9-step guide to financing your dream home
What are the best first steps to buying a house? We put together the answers and support you need to make the home buying process smooth and free of regret. Read on for a step-by-step guide that can show you how to buy a home that will meet your needs for years to come.
1. Fall In Love with Your Job and Your City First
The days of flipping real estate are over in most areas. These days, if you want to own a home, you need to be willing to commit. From Forbes Magazine: "Are rents cheap and homes costly in your city? Are you planning to move in the next year or two? Is your job looking iffy? If any of these apply, buying might not be a good move." Once you know that your job and your hometown are set for the next five to ten years, you can move on to the first of the steps in the buying process.
2. Shore Up Your Credit and Finances
The first step is to check your credit report. According to the real estate experts at Zillow, "Generally, the higher your score, the better loan you'll qualify for. Don't forget to check your report for errors. If there are any, dispute them. It may help your credit score." Even a slightly higher score can net you a lower interest rate on your loan, saving you thousands over the course of the mortgage. You may need to pay down your debts if they are too high in relation to your income. And, if at all possible, save up a down payment so that you can start life in your new home with equity and lower payments.
3. Figure Out How Much House You Can Afford Month to Month
You can get specific numbers after meeting with a loan agent, but, for a general idea of where to start, Bankrate says to plan according to the following guideline: "Your monthly mortgage payment, including principal, interest, real estate taxes and homeