then you will typically lose your earnest money deposit, and if you buy the home, your earnest money deposit will count towards your closing costs.

• It's common for buyers to list an inspection contingency that would allow the buyer to back out of the purchase (or negotiate repairs) without losing their earnest money. This is a good idea to protect the buyer in normal markets but it might not be an option in a hot seller's market.

The seller has three options after you've made an offer, they can:

• Do nothing: If the seller does nothing that means that the contract will expire on the expiration date per the contract. In this case, your real estate agent should contact the seller to determine how best to modify the offer before submitting another offer.

• Accept the offer: If the seller accepts the offer, you can move on to the next step.

• Reject the offer: If the seller rejects your offer, the ball is back in your court. You can choose to submit another offer or move on to another home.

• Give you a counteroffer: The seller can also come back with a counteroffer of their own. They may change the purchase price or the terms of the sale. You can accept the counteroffer, reject it, or make another counteroffer.

10. Go on a Home Inspection Before You Buy

Before closing on the sale of a home, it’s important to get a certified home inspector to have a look at what you’re about to buy. If you’re using a lender, this will be required and coordinated by your lender, however, you’ll most likely be responsible for the fee for the inspection. Inspections are typically required by the lender. The lender will typically also require that an inspector on their approved list be the one to complete the inspection.

It's normal for even the best-kept homes to have a laundry list of items listed on an inspection report. Don't panic. It's the inspector's job to not only list items that need repair but to list items that could need repairs in the future. Some items may be required to be repaired for the lender to proceed with a loan. You and your realtor should negotiate repair work with the seller or request a credit be provided by the seller for you to fix items that are of concern. These negotiations can be a challenge in a seller's market so be sure to use a trusted agent with experience doing deals in your area. They will be familiar enough with the local market to help you negotiate a fair deal for maintenance and repairs.

Due to inexperience, many home buyers would step into a seemingly beautiful home, purchase it without thinking of the inspection and later find out things like mold in the wall, gas leaks in the water heater, and so much more. So even if you’re paying cash, do the inspection! It’s advisable to spend that extra cash to avoid buying something you would regret later.

11. Get a Home Appraisal

If paying cash a home appraisal might not be required but is always a good idea. If you're doing a home loan, a home appraisal will be required by the lender. An appraisal is an unbiased professional opinion of a home's value and is used whenever a mortgage is involved in buying, refinancing, or selling that property. A qualified appraiser creates a report based on an in-person inspection, using recent sales of similar properties, current market trends, and aspects of the home (for example, amenities, floor plan, square footage) to determine the property’s appraisal value.

If possible, an appraisal contingency would allow you to back out of the contract without losing your earnest money if the home doesn't appraise above the contract price. Otherwise, you'd be required to negotiate with the seller, add funds to close the deal above appraised value, or back out and lose your earnest money should you not close.

12. Maintain Creditworthiness

The dream of owning a house can get us so wrapped up in the heat of the moment without considering what the banks consider creditworthy. Even if you know you can make the necessary payment, the banks may still not agree. Therefore, know your credit worthiness before taking any action.

Download and monitor your credit scores monthly. The best service to monitor your credit changes is Credit Karma, and it’s FREE. If you don’t have it, download the app to review your credit history today! A solid credit monitoring app will alert you to changes of any kind, whether you’re shopping for credit or even if scammers hit you with credit fraud. Credit monitoring is essential to protect against the modern world.

Once you’re pre-approved, maintain your credit! What does that mean? Do all you should to resist negatively impacting your credit score. Loans fall through daily due to negative impacts on credit scores after a pre-approval but before closing the loan. Untreated credit pulls, new car purchases, and derogatory marks can kill your dream purchase, so we recommend holding off on all major purchases and being intensely focused on your credit while locked into a pre-approval. It could cost you several thousands of dollars, and you may lose the loan and even the house if you have a derogatory mark before closing your mortgage.

Last warning, lenders typically re-verify credit within days of closing, and unexpected changes can kill a deal at a moment's notice. Better to be safe than sorry!

13. Do a Final Walkthrough

You should do a final walkthrough in your new home as close to the closing time as possible, even if you're 100% committed to the property. On the final walkthrough, confirm that:

• repairs are completed

• agreed upon items were left (refrigerators, washer, dryer, etc)

• other agreements (cleaning) were performed

• systems (HVAC, furnace, etc.) are still in working order

• no changes or damage were done while moving out

The final walkthrough is your last chance to catch any issues so make it count. It's a good idea to have your real estate agent on hand to discuss and negotiate with the seller should anything be out of order in your new home.

14. Close On Your Home

Your lender is required to provide you with your Closing Disclosure 3 business days before closing. The Closing Disclosure should be 100% accurate and include all costs and cash needed to bring to the closing for both the buyer and seller. You might want to compare the Closing Disclosure with the Closing Estimate that was provided within 3 days after your initial application to see if any fees have changed.

Review the Closing Disclosure asap and contact your closing attorney and/or lender with any questions to be sure you're ready to close.

Bring your ID, a copy of your Closing Disclosure, and Proof of Funds or a Cashier's Check (if required by the lender) to cover your portion of closing costs to the closing table, which is usually done at your attorney's office.

You'll sign the Settlement Statement, which lists all costs associated with the home sale. This is when you'll sign the final paperwork to cement the deal, sign your mortgage note, and pay your closing costs.

Once the closing is complete, you'll get the keys and congratulations are in order because you are the proud new owner of your home!

15. Make It Your Own

If you've made it this far then congratulations are in order! All homeowners are ecstatic about reaching this step in the process of buying a home. At this point, the home is yours and you're ready to turn your house into your home.

According to a study by Realtor.com, homeowners spend on average $10,000 making a home their own - on things like furniture, home improvements, and repairs.

According to TheMortgageReports.com, here are some of the priciest repairs and related average costs associated with each repair:

• Kitchen remodel ($22,140)

• Bathroom remodel ($9,723)

• Roof replacement ($7,312)

• Air conditioner replacement ($7,000)

• Septic system replacement ($5,340)

• Furnace replacement ($4,220)

• Concrete driveway installation ($4,029)

• Foundation repair ($3,996)

Here are other common expenses Realtor.com points out often associated with buying a home:

• Bathroom/kitchen refinishing

• New fence

• Painting

• Plumbing repair

• Replacement of siding

• Air conditioner duct cleaning

• Addition of deck/porch

• Addition of garage/carport/shed

• New windows and/or skylights

• Repair driveway or sidewalk

Whether you buy a new or used home, it's important to create a budget for furniture, repairs, and home improvements so that you don't blow your money on unnecessary expenses.

Learn how to jumpstart your budget to get the most out of your savings.

Final Thoughts

Homeownership requires special considerations that renting simply doesn’t require, so be prepared. That is not to say that it isn’t worth it because home ownership is the best long-term financial investment for most Americans. There will be additional costs, such as maintenance, repairs, and utilities. Additionally, you’ll have to pay for insurance and taxes related to your home.

The truth is that all of these costs quickly add up, and if you’re not prepared financially, you could end up in a situation you never thought possible, where you cannot keep up with your debt.

The best you can do is to put into good use the tips mentioned here. In all, you will find and create the place that you can truly call yours at an affordable price.

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