Understanding the Process of Homeownership

Real Estate

Homeownership is considered as the ultimate goal of the American dream. To make this dream come true, you need to understand the process of buying a home. It is a thrilling and exhausting experience, but with the right real estate agent and some useful tips, you can own a beautiful and affordable piece of property.

According to Gallup, in 2007, 73% of Americans owned their homes. However, by 2012, this number decreased to 62%. The housing crisis was caused by bad mortgages, which led to a significant decrease in homeownership. Many people signed subprime loans with punitive terms, and others agreed to adjustable interest rates, believing they would sell their homes before the rates increased. As a result, by August 2012, almost 1.5 million homes were in foreclosure, which equates to one in every 681 homes in America, as reported by RealtyTrac.

These statistics are not meant to scare homebuyers, but rather to emphasize the importance of fully understanding the terms of your mortgage and choosing a property that you can afford. Buying a home is a significant financial investment. Therefore, it is crucial to follow your budget and make an informed decision.

In this article, we will discuss the steps involved in finding the perfect home. We will answer questions such as whether you need a real estate agent, why you need to be pre-approved by a bank, how to negotiate the deal, and how to avoid getting a lemon. Let’s begin with the first critical step of getting pre-approved for a mortgage.

Getting Pre-Approved for a Mortgage

The first step to buying a home is figuring out how much you can afford to spend. Unless you have the cash to buy a home, you will need a loan called a mortgage from a bank. Before you start looking for a house, you need to get pre-approval for a mortgage from a bank or several banks. The bank will ask you financial questions to determine how much you can afford to pay each month. This number will determine the price range of affordable houses. The bank will consider your income, debt, and other expenses to calculate the amount of the mortgage payment. It is also essential to create a budget that includes all your monthly expenses to determine the exact amount you can afford to pay each month for your mortgage.

It’s important to understand the difference between getting pre-qualified and pre-approved when looking to buy a house. Being pre-qualified means providing a lender with your income level, debt, and credit information, and they estimate what you can afford. However, being pre-approved means the lender has analyzed your financial situation by checking your credit report and debt-to-income ratio. With pre-approval, you receive an official letter that can help when negotiating with a seller. A pre-approved offer is more likely to result in a completed sale, so a seller might accept a lower price.

During the pre-approval process, it’s important to remember that a monthly mortgage payment is only part of the expense of buying a home. You’ll need a down payment of at least 20% of the home price to secure the loan, and there are additional costs not included in monthly payments. Ask your lender about property taxes, mortgage insurance costs, and closing costs for homes in your price range.

Before starting your home search, consider what you need versus what you want in a home. Make a list of your non-negotiable needs, such as a certain number of bedrooms or a good school district, and your wants, such as hardwood floors or a swimming pool. Focus your search on homes that meet your needs and include some of your wants. Consider different types of homes, like condos or townhomes, and think about the style of home you prefer.

Choosing the right location is arguably the most important decision before starting your home search. Your location preferences should align with your needs and wants, like living in an area with good schools or being close to work. Keep in mind that your location preferences may change over time, so balance your near-term needs with your long-term goals.

Factors to consider when choosing a location:

• Distance to the city
• Proximity to work
• Quality of schools
• Availability of public transport
• Crime rate
• Tax rate (especially property tax)
• Zoning regulations
• Restrictive covenants (e.g. keeping chickens in the backyard)
• Noise levels
• Air and water quality
• Community values

Real Estate Agents

Do you need a real estate agent to buy a house? No, you don’t. Thanks to the internet, anyone can search and view homes on the market. You can customize your search by various criteria, and even contact the sellers to arrange a viewing. However, despite these tools, why do most people still use a real estate agent?

We need to understand what a real estate agent is first. A real estate agent is someone licensed by the state to help people buy and sell homes. They have an advantage because they know the process and the paperwork; they have relationships with lenders and understand the local market.

It’s important to note that most real estate agents work for the seller, not the buyer. This is because the seller pays the commission when the home is sold, not the buyer. Since the agent’s commission is higher when the price is higher, it’s in their interest to secure the highest sales price.

When you contact a real estate agent directly about a specific home you found online, keep in mind that the agent is working to sell the house, not to help you. They’re bound by contract to get the best deal for the seller. Also, most real estate agents work for a specific agency, so they may limit your choices to homes listed by that agency.

The best type of agent for a homebuyer is a buyer’s agent. They sign a contract with the buyer to find the best house for the best price, regardless of which agency is listing it. Using a buyer’s agent means you’ll be shown homes that are For Sale By Owner (FSBO), and everything you tell them remains confidential.

What is a Buyer’s Agent?

A buyer’s agent is a real estate agent who works exclusively for the homebuyer. They negotiate the best price, ensure the property is inspected, and represent your interests throughout the process. Using a buyer’s agent means you’ll have more choices and everything you tell them remains confidential.

