How to buy a home, from mortgage pre-approval to closing
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- To buy a home, you first need to team up with a trusted real estate agent and make sure your credit is in good shape.
- In most cases, if you are considering getting a mortgage loan, you need loan pre-approval in hand before you can start looking for homes.
- Once you’ve found “the right one” and made an offer, you’ll need to sign a purchase and sale agreement and get the home inspected before you officially apply for a mortgage.
- The bank that takes out your loan will want an appraisal of the home, and you will need to purchase home insurance and do a final check on the property before closing.
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Buying a house is not a walk in the park.
It takes a lot of organization, careful thought and, of course, money. But if you really want to own a home, you have to prepare for the road ahead.
Business Insider spoke to Dana Bull, real estate agent at Sotheby’s International in Boston, and George Chedid, real estate agent at Century 21 Barrood in Kendall Park, New Jersey, to establish a timeline for the home buying process.
Below, learn about the steps you’ll take to buy a home, team up with a real estate agent and find out what you can afford to get the deal done, and all the rest.
How to buy a house
1. Build your team
A home is a huge purchase, so you’ll want to make sure you make as few mistakes as possible along the way. This means building a team of people you trust, including a real estate agent, a lender and a lawyer, who is often the bank’s lawyer, Bull explains.
2. Determine your price
You can do this yourself using a mortgage calculator on sites like Zillow or Trulia (just be sure to include property taxes and insurance in this estimate), or you can ask a lender to pre- qualify for a loan.
The general rule is to spend less than 30% of your take-home pay on total monthly housing expenses.
But figuring out how much you can realistically afford will depend on your debt-to-income ratio. Chedid recommends that your monthly debts, including your housing costs, not exceed 40-45% of your gross monthly income.
3. Get pre-approved for a loan
In most cases, if you are considering getting a mortgage loan, you need loan pre-approval in hand before you can start looking for homes – most realtors won’t entertain buyers who don’t. do not have any.
Bull calls this getting your “fundraising ducks in a row”. While you may already have an idea of what you can afford, you will need to know how the bank sees you. A mortgage broker will assess your income, assets, and credit to determine your maximum loan amount.
Because a loan pre-approval carries more weight than a loan pre-qualification, it will take more work to get one. This requires a number of documents from each applicant (so if you are married, you and your spouse will need to provide these items):
• Pay stubs for a period of one month
• Bank statements, checks and savings, for a period of two months
• Income tax returns for a period of two years
• W-2 for a period of two years
During the pre-approval, the lender will also do a thorough investigation of your credit, which will appear on your credit report. Once you are pre-approved, you will receive a conditional letter indicating the amount for which you have been approved.
If you are a first-time buyer and your parents offer you money, your lender will want a letter from them confirming that amount.
It should be noted that you are not required to go with the lender who offered you pre-approval. You can use your pre-approval to find lenders who will offer you better rates.
“The rate is important, but so is the service and making sure you get to the closing table,” Bull explains.
4. Calculate exactly how much you can afford
Now you can know how much home you can realistically afford given the amount of your loan.
Remember to factor in taxes, home insurance, closing costs, private mortgage insurance (PMI), and homeowners association fees, if you expect to have them.
5. Buy houses
While your real estate agent should be your main resource, “do your homework,” Bull says. Find out which neighborhoods you want to be in and discover some open days. The more you see, the more informed your decision will be when you finally choose “the right one”.
You will need to be on your guard while you shop. New homes are hitting the market every day, so staying on top of listings is imperative, whether that’s signing up for online alerts or contacting your real estate agent on a daily basis.
Bull also suggests making it a priority to see the houses on the day they enter the market, or the first available exhibition, and to always be ready to sign an offer. You might even want to leave your lender “on hold behind the scenes,” she says, so you can quickly get an updated pre-approval letter.
6. Make an offer
Once you’ve found your dream home, it’s time to make an offer. The seller can categorically reject your offer, counter your offer, or accept it. If they disagree, you can accept their cons, or you can counter their counteroffer. Your real estate agent will want to know your maximum budget in advance and negotiate on your behalf.
Bull said the best deals come from cash buyers who have no prospects because those deals can be closed in a week. But most people have financing contingencies, which means they have to work with the bank to get a loan, which can take the closing process for up to 45 days.
Once your offer is accepted by the seller, a sales contract and down payment made to the listing agent will bind the offer.
7. Examine and sign the purchase and sale contract
When signing the purchase and sale contract, the buyer will also need to provide an additional deposit – usually 5% of the price of the deposit (minus the deposit already paid).
The buy and sell contract also has several dates for when things will take place, including inspection and appraisal, and the funding deadline, which will require the remainder of the down payment.
As a buyer, it’s your lawyer’s job to make sure the deal is successful. They will review the terms of the purchase and sale contract and contact the seller’s lawyer to renegotiate one of the terms.
The purchase and sale contract will state the final price and all other conditions of the offer. The sale is only final if all the conditions are met.
The attorney will also perform a title search on the property to make sure there is no lien from the previous owner, such as a default on his mortgage, for example.
8. Get inspected
Typically, a buy and sell will include an inspection contingency. An inspector will ensure that the buyer purchases the property in the condition stated in the offer. It is paid by the buyer and typically costs between $ 300 and $ 600, depending on the size of the home.
If problems arise, the buyer can renegotiate with the seller to pay for the repairs or lower the price, or even opt out of the deal altogether without losing the deposit.
9. Apply for a mortgage
The lender should keep an eye on the interest rates because they fluctuate daily. It is usually locked right after the buy and sell contract, but if rates drop significantly, it can be relocked.
You can choose between a fixed rate mortgage or an adjustable rate mortgage (ARM). The main difference between the two is that with a fixed rate, you will lock in a mortgage rate for the term of the loan, which is 15 or 30 years. Your monthly mortgage payment will stay the same until you pay off the loan, unless you refinance.
With an ARM, your monthly mortgage payments will be the same for a set period – typically three to 10 years – and then change each year thereafter based on the current market rate. This will usually give you a lower initial interest rate, but will not guarantee predictable payments over the life of the loan. Your lender can help you choose the loan that’s best for your situation.
10. Get an assessment
If you take out a home loan to finance the purchase, the bank will want to make sure the price is an “appropriate deal,” Bull explains. determine the value of the property.
If the bank thinks the property is not worth what the offer says, it can renegotiate with the seller. If the seller does not move, the buyer may have to pay the difference in cash.
11. Purchase home insurance for the property
If the property is financed, you will need to purchase home insurance before closing. This is not necessary if you are purchasing a condo or townhouse where the owner’s insurance is covered by the association fee.
Policygenius can help you find the best home insurance for your property ”
12. Make a final visit
Once the mortgage is secured, lawyers will set a date for a final review and closing. The final visit usually takes place a day before closing and it’s a time when buyers can physically confirm that the home is in the condition agreed to in the contract, Chedid explains.
13. Close on the property
On Closing Day (also known as Settlement), you’ll sign many documents – over 20 documents – and the final funds will be distributed, Chedid says.
It is a process that can take up to two hours. “Once all the papers are signed, the buyer is now the owner,” says Chedid.