Buying a home, especially your first home, can be simultaneously the most exciting and the most stressful time in your life. You can simply to react to calls, emails, and requests as they roll in, or you can be prepared. Here is a sample 20-step process to buying a home, based on my home-buying experiences. These aren't necessarily completed in this exact order. If you understand these steps, then you’ll know what you need to do and what to expect when purchasing a home, so you don’t have to be reactive and stressed out.
1. Gather your personal and financial information.
You may be surprised how much information your lender will need. I recommend putting the following information in an electronic file so you’re ready to go. This information will arm you to have an intelligent conversation with a lender. You’ll also be ready to go if you find a house you want to buy right away. You should also know your approximate credit score.
a. Proof of income from the last 2 years: W-2’s, 1099’s, etc.
b. Tax returns from the last 2 years.
c. Picture of your driver’s license.
d. Picture of your social security card.
e. Last 2 pay stubs.
f. Most recent bank statement, from which you’ll be making your down payment.
g. Employment history, including contact information.
h. A list and values of your assets and liabilities.
2. Speak to a lender.
Most lenders look for your total house payment to be less than 28% of your gross income. This payment includes principal, interest, taxes, insurance, PMI, and HOA fees. For example, if you make $60,000 per year ($5,000 monthly), a lender would look for your payment to be $1,400 or less, or 28% of $5,000. The lender will be able to tell you what the maximum purchase price of the house can be to keep the payment lower than this amount, which depends on which loan you get and how much you put down. The lender will discuss different loan options (FHA, conventional, etc.) and help you decide which is best for you.
They will also furnish pre-approval letters for you to submit along with any offers, proving you have the financial ability to purchase the home.
Ask the lender how much time they need from contract date to close date, so you know which close date to suggest in your offers. This period is normally about 30 days.
Also, ask what the lending fees and closing costs will approximately be.
Note that just because you are approved for a certain loan amount, it does not mean you need to buy a house for the maximum price. If you are or want to be an aggressive saver, consider buying one for half as much as you’re approved for (if you can).
3. Contact a real estate agent.
With the ease of internet searches, you may be tempted to forgo a real estate agent. As a buyer, there’s no reason not to have one. The seller pays the buyer’s agent’s commission out of the sales price. Furthermore, the agent will have experience and insights to aid in your search. They also have access to the multiple listing service (MLS), where most listings are. We once saw a home on the MLS that was not listed online at all for the first 6 months it was on the market. It was listed only on the “income property” section of the MLS. We’re pretty certain potential buyers never even knew it was listed. Don’t leave all the searching to the agent, though! Search on your own as well.
4. Look at homes.
Work with your agent to create a list of homes you’re interested in. Your agent will set up showings. Try to cluster them, if possible, to make things easier for everyone. Keep in mind the sales price you’re comfortable paying. Sellers typically come down in price when they sell, but be realistic. If you’re approved for a $300,000 house, it’s probably safe not to look at any listed for $500,000. On the flip side, try not to compromise on what you’re looking for. If you want a garage, only look at houses that have garages (assuming these are available in your price range).
5. Make an offer.
If you find a home you like, make an offer on it. My advice is not to be anchored to the list price. If a home is for sale for $250,000 and you do not want to pay more than $200,000, then offer $200,000 or less, even if you arbitrarily think they’re hoping to get $240,000. The seller can always make a counteroffer (in my experience, they almost always do). You never know what the seller will accept. You can make an offer by submitting an executable contract or through your realtor (who could make a verbal offer). If you submit a written offer, all the seller has to do is sign the contract and you’re under contract for the home.
This process can be nerve-wracking at first – especially once you see how long the contract is. In addition to the price, the contract will include fillable fields regarding your loan type, close date, earnest money amount, and other miscellaneous items. For example, in Florida the washer and dryer are not automatically included, and you must write this stipulation in if you want them. It will also contain pages of other legalese that you should review with your agent (and an attorney if you’re not using a standard contract). If you’re getting financing, include an appraisal contingency too.
Note that in addition to your down payment, you’ll be responsible for closing costs that can total about 3% of your loan. On our most recent offer, we asked for and received closing cost assistance of $5,000. If you don’t have cash or simply want to hold onto as much of it as possible, you can offer a higher purchase price with closing cost assistance. Using the above example, you could offer $207,000 with 3% in closing cost assistance, which would mean you’re basically offering $200,790. Alternatively, you could offer $205,000 with $5,000 in closing cost assistance, which is like offering $200,000. (Note that the home will have to appraise for the contract purchase price.) Don’t be afraid to get creative! One real estate book I read said to offer an odd number, like $201,100, to make your offer stand out and cause the impression that some high-level analysis went into it.
6. Get an accepted offer.
Your first offer may not be accepted. Eventually, though, one will!
7. Fill out a loan application and submit paperwork.
A loan application will include your personal information, previous employment history, current employment, income, current housing, net worth, and much more. It also gives your lender the go-ahead to run your credit. It must be completed within 5 days of contract signing. At this point, the lender will request supporting documentation from you, which will include the items mentioned in #1 and probably some additional ones.