To find a buyer’s agent, it’s important to shop around and meet with different real estate agents. Look for someone who understands your specific needs and preferences. Recommendations from friends and neighbors can be a good starting point. In most cases, you won’t have to pay more for a buyer’s agent, as they usually split the sales commission with the seller’s agent. Although the commission may affect their loyalty to the buyer, it’s usually a small difference. When working with an agent, pay close attention to the contract you sign, especially if it specifies what the agent will be paid. There are different types of contracts to understand, including dual agency, neglecting to specify, buyer’s agency clause, and release clause. Once you settle on a real estate agent, it’s time to start house hunting. Your agent will ask about your preferences and search the Multiple Listing Service (MLS) for matching properties. You can also do your own searching online, using sites like Trulia.com and Realtor.com. Other sites like ForSaleByOwner.com and Craigslist.org include private listings not in the MLS database. Online listings provide useful information such as how long the home has been on the market and stats about the local school district. You can even use online calculators to estimate your monthly mortgage payment including property taxes.

Your real estate agent will work with you to create a list of potential homes to visit in person. This is an exciting time as you get to see the homes up close. Your agent will schedule appointments with the sellers’ agents for showings, which usually take place when the current owners are not present. In some cases, the seller’s agent will be there to provide more information about the property, but if not, they will usually provide a printed overview of the home’s amenities called the listing sheet. You can use the back of the listing sheet to take notes on the home’s positive and negative qualities. Make sure to bring a digital camera to take photos as it can be easy to forget details after seeing multiple houses in a day.

If you find a few homes you like, consider returning for a second or third walk-through at different times of day to get a better sense of the neighborhood. You may discover things like a noisy neighbor or a loud train that could affect your decision to purchase. While you may feel like you’re bothering the owners, it’s worth the extra effort when making such an important long-term investment.

Once you’ve found your dream home, it’s time to make an offer. The first step is to consider your mortgage pre-approval letter and determine the maximum amount you can afford to pay. The listing price is important, but you should also look at the sales prices of similar homes in the neighborhood to ensure you’re getting a fair deal. Your real estate agent can provide you with a Comparative Market Analysis (CMA) or you can search for sold listings on websites like Trulia.com. You should also discuss short-term and long-term price trends in the area, how long the home has been on the market, and any previous offers that were made. By doing your research and working with your agent, you can make an irresistible offer that fits your budget.

When the real estate market is booming in cities like San Francisco or New York, you may need to offer more than the asking price. Your real estate agent can provide guidance on how to best navigate a potential bidding war. Once you agree on a price, you will need to draw up an offer letter, which can double as a legal contract in some states. Your agent will be able to help you with this process, but it’s important to understand the details of the agreement before you sign. You may be required to offer earnest money, which is a deposit that shows the lender you’re serious about the purchase. The offer will also include clauses and contingencies required of both the buyer and seller, such as a home inspection contingency and financing contingency. The seller is not obligated to accept any offer, but you can expect a response within a day or two. It’s common to negotiate the purchase price or other terms of the deal, so be prepared for some haggling.

It is crucial to stick to your mortgage pre-approval letter during negotiations. Falling in love with a house can be easy, but it’s important not to let emotions make a potentially disastrous financial decision. Defaulting on house payments can result in foreclosure, bankruptcy or worse. If your best offer is not accepted, it’s important to walk away and wait for the next opportunity.

With persistence and some luck, you and the seller will come to a fair price for the home. Depending on the real estate laws in your state, the offer letter may become the contract or a separate document will need to be drafted and signed. Earnest money will need to be deposited if it has not already been done. Even after signing the contract, you can still back out of the purchase, but you will lose the deposit.

Once the purchase contract is signed, both you and the seller will need to abide by the contingencies of the contract, beginning with the home inspection. A professional and thorough home inspection is crucial when purchasing a home. The buyer is responsible for paying for the inspection, which can cost between $200 and $500. Your real estate agent can recommend a certified inspector, or you can find one certified by the American Society of Home Inspectors. An additional inspection may be needed for FHA or VA loans, but it’s important to get a full inspection regardless.

Your offer should be contingent on the results of the inspection. If major issues are found, such as a termite infestation or foundation cracks, you can back out of the contract or have the seller repair the issue to your satisfaction. The inspector will cover major areas of the home during the inspection.

When considering buying a house, it’s important to have it inspected thoroughly to ensure it is in good condition. The inspector will check for signs of water damage in the basement or crawl space and any cracks in the walls or floor that might indicate structural issues. The quality of construction will also be assessed, including the installation of flashing to protect the wood and the condition of the roof. Plumbing will be checked for proper installation and any evidence of leaks. The heating and cooling systems will be assessed for their condition, whether they need replacing soon, and if they are suitable for the square footage of the house. Electrical problems or code violations will also be noted, along with any other interior issues such as uneven floors, malfunctioning windows or doors, or leaks and mildew in the bathrooms.

Once the inspection is complete, the inspector will provide a printed report that can be used to renegotiate the purchase contract to include repairs. If the report is clean, then it’s time to focus on closing the deal. The terms of the mortgage should be locked in, and a title search conducted to ensure there are no other claims of ownership or liens against the property. If everything is clear, the closing can take place, where the buyer and seller will sign a stack of papers and exchange payment for the keys to the new home. The buyer will need to bring proof of homeowner’s insurance, a certified check for the down payment, and another check for closing costs. The closing agent will help the buyer understand each form they are signing to ensure a smooth transaction.

