There are many steps involved in buying a home. A buyer needs to determine how much to spend on a house, what type of mortgage is best, find a home, make an offer, get a loan and close the deal. The buyer might also want to get preapproved for a loan and get an attorney and a real estate agent to help with the process.
Review your credit and finances
Before you begin the home buying process, you should review your credit and finances. Start by requesting a copy of your credit report from the three credit bureaus listed below. Review your credit report for errors. If you find an error, work to correct it right away. For instructions on correcting your credit report, refer to the websites of the three agencies.
You should also review your finances to determine how much of a home you can afford. What you can afford depends on your income, credit rating, monthly expenses, down payment and the interest rate. There are calculators for figuring out how much you can afford to spend on a home purchase provided on the US Department of Housing and Urban Development (HUD) Web site.
Learn about Mortgages
After you have reviewed your finances, credit reports and purchasing power, you should start researching the different types of mortgages. Unless you have the cash to pay for the purchase of a new home, you will need a mortgage. The financing for your home purchase will have two main documents: a note, which provides for the loan of money for your purchase, and the mortgage, which provides the security for the repayment of your loan. People typically call these two documents their "mortgage." A mortgage is a lien (a legal right that a creditor has on property) on a house or other property that secures the repayment of a loan;. this means that under the terms of the mortgage, if you fail to make your loan payments, the lender can foreclose on the mortgage and have your house sold to pay off your debt.. There are many different types of mortgages available, and finding the one that is right for you will depend on many factors, such as how long you plan to own the home and how much you can afford for a down payment.
The Different Types of Mortgages
The following are the some of the most common types of mortgages:
- Fixed-rate loan. Interest rates and monthly mortgage payments are fixed for the life of the loan, typically 15, 20, or 30 years.
- Adjustable-rate mortgage (ARM). Mortgage payment rates and loan payments vary during the life of the loan. With these mortgages, interest rates start lower than with a fixed-rate mortgage and then become variable. At specific intervals, a lender adjusts the rate up or down as interest rates fluctuate, usually based on a standard index. For example, your interest rate might be based on changes in the interest rate paid on one-year Treasury Bills issued by the government
- Balloon loan. The Annual Percentage Rate (APR) is fixed for a set number of years (usually 7) and at the end of that period, the entire loan balance is due in full. These loans can offer lower rates than fixed rate loans for longer periods, a 30-year mortgage, for example, or this type of loan could be a good fit if you're planning on selling the home before the balloon payment is due.
- Federal Housing Administration (FHA) mortgage. Eligible parties may qualify for a down payment as low as 3%. Loans come from lenders that are approved by HUD.
- VA loans. The Department of Veterans Affairs helps eligible veterans and service personnel get loans through conventional lenders. Down payments might not be required.
Find a Real Eestate Agent
Although a real estate agent's assistance in buying a house is not legally required, a buyer may find that having one is very helpful since the process can be complex and there is a lot of paperwork involved. Your agent can help search for homes, arrange showings and even negotiate over such things as needed repairs. Also, the commission for the buyer's agent is often paid for by the seller.
Get Pre-approved for a Home Loan
Pre-approval from a mortgage lender will help a buyer know how much house he or she can afford and reveal any credit problems that the buyer may have. For a small application fee, the loan officer runs the buyer's credit report, looks at the buyer's list of bank accounts and balances and approves the buyer for a loan of a certain amount. Pre-qualification by a lender, on the other hand, is an estimate of the loan amount a buyer could qualify for, and no commitment is made to make a loan to the buyer.
Wish List for Your Home
Make a list of features that you want to find in a home and in the surrounding community. List the things you must have, things that would be nice but are not necessary and those things that you definitely do not want. This list will help your real estate agent find houses to show you and should save time by narrowing down the choices. There is a home wish list form on the HUD Website.
Visit Houses
You may want to look at ads in the newspaper or in free publications, often available at local stores, to get an idea about what houses are available in your price range. You might also want to check out houses on the Internet because many Web sites have detailed descriptions of homes, still photos, virtual tours (videos) and information about neighborhoods and school districts. Next, you may want to drive through the neighborhoods that you are considering. Finally, you can visit homes with your real estate agent, or if you are not working with an agent, you can contact the home seller's agent to see a home you're interested in.
Make an Offer
After you find the home that you are interested in purchasing, you need to make an offer. The seller may accept your offer, make a counteroffer or reject your offer. If the seller counters your offer, you may need to negotiate until you can agree on the terms of the sale. Even if your offer is not accepted, you can make another offer. When you present your purchase offer to the seller, or when your offer is accepted, you may have to include an earnest money payment, which shows the seller that you're serious about completing the sale. The amount required as earnest money can vary, depending on local customs, and the money will usually be held by a third party, such as a real estate broker or title insurance company, until closing, when it will be applied towards the purchase price.
Get a Home Inspection
After your offer is accepted, set up a home inspection, which involves having a professional home inspector go through the home and thoroughly look at such things as wiring, fixtures, plumbing, the foundation and the roof. Make your offer to purchase the home dependent upon a satisfactory home inspection. An inspection will tell you about the condition of the home, and it can help you avoid buying a home that is in need of major repairs. If you negotiate repairs as part of the purchase, ask for a walk through before finalizing the purchase. You might also negotiate for a credit at closing for the amount needed for repairs.
Shop for Homeowner's Insurance
You need to purchase homeowners insurance in order to protect your investment, and your lender will require that your home is insured. Get quotes from several insurance companies when shopping for homeowners insurance. Compare the coverage each policy offers. Most standard homeowners' insurance policies will provide coverage for damage to your home caused by theft, fire and lightning, smoke, frozen pipes as well as ice and snow. Homeowners insurance also provides coverage for liability claims, medical payments to third parties and legal costs if a lawsuit is brought against you due to an accident that occurs at your home.
Closing
Closing is the process where ownership of the house is transferred from the seller to the buyer. A real estate deed is the document that shows the transfer of ownership from the seller to the buyer; the buyer receives the deed from the seller at the closing. In exchange, the buyer pays the seller the balance of the purchase price. The real estate deed is then recorded in the county's recording office.
Questions for Your Attorney
For you to make truly informed decisions regarding the purchase of your home, you will want to seek the advice of an experienced real estate attorney. An attorney will explain to you the important terms that should be included in a purchase agreement and negotiate with the seller or the seller's real estate broker or agent to include terms that are important to you. An attorney will explain any rights and obligations which you may be assuming when purchasing a home. An attorney may also help you understand the different forms of financing available to you. You may want to ask your attorney the following questions:
- Does state law require that an attorney draw up the actual contract for purchase?
- I signed a real estate sales contract, which allows time for my attorney to review it; what changes to the contract can I ask the seller for, based on your review of my contract?
- How much of your practice is in real estate?
- What are your fees?
Related Resources on lawyers.com
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Home Purchase Worksheet
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Home Evaluation Worksheet
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Residential Real Estate articles and information
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Selecting a Real Estate Lawyer
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Find a Residential Real Estate Lawyer near you
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Real Estate message boards for more help
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