8. Submit escrow.
Part of your contract will include earnest money, which shows the seller you’re serious about buying the home. It’s usually about 1% of the purchase price and it is due within 3 days, although the amount is up to you when your agent writes the contract. You will get this money back if you choose not to move forward during the inspection period. If you choose to cancel the contract after the inspection period, you may not receive your escrow back. If you don’t submit escrow at all, the contract is void.
9. Speak with an insurance agent (or two, or three).
As soon as you’re under contract, I suggest speaking with an insurance agent. Most properties can be easy to quote, and others take a little longer. You want to make sure you get the best coverage for the best possible price, so get ahead by shopping early. You will need to refine as you gain more information, however, you should get the process started.
10. Sign disclosures.
Your lender will send you disclosures periodically. Check to make sure their numbers are correct (income, assets, purchase price, etc.) and sign.
11. Inspect.
Once you are under contract to purchase a property, you will have time to inspect the property. The inspection period varies and is usually 7-15 days. You should certainly have a professional inspector inspect the home and give you a report early on in the inspection period. Depending on the inspection report, property type, and location, you may prefer to have additional inspections as well. We had a termite inspection and a structural inspection done recently. Inspections cost money, however, it is worth every penny to know what you’re buying.
12. Get quotes and renegotiate (optional).
Sometimes, inspections come back clean. Other times, they unearth some serious problems. Mostly, they’re somewhere in between. Use the inspection period to bring professionals out to give you estimates for repairs. Insurance providers looks at four main parts of the home: roof, HVAC, plumbing, and electrical. These items are broken out in a 4-point report, which your inspector gives to you, and you in turn provide to your insurance agent. These areas of the home greatly influence insurability and insurance premiums, so most sellers will agree to either fix these items or will agree to a lower selling price for the amount the repairs will cost the buyer. We recently renegotiated decreasing the purchase price by the cost of a new roof. Alternatively, the seller of my first house let me pick out the shingle color and paid for and redid the roof two weeks before we closed.
13. Order the appraisal.
Once you make it through the inspection period, you should immediately order the appraisal. An appraiser will compare the home you’re buying to other recent sales in the area to ensure it is worth what you’ve offered to pay for it. The reason the appraisal is important is that your lender will finance either the appraisal price less your down payment or the purchase price less your down payment, whichever is lower. This protects the lender in the case of default because in that case they’d ultimately own the home.
14. Submit additional information to your lender.
My experience tells me that lenders will need more information during the time you’re under contract. They may ask for additional account statements. They may ask if you’re selling your current home. They may ask your boss when your next raise is. They may ask why you transferred $10,000 from your checking to your savings last month. They may ask why you’re moving into a multi-family property from a single family one. They may ask why you opened a credit card 60 days ago. Just know that whatever they asked for up front probably won’t be all the information they need.
(These are all actual examples that have happened to me. And for some reason, telling them you opened a credit card to buy things with is not a detailed enough answer. Learn from me.)
15. Finalize insurance.
Approximately a week prior to closing, your lender will need to speak with your insurance agent. The agent will tell the lender how much money you’ll need to pay towards your insurance premium every month (also called escrow), and your agent will bind your policy and get a policy number. The lender needs to know that the property is insured the day you close. Again, if you default, they will own the home so they want to know it’s protected. Note that if you do this prior to receiving the appraisal and the appraisal comes back lower than the purchase price, you will be able to “unbind” the policy. Unfortunately, I also know this from experience.
16. Receive the appraisal.
Review the appraisal report. If the house does not appraise for the purchase price, there is a problem. For example, let’s say you have an accepted offer for $360,000 and the house appraises for $357,000 (actual example from a friend of mine). If this happens, you will need to renegotiate the price with the buyer, contest the appraisal, come up with the difference, or a combination. We recently had a house appraise for lower than the contract price and chose to provide a comparable listing the appraiser missed along with contesting the appraisal. If the house appraises, you’re good to close.
17. Sign the final closing disclosures.
A few days before closing, your lender is required to send you the closing disclosures, which include the purchase price, loan amount, interest rate, payment amount, closing costs, amount owed by the buyer, amount owed to the seller, and more. The numbers will be very close to the final ones you’ll sign when you close. Check the information and sign.
18. Change utilities to your name.
If you want to have utilities when you close, you need to get them put into your name prior to closing. The buyer will have those shut off that day.
19. Schedule movers.
If you have to put a deposit down to schedule movers, it’s safe to wait until after the appraisal and final disclosures come through. It’s safest to wait until you actually close. The same goes for repairs (below).
20. Schedule repairs.
You may have received some quotes for repairs during the inspection period that you need to act on. Recently we were set to close, and we lined up a tree trimmer and a contractor to get to work the business day after we closed.
As you can see, buying a home can be an overwhelming process. It’s worth it though! Just take the process day by day. While it’s important to understand the big picture and these 20 steps, you’ll realistically just need to complete on average less than 1 of them per day. After 30 or so days, you’ll be a homeowner!