The process of closing on your new home involves reviewing and signing several important documents, including the mortgage note which outlines the consequences of failing to make payments, the settlement statement which details all of the costs associated with the settlement, and the warranty deed which officially transfers the title from the seller to the buyer. It is recommended to have a lawyer present during this process and to give your full attention to double-checking all of the documents. After everything is signed, the closing agent will hand you a set of keys and you can begin the process of moving into your new home. For more information on mortgages and home buying, see the links provided. This article was originally published on May 16, 2003.

Frequently Asked Questions About Buying a House

What steps should I take to prepare for buying my first home?
To prepare for buying your first home, you should pay off any high interest debt, maintain an accurate monthly budget, save for a down payment and closing costs, get pre-approved for a mortgage, find a trustworthy real estate agent, and search for homes within your budget (while staying within it).
Is it possible to buy a house with bad credit?
It may be difficult to find a lender if your credit score is below 500, but it is not impossible. A large down payment can help improve your chances. However, lenders who overlook bad credit may charge higher interest rates, which can cost you more in the long run.
How much should I save for a down payment?
Typically, conventional lenders require at least a 10% down payment, but some lenders may accept as little as 5%. If possible, putting down 20% can lead to better rates and more affordable monthly mortgage payments.
How can I determine my budget for purchasing a house?
Lenders can help you determine the maximum amount you qualify for, but that does not necessarily mean you can comfortably afford the monthly payments. Consider your income, debt, and monthly expenses to determine a realistic budget.
How long does it take to buy a house?
From offer acceptance to closing, it typically takes 30 to 60 days.

More Information

Author’s Note: The Process of Buying a House

After years of renting and moving frequently, my wife and I decided to buy our first home in 2011. We were able to take advantage of low prices and interest rates, but we also wanted to avoid the mistakes made during the housing boom. To ensure we could afford our new home, we created a realistic family budget. With the help of a trustworthy real estate agent, we found a home and went through the process of buying it. In the end, we not only had a house, but a place to call home.

Related Articles

• The Process of Selling a House
• What Realtors Do
• Important Questions to Ask Your Realtor
• Understanding Credit Reports
• The Basics of Mortgages

Sources

• Jacobe, Dennis. Gallup. “U.S. Homeownership Hits Decade Low.” April 26, 2012 (Accessed Sept. 14, 2012) http://www.gallup.com/poll/154124/u.s.-homeownership-hits-decade-low.aspx
• RealtyTrac. “National Real Estate Trends” (Accessed Sept. 14, 2012) http://www.realtytrac.com/trendcenter/trend.html

FAQ

1. What are the steps involved in buying a house?

There are several steps involved in buying a house, including: researching and choosing a neighborhood, getting pre-approved for a mortgage, finding a real estate agent, searching for homes that fit your budget and needs, making an offer on a home, getting a home inspection, securing financing, and closing on the sale.

2. How much money should I save before buying a house?

You should aim to save at least 20% of the purchase price of the home for a down payment. In addition to the down payment, you should also have money set aside for closing costs, which can range from 2-5% of the purchase price.

3. What should I look for when choosing a neighborhood?

When choosing a neighborhood, consider factors such as safety, proximity to work and amenities, schools, and property value trends. You should also visit the neighborhood at different times of the day to get a feel for the area.

4. How can I get pre-approved for a mortgage?

To get pre-approved for a mortgage, you will need to provide your lender with financial information such as your income, debts, and assets. Your lender will then review your financial information and credit score to determine how much of a loan you qualify for.

5. Why is it important to have a real estate agent?

A real estate agent can help you find homes that fit your budget and needs, negotiate with sellers, and guide you through the buying process. They can also provide valuable insights into the local real estate market.

6. What should I look for when searching for a home?

When searching for a home, consider factors such as location, size, number of bedrooms and bathrooms, and overall condition. You should also look for homes that fit within your budget and have the potential for appreciation in value.

7. What is a home inspection?

A home inspection is a thorough examination of a home’s condition, typically conducted by a professional inspector. The inspection can reveal any potential issues with the home’s structure, plumbing, electrical systems, and more.

8. How do I secure financing for a home?

To secure financing for a home, you will need to apply for a mortgage with a lender. Your lender will review your financial information and credit score to determine if you qualify for a loan and how much you can borrow.

9. What is a closing?

A closing is the final step in the home buying process, during which you sign all of the necessary paperwork and pay closing costs. The seller will transfer ownership of the home to you and you will receive the keys to the property.

10. How long does the home buying process typically take?

The home buying process can take anywhere from a few weeks to several months, depending on factors such as the availability of homes in your desired area, the speed of your lender and other parties involved in the sale, and the time it takes to complete a home inspection.

11. What happens if my offer on a home is rejected?

If your offer on a home is rejected, you can choose to submit a new offer or look for other homes that fit your budget and needs. A real estate agent can help you negotiate with sellers and find homes that are a good fit for you.