Buying a home is a major financial decision, and it's important to be well-informed about the process before you start shopping.
Here is a comprehensive guide to navigating the home buying process in 2023:
Step # 1: Get your finances in order.
The first step in the home buying process is to get your finances in order. This means determining how much you can afford to spend on a home and getting pre-approved for a mortgage.
To determine how much you can afford to spend, consider your income, debts, location, down payment amount, and other expenses.
Once you have a good understanding of your budget, you can start shopping for a mortgage. Keep in mind that while you may qualify for a sizable mortgage, you may not want to commit too much of your budget to housing. Explore different loan options and decide which one works best for you with the help of a lender:
Bridge Loan
Bridge loans are a good temporary loan option to 'tide' individuals over until they can secure a more permanent method of home financing. They are a good option if you're looking for a short-term unsecured personal loan until the sale of your previous house goes through.
Home Equity Loan
Home equity loans are more common for homeowners who are looking to secure a loan with the property as collateral. They allow you to be proactive in your financial planning because of the lump sum disbursement and possible tax-deductible benefits.
New Construction Loan
A construction loan rate is a straight line of credit where you have a fixed dollar amount available and can only draw as the funds are needed on the line of credit.
Residential Loan
A residential loan is your basic loan type for funding personal residences. Payment installments are spaced over 30 years with a fixed interest rate.
Commercial Loan
Commercial loans tend to have higher interest rates, higher down payments, shorter loan terms, and therefore, higher monthly payments. Even with all that however, they are still the best option for the following circumstances:
- Invest in a property with five or more dwelling units.
- Buy a property in the name of an LLC.
- If you do not have the W-2 income or history able to qualify for a residential loan.
- If you've reached your limit of ten residential loans.
Renovation loans let you wrap the costs of home improvements into the total amount of the home loan. Especially when mortgage rates are low, this can be a way to borrow more money for repairs while paying less interest than you would with another type of home improvement loan, like a personal loan.
Step #2: Get preapproved for a mortgage.
You know your homebuying budget and you've decided on the type of home loan that will work best for you. Now it's time to go out there and get it.
What You'll Need for Mortgage Preapproval:
- Employment Status and Information / Source of Income
- Credit History Report Authorization
- Social Security Number and Other Personal Information
- Ballpark Purchase Price and Loan Amount Needed
A mortgage preapproval will give you real numbers, and therefore, a better idea about your finances. A preapproval letter also shows sellers and real estate agents that you're a serious buyer who can get financing, which can give you a crucial edge over competing home shoppers. However, it is typically valid for only 60 to 90 days, after which it will need to be updated.
Step #3: Start your home search.
Now comes the fun part (for some)!
Before tackling the search itself, brainstorm a list of must-haves, nice-to-haves, and cannot-haves. Whether you are looking for a starter home or somewhere you can imagine living for years to come, there are a lot of little details that make a house your home. So when drawing up your wish list, consider factors like:
- Detached house or attached unit?
- Ideal location?
- Move-in ready or fixer-upper?
- How many beds and baths?
Find someone to assist in your home search.
A good real estate agent can be a valuable asset throughout the home buying process. They can help you find homes that meet your needs and budget, negotiate offers, and guide you through the closing process. When choosing a real estate agent, be sure to interview several candidates and ask about their experience, qualifications, and fees.
You can search for homes online, through your real estate agent, or by visiting open houses. Be sure to schedule plenty of time to view each home in person.
Step #4: Make an offer.
Once you've found a home that you love, it's time to make an offer. Your real estate agent can help you draft an offer that is fair to both you and the seller using comparable sales information and any intel about the sellers they might have learned from the sellers' agent.
The seller may accept your offer outright, counter your offer, or reject your offer. If your offer is rejected, you can negotiate with the seller or walk away from the deal — it depends on why they turned you down. If the seller counters your offer, talk it out with your agent to decide whether to accept or make your own counteroffer. If the offer is accepted, congratulations! A few more steps and you are officially a [new] homeowner! Now is when you'll likely write your first check as a deposit towards the purchase of the home, also known as 'earnest money'. It usually goes into an escrow account, and when the sale goes through, most buyers use it as part of their cash to close.
Step #5: Get a mortgage.
You know the home you want to buy and how much you'll have to buy it for. Now you'll choose a lender to get a mortgage from (likely the one who preapproved you).
The documents you'll need to complete the mortgage application include:
- W-2 and 1099 forms from the past two years (possibly more, if you've changed employers).
- Pay stubs from at least the last 30 days, including year to date earnings.
- Recent bank statements and other asset statements.
- Details on long-term debts like car or student loans.
- Address and approximate value for the subject property.
- Purchase price.
Once the mortgage application is complete, you'll go into underwriting. During this process, the lender makes a final decision on whether to give you the loan.
Step #6: Get homeowner's insurance.
Securing homeowners insurance for a home you don't yet own might seem a bit unusual; however, it's often a requirement from lenders before they grant you a mortgage. You'll want a policy with enough coverage to fully replace the home (which might not be the same as the purchase price or appraised value) and one that goes into effect on our closing date.
Step #7: Schedule a home inspection and appraisal.
Once your offer has been accepted, it's important to get a home inspection and appraisal.
The basic home inspection will identify any current or potential issues with all aspects of the house and its systems. If you have any particular concern (i.e. mold or radon) or unique feature (i.e. pool, septic system, or retaining walls), you may want to get a more specialized home inspection. You choose the inspector and pay for the inspection.
The home appraisal is completely separate from the inspection and determines the home's value. While the home inspection is more for your peace of mind, the appraisal is for the lender, who wants to make sure the amount they are lending matches the amount the home is worth. An appraisal looks at the home you're buying and compares it to recently sold homes to determine the market value of the property. The lender chooses the appraiser, but you pay for the appraisal. If you're buying the house with cash, it is still worth getting an appraisal to evaluate your investment.
If the home inspection or appraisal reveals any major issues, you may be able to negotiate with the seller to make repairs or reduce the purchase price.
Step #8: Negotiate any repairs or credits with the seller.
Depending on what the appraisal / inspection reveals and what kind of housing market you are facing, there may be some items to negotiate before closing.
If in a strong seller's market, it can be difficult to get modifications, since the seller can just go to their next offer. What would make it easier is if it is a necessary repair that will continue to get flagged by home inspections.
If in a buyer's market, almost any aspect of the transaction can be negotiated, including having the seller pay for some of the closing costs, warranties, or HOA fees.
Step #9: Close on your new home.
Once financing, appraisals, and negotiations are all squared away, it's time to close on your new home! This is a legal process where you will sign all of the necessary paperwork and transfer ownership of the home from the seller to you. Your lender will provide you with the Loan Estimate, closing disclosures, and "Intent to Proceed" at least three days before the actual closing. Before closing, you will need to sign a mortgage agreement and purchase a homeowner's insurance policy.
Step #10: Move in!
After a whirlwind of emotions, what felt like endless paperwork, and possibly writing the largest check of your life, you're now ready to make memories in your new home. Congratulations!
Additional tips for navigating the home buying process in 2023:
- Be prepared to act quickly. The housing market is competitive in many areas, so it's important to act fast when you find a home that you love.
- Be aware of the latest market conditions. The housing market is constantly changing, so it's important to stay up-to-date on the latest market conditions before you start shopping for a home.
- Don't be afraid to negotiate. Negotiating is a part of the home buying process, so don't hesitate to negotiate on the price, terms, or repairs on the home.
- Get everything in writing. Once you've reached an agreement with the seller, be sure to get everything in writing. This includes the purchase agreement, mortgage agreement, and any other relevant documents.
Buying a home can be a complex process, but also a very rewarding experience. We're here to help navigate the home buying process and make your time of transition as smooth-sailing as possible. Contact us with any questions on home buying or how to get preapproved for a mortgage.
