Buying your first home can be incredibly intimidating. It was for me — and I know since I’m closing on my first home tomorrow.
If you are a first-time home buyer like me, I really didn’t know what I was getting myself into and there was no single great resource for guidance. In fact, I had to piece together the process from multiple sources, many of which were clearly biased (mortgage lenders, banks, etc.). As I began to dive deeper into the process, I realized this struggle was probably true for many people in my situation. In this article, I outline the fundamental steps to purchasing your home — soup to nuts. My goal is to give you a broad overview with insight into each step so you can anticipate what to expect at each stage.
This will serve as a foundation for subsequent posts which will take a detailed look into specific points. And, while these steps are presented in a linear fashion below, they may certainly not take place in this exact order. You may find yourself working through several stages simultaneously before moving forward. Let’s get started.
Decide to Buy a Home
This first step should not be underestimated. It takes careful consideration of your personal finances, current living situation, and future plans. Although part of making this decision will undoubtedly be based on whether you can afford a home, I would strongly suggest weighing other factors of home ownership as well. In other words, just because you can afford a home doesn’t mean you should buy one.
Decide How Much You Can Afford/Want to Spend
Figuring out how much you can afford is no easy feat. Mortgage lenders and financial advisors can help in this process, but there is no substitute for developing an understanding of your own personal finances. Remember, just because they approve lending to you doesn’t mean they have your best financial interests at heart. Having a clear budget in mind can be helpful for multiple reasons. It can help narrow your search considerably, and consequently help you focus on other factors that matter to you (e.g., schools, neighborhood, proximity to major roads, size of the house and lot, type of construction, etc.). For me, this step was integral in deciding when I was ready to buy a home. For example, one year ago, we considered how much we could afford and decided to wait another 6 months so we could afford a larger down payment. See our next post about how you might decide when to buy a home.
Start Looking for a Home
With your budget in mind, there are many ways to consider looking as you start your search. These include, online search engines (e.g. Zillow, Trulia, etc.), going to open houses, using a real estate agent/broker, logging on to a Multiple Listing Service, or even approaching owners directly.
Choose a Mortgage Lender
Unless you are planning an all-cash transaction, you will likely need to choose a mortgage lender. This can be a daunting task. There are many lenders to choose from, lots of new terminology to learn, and unique circumstances to consider. However, deciding on a lender before you make an offer can sometimes be necessary, and the lender can provide pre-approval letters which may help strengthen your position. The closer you get to finding a home you like, the closer you should be working with a lender to get your mortgage setup. We dive deeper into mortgages in a later post where we examine specific types and the benefits and drawbacks of “doctor loans”.
Make an Offer
Once you find a home you are interested in, it’s time to make an offer! Offers can be as simple as a verbal communication, or you may be required to make a formal written offer. This varies by state and if you have a real estate salesperson/broker, this is when they can act as your agent. Depending on the market, you can make your offer as aggressive as needed. For example, waiving contingencies (i.e. mortgage or inspection) or promising to close quickly can be appealing to a seller but should only be considered in rare instances and when you have done your due diligence. Waiving contingencies exposes you to more risk in exchange for potentially winning the bid, but should be considered very carefully.
In my case, I asked the seller to perform an inspection right away (the very next day after seeing the house), so I had a clear idea of the work might need to be done. I was then able to make an educated but competitive offer more quickly than others.
Find an Attorney
A real estate attorney is another important part of the process, and in many states is a requirement. Your attorney will serve to help advise and review your contract (see below). They will also be essential in establishing an escrow account (a temporary holding) for your deposit, down payment, and ultimately your payments to multiple parties (e.g. bank, insurance, seller’s attorney, etc.). Another vital role they play is checking for any existing liens on the property. You’ll want to find an attorney before receiving a contract from the seller, this way your attorney will be familiar with you already and be prepared to review your contract.
Unless your offer is declined outright, most offers will require some negotiations prior to acceptance. This is the time when the buyer and seller hammer out further details about the home until an agreement is reached. In my case, this was handled via my real estate agent who helped communicate our terms to the buyer’s agent and then the buyer.
Conduct a Home Inspection
Conducting a home inspection is critical for most home buyers (for those planning to tear down the house this can potentially be omitted). Although most would consider this step after the seller has accepted your offer, it may be to your advantage to consider conducting an inspection even while negotiating terms.
In either case, this is the opportunity to take a close look at almost every component of the house, and uncover any hidden problems. Both your offer and the contract may include an inspection contingency.
Seller Accepts Offer
Once the negotiated terms have been settled, the seller accepts your offer. This is the first big step toward your purchase! It is now the seller’s attorney’s responsibility for drafting a contract with the accepted offer and the terms you outlined.
A survey of the land should be considered to resolve any possible boundary disputes, and especially should be considered if no prior plot plan is available. This is useful to have before closing, as any property disputes that you discover can be the responsibility of the seller (if outlined in the contract as such).
Sign Contract and Wire Deposit
At some point during this process, the seller’s attorney will send your attorney a copy of a written contract. It is your attorney’s job to review this contract, and ensure language that is protective for your interests. This may come in the form of edits, or attached riders. This is also why finding an attorney early in the process is important. In the meantime, you’ll need to prepare your deposit or earnest money, which can vary anywhere from 1-10% of the purchase price.
Finding and choosing an insurer for your new home is important. In fact, if you are planning on a mortgage, it is a requirement. Familiarizing yourself with several aspects of home insurance can help you make this choice. Or, an insurance broker can work with you to compare quotes and also different plans. Having this in order before your closing date will be important, as the mortgage lender will often require proof of payment, or it may be escrowed.
Take Over Utilities
Although a minor detail, this is a very important one. Clarifying the transition of utility accounts is important to make sure the electricity, water, gas, or any other resources are not interrupted (if desired). This can be just a quick phone call to individual companies, but the seller may need to alert them as well to approve the transition.
Walk-Through and Closing
Finally! The day that you’ve been waiting for. You will need to schedule a walk-through of the home on the day of closing. It’s helpful to bring a checklist of items to ensure everything is as expected when you first saw the house. Given everything is acceptable, closing technically takes place at the seller’s attorney’s office. However, this doesn’t necessarily mean you have to be present. It also doesn’t mean you will necessarily even meet the seller. For example, we will be signing our papers at our attorney’s office, and our attorney will then bring the papers to the seller’s attorney’s office. These papers include loan documents, promissory notes, and other specific agreements and disclosures specific to your property.
- Buying a home is a complicated process with multiple steps, but knowing what to expect can help prepare you to make the right decisions.
- Finding the right people (realtor, attorney, mortgage lender, etc.) who you can trust and rely on can go a long way.
- Remember, there are always unpredictable parts of this process that will be unique to your situation (e.g. volatile market, unforeseen problems with the house, mortgage difficulties, etc.), but