You’ll feel more confident about your home buying journey when you understand what is required of you and every other person who is involved in the transaction. This guide takes you through it, and shows you that you’re only 11 steps away from buying a home.
Step 1. Get Your Finances in Order
Your credit reports are an ongoing look at how you manage your finances. You must know exactly what your credit reports say about your financial history before you apply for a mortgage, because the reports play an important role in the mortgage approval process and in determining the interest rate and other loan terms that a lender offers you.
If you haven’t looked at your credit reports, you might be surprised at their contents, because errors are common.
Step 2. Get Familiar with the Mortgage Industry
Finding the right loan and lender is crucial to your home buying success. It’s up to you to determine which lender is best for your needs, and it’s always a good idea to have at least a bit of background about the loan process before you talk to a lender.
Step 3. Get Pre-Approved for a Mortgage
Do you know how much house you can afford? Probably not, unless you’ve talked with a lender.
Pre-approval helps you in other ways. Consider this scenario. A home seller gets two similar offers. One is accompanied by a letter from the buyer’s bank that states she is pre-approved for a mortgage in the amount of the offer. The other has no supporting documents. Which offer do you think the seller will consider first?
- Banks vs. Mortgage Brokers
If you’re buying a home, chances are you’ll need a mortgage, but did you know there are big differences between mortgage brokers and bank loan officers?
- Bank Loan Officers
The loan officers at a bank, credit union or other lending institution are employees who work to sell and process mortgages and other loans originated by their employer. They often have a wide variety of loans types to draw from, but all loans originate from one lending institution.
The loan officer takes your application and works to find a home loan that suits your needs. If your personal credit is approved, the officer moves forward to process the purchase.
- Mortgage Brokers
Mortgage brokers are professionals who are paid a fee to bring together lenders and borrowers. They usually work with dozens or even hundreds of lenders, not as employees, but as freelance agents.
Think of mortgage brokers as scouts. They find and evaluate home buyers, analyzing each person’s credit situation to determine which lender is the best fit for that person’s needs. The broker submits the home buyer’s application to one or more lenders in order to sell it, and works with the chosen lender until the loan closes. A good mortgage broker can find a lender for just about any type of credit.
The mortgage broker working to secure your loan is earning a fee for the transaction and the better deal they achieve for a lender, the more they are paid. Don’t be too anxious to disclose to a broker the interest rate you are willing to accept–let them tell you what terms they can secure. Shop around to make sure the terms are reasonable.
Many of the mortgages companies that advertise online are mortgage brokers.
- What Difference Does it Make?
A local or online mortgage broker may find you a lender in another part of the country. An online bank might not have a local office where employees can help you one-on-one.
Some out of town lenders don’t understand the types of heating systems used in specific areas, they aren’t familiar with private septic systems, and they don’t immediately understand common classifications and terms used by local appraisers. Those are just a few examples of problems I’ve seen that caused significant slow-downs in loans made by an out of town lender working with a mortgage broker.
Using a local bank can sometimes be a plus. Their staff generally understand the specifics of local properties, but a distant lender who doesn’t will delay closing until questions are answered.
Mortgage brokers can often find a lender who will make loans that a bank refuses–problem credit is one example. Loans for unique or commercial properties might be easier to secure through a mortgage broker.
Make your choice of a lender based on the best loan terms you can find. Ask questions about expected time-frame. Ask your real estate agent friends who have recently bought a home for lender and broker referrals.
- Pull Your Own Credit Reports
Order your credit reports and scores from all three major credit reporting agencies before you visit a bank or broker. Personal copies of current reports should provide enough details for them to give you an opinion of the types of loans they can offer you. The lender you decide to use will access your credit files, but taking your personal copies to the initial interview avoids multiple credit pulls that can lower your scores. Requesting your own credit reports does not affect your scores.
Step 4, Determine Your Wants and Needs
Buying a home isn’t as difficult as you might think, even if you’re short on funds, but the process will go a lot smoother if you get familiar with your real estate market and narrow down your wants and needs before you start looking at houses.
Step 5. Select Your Real Estate Agent
Real estate agents represent buyers, sellers, or both–and in some states they can work as neutral facilitators for either party. It’s essential to understand agent duties and loyalties before you make that first phone call. Realtors work off commission only. So please pick your Realtor® and be loyal to her. You should watch this video.
