Buying your home is an exciting experience and it may be the largest financial investment you will ever make. Taking the time to learn about the steps involved in the buying process will help ensure that you purchase a quality home at a price you can afford. There are seven basic steps to buying a home:
Step 1. Prepare for home ownership
- Begin by seeking homebuyer education. You can contact The U.S. Department of Housing and Urban Development (HUD) to find an approved provider of homebuyer education in your area. Visit the HUD website or call 1-800-569-4287.
- Monitor your credit record. Get a free copy of your credit report and if necessary, take steps to improve your credit score. Your credit score is a key factor in determining the rate of interest that you will pay for your mortgage loan. Generally, a higher credit score will qualify you for a lower interest rate.
- Figure out what you can afford. It will save you time, energy, and money if you have a realistic picture of what you need and how much you can afford before you start shopping for a home.
- Choose the type of home that fits your lifestyle, in a location that has the amenities and community services that you want.
- Know your rights. You have the right to equal housing opportunities; disclosure of settlement costs; and protection from predatory lending practices. Your home mortgage will probably be the one of the largest loan contracts you ever sign. Take the time to know your rights before you start shopping for a home and a loan.
Step 2. Shop for a Loan
Comparison shop. Gather all the information you need to complete the mortgage loan application. Then compare the different types of mortgages that each lender offers and the tradeoffs associated with each option. You may want to create a comparison chart to record and compare the terms of different loans and lenders.
- You can avoid paying for private mortgage insurance if you have a down payment that equals at least 20% of the purchase price.
- Learn about home buying programs in your state that can lower your costs and mortgage payment.
- Get pre-qualified for a loan. When you are ready to make an offer, you will be in a better position to have your offer accepted if you are prequalified or preapproved for a loan.
Step 3. Shop for a home
- Know your housing priorities, including the type of structure, size, location, and community services that are important to you.
- Decide whether you want to use the services of a realtor. Realtors are familiar with the housing market and can assist you in finding the house that meets your needs. The seller generally pays the realtor’s commission to help sell the property, which means that the realtor will try to get the best sales price and terms for the seller. To get the best outcome for yourself, you may want to hire your own realtor to represent your interests as the buyer.
- Know housing market trends before you start looking for a home. In a buyer’s market, there are a lot of homes for sale, with relatively few buyers, so sellers have to offer potential buyers additional incentives. In a seller’s market, there are a lot of buyers and relatively few homes, so sellers are likely to drive a hard bargain, and the home you want may be sold before you have a chance to make the offer.
Step 4. Make an offer
Make an offer that is realistic. Offers are usually conditional on the home inspection (see step 5), appraisal, having a clear title, and final approval of the loan.
- Provide an earnest money deposit. The earnest money deposit lets the seller know that you are serious about wanting to purchase the home. In most cases, if you retract your offer, the seller keeps the deposit.
- Get pre-approved for a loan to give yourself a stronger negotiating position.
Negotiate the deal. When you make an offer, the interested seller usually will negotiate back and forth with you until you reach a joint agreement. Every point in the contract is negotiable, but it is usually best to know common practices and accepted standards in the negotiation of the contract before you start the process.
Step 5. Get a home inspection
- A home inspection report provides an in-depth and impartial evaluation of any problems with the property. Your realtor and lender will have suggestions regarding who to use. The charge for the inspection will be added to your closing costs unless the seller has agreed to pay for the report.
- When you make a written offer on a home, you need to insist that the contract state that the offer is contingent on a home inspection conducted by a qualified inspector.
- If you are satisfied with the results of the inspection, then your offer can proceed, but be sure to negotiate and include, in writing, any financial adjustments, repairs or replacements that the seller agrees to make as a result of issues identified in the inspection report.
Step 6. Get homeowners insurance
- Learn what is covered by homeowner’s insurance and what type of policy to purchase.
- Shop for a policy. Remember to consider flood and earthquake insurance if appropriate.
- Know how to read the policy and file a claim.
Step 7. Close the deal
- The final step in the home buying process is called the “closing" or “settlement.” The closing usually takes place using the services of a settlement agent who oversees the transfer of the property from the seller to the buyer.
- Prior to closing, you need to secure the services of a title company. The title company provides you with title insurance and often serves as the settlement agent. Title insurance protects you and the lender from claims by others against your new home.
- The settlement agent will set up escrow to manage the transfer of the property. All documents, deeds, titles, funds and conditions of the sale are collected in escrow and monitored by the settlement agent. When all of the conditions specified in escrow agreement have been met, you and the seller will be instructed to make an appointment to sign the paperwork that will finalize the closing.
- Before you go to the closing, understand the Real Estate Settlement Procedures Act (RESPA) and the protections that it offers you. Lenders are required to give you paperwork that outlines the costs you will incur in receiving the loan. These documents include the charges you will likely pay at closing and an estimate of your monthly mortgage payments, a Settlement Statement that details all closing costs, and a Truth-in-Lending Statement that outlines all of the specifics of the loan.
- Prepare ahead for closing day. At closing, you will sign numerous papers that make the sale final. Make sure that you have a good idea of what the settlement costs should be so that you can check the paperwork for errors before you sign. You will be required to bring picture ID and a cashier’s check to cover the closing costs.
- The transaction is recorded with the county within a day or two of closing. After the recording, you will be given the keys to your new home!
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