Buying a home can be a daunting process. For first-time homebuyers, buying a home is typically the biggest financial decision they have ever made. My goal for this post is to provide a brief but clear picture of the homebuying process. I am a licensed realtor in Virginia. Some steps may be slightly different in other states.
First, decide if buying a home is right for you. Renting may seem like throwing money away, but if you don’t plan on staying for a while, it may be wiser to rent until you’re ready to buy.
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Find out how much you can afford. If you decide to buy, start talking to a lender. If you’re a first-time homebuyer, chances are you probably won’t know a lender. Just ask any realtor to connect you with a lender. Don’t know a realtor? Ask your friends to refer you to one. There are over 1 million licensed realtors in the United States. Someone you know will know a realtor. Once you get in touch with a lender, they will ask you to provide some basic information about your income and debt. They will also have to run your credit. After you provide this information, they will tell you how much you can afford. This is also known as the preapproval process.
Decide how much you want to spend and learn about the different types of mortgages. Just because you get approved to borrow $500,000 doesn’t necessarily mean you should borrow $500,000. Examine what the monthly payment would look like and decide what you would feel comfortable paying every month. Also, learn about the different types of mortgages. A 30-year mortgage is the most common, but if you can afford a little more each month, a 15-year mortgage may be right for you. A 15-year mortgage will have a lower interest rate and pays off in half the time. If you don’t plan to stay for long, an adjustable rate mortgage (ARM) could be right for you. You may see an ARM written as 5/1 or 7/1, for example. In a 5/1 ARM, the interest rate is fixed for the first 5 years (amortized over 30 years), and then the rate adjusts every 1 year after that. It usually adjusts to the LIBOR (London Interbank Offered Rate) plus a margin. There is usually a periodic cap and a lifetime cap on how much the rates can increase per year and during the entire loan term. ARMs can be risky and are typically not recommended by most realtors unless you know you for sure that you are moving in a few years.
Find a realtor. In my opinion, the best way to find a realtor is to ask around and find a satisfied customer. Ask other homeowners if they had a positive experience with their realtor. If they did, they’ll be happy to refer you. If that doesn’t work, you can go to open houses in your neighborhood. Most people don’t know this, but agents holding open houses are there mainly to find prospective clients. If that doesn’t work either, you can always google someone. Once you find someone you are comfortable working with, they may ask you to sign an “Exclusive Right To Represent Purchaser” agreement, which establishes a relationship between the broker and you, with the realtor being the agent for the broker.
Start looking around. The realtor may send you listings, but these days many people do their own research online. When you find a few houses you like, ask your realtor to show them to you. I would recommend looking at a minimum of 5 houses to get an idea of prices in your market. Once you find a house you like, you are ready to make an offer.
Make an offer. When you’re ready to make an offer, your realtor will help you with all the paperwork and help you fill out the forms you need. These days, your realtor should be equipped with a way to let you sign everything electronically. When you submit an offer, you’ll also need to send over a preapproval letter from your lender and a copy of a check with your earnest money deposit (EMD check). The EMD is an amount of money held in escrow that shows you are serious about buying and following through with the terms of the contract in good faith.
Wait for a response from the seller. Once your realtor sends your offer to the listing agent or seller, you can typically expect to get a response the next day. However, sometimes it can take a few days and sometimes it can be a few hours. The seller can either accept your offer or send over a counter offer. If they send over a counter offer, you can either accept their counter offer, counter their counter offer, or just end the transaction and look for another house. A counter offer from the seller automatically frees you from any obligation to your initial offer.
Ratify a contract. If you and the seller eventually agree on a price and other terms, you will officially have a ratified contract, and the house is considered “under contract.” However, the house won’t be yours until settlement, which is usually another 30-40 days later.
What happens after you have a ratified contract? Why does it take so long for the house to be mine? A lot happens during the period from contract to close. Here they are.
Get a home inspection. A home inspection isn’t required, but I highly recommend it. You will have had to have a home inspection contingency in your contract. Getting a home inspection will usually cost around $300-600, but it is well worth the money. Not only will you be learning about the parts of your home and how to maintain it from a professional home inspector, but you will also have an opportunity to negotiate with the seller to have repairs made for anything the home inspector identifies as defective or in need of repair. Most of what I know about houses came from the education I received during home inspections. You can also add a radon inspection contingency if your area is at risk for radon.
Get an appraisal. In addition to the home inspection, the appraisal will be another out of pocket cost required by the lender. This is usually $400-500. The appraisal provides a professional estimate on the value of the house. The lender requires it so that they know what the value of the collateral is in case you default on your loan. You won’t be able to opt out of this one if you want a mortgage.
Get final approval for your mortgage. You provided basic information to the lender to get preapproved, but now you will have to provide documentation for anything the lenders asks for. The underwriting process is typically the most time-consuming step in the contract to close period, so make sure to do everything mortgage-related with a sense of urgency.
Get homeowner’s insurance and schedule for utilities to be transferred. You will have to get a homeowner’s insurance policy. Also, you will have to call the utility companies to have them transfer service into your name on the settlement.
Conduct a walk through. This typically takes place on the day of settlement or a few days before. During the walk through, you make sure everything in the house is in the condition you expect it to be in before you finally take possession.
Go to settlement. I’ve heard this called settlement, closing, closing escrow, and escrow. It is the day you get the keys to your new home. You will sign a bunch of papers and feel a sense of relief. Congratulations, you are now a homeowner.
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