- Common Myths About Working with Real Estate Agents
If you spend time on the web site “About Home Buying and Selling”, you’ll notice that there is a good bit of information to help you understand buyer-agent relationships. You’ll have a better home buying experience if you learn the ins-and-outs of working with real estate agents before you make your first phone call to an agency. Get started by avoiding these common myths about real estate agents.
- Home Buying Myth Number 1
I’ll get the best deal on the house if I call the agent listed on the For Sale sign.
Maybe, maybe not. That agent represents the seller and is contractually bound to get the best deal for the seller. That doesn’t mean the agent can’t work with you in a fair and professional manner as a dual agent, but it does mean you should not disclose confidential details to the agent until you are assured that the agent will keep your information confidential.
- Bottom Line If you tell a seller’s agent the top dollar you will pay for a house, the agent must pass that on to the seller. A dual agent cannot do that. Agency laws differ in every state, so take time to learn about agent duties and loyalties before you enter the home buying market.
Step 6. Start Searching for a Home
Your agent will give you multiple listing sheets to study. I’m sure you’ll also pick up House For Sale magazines and read classified ads in your local newspapers. You’ll probably spend time surfing the Internet for homes. You might even plan afternoon drives to preview neighborhoods. Those are all excellent ways to see what’s available. Here are some tools to help you narrow your home buying search.
- Consider the Houses that Others Overlook 2. Find Out What’s Out There 3. Search Public Versions of Multiple Listing Service Web Sites 4. Find Real Estate Agent Web Sites 5. Browse Real Estate Search Engines and Networks 6. Find For Sale By Owner Properties (You don’t need a Realtor, but you should watch this video) 7. Look at Print Magazines 8. Find Foreclosed Homes (these are long and sometimes stressful processes to go through)
Step 7. Handle Pre-Offer Tasks
Deciding whether or not you want to buy a house involves a look at its structure and its features, but there are many other topics that are every bit as important to your purchase. Here are a few topics you should explore before you make an offer.
- How’s the Resale Potential? 2. Contract Contingency Basics 3. What Kind of House Is It? (Site Built, Modular, Manufactured) 4. Do Others Have a Right to Use the Property?” 5. Can You Live with the Deed Restrictions? 6. Is the Reported Square Footage Accurate? 7. Is the Heating/AC System Efficient?
Step 8. Make an Offer
There’s no one set of instructions that can cover all the differences in real estate laws and customs that exist throughout the United States, so the mechanics of making an offer and its specific contingencies depend greatly on your location. However, there are some home buying tips that can help you fine-tune your offer, no matter where you live. Just remember, your Realtor is obligated to present your offer to the seller.
Step 9. Home Inspections and Other Tests
In some states, home inspections are accomplished before the final purchase contract is signed. In other states, inspections take place after an offer is finalized. No matter when you do them, it’s critical to decide which inspections and tests you want to perform.
Talk with your real estate agent or other adviser to find out when inspections should be handled and if additional types of testing are important for your specific area.
Step 10. Avoiding and Correcting Last Minute Problems
As your closing date nears, everyone involved in your real estate transaction should check its progress on a daily basis, because staying on top of things means you’ll know immediately if there’s a problem that must be dealt with. Here’s a bit of information that focuses on a few common problems that home buyers must deal with before they close on a house.
- Things You Shouldn’t Do When You’re Buying a Home
• Attending No Money Down Seminars
• Choosing Bad Agents
• Wiping Out Savings
• Refusing Professional Advice
• Choosing Exotic Financing
• Picking Wrong Neighborhoods
• Choosing Most Expensive Homes
• Passing Up Home Inspections
• Altering Financial Pictures Before Closing
• Plunging Into Debt After Closing
Step 11. You’re on the Way to Closing
Most of your home buying problems are behind you now and you’re on your way to closing, also called settlement, the event that transfers ownership of the property to you. Just a few more things to learn, a few more things to do, and you’re there!
• Coping with Buyer Remorse
• Get the Facts About Title Insurance
• Learn to Read the HUD-1 Settlement Statement
• Take Your Final Walk-Through
Never hesitate to ask questions. Ask as many questions as necessary to help you understand the entire home buying process. You are making a long term commitment and spending a major amount of money–you’ll feel much better about the transaction if you stay informed and understand what’s happening every step along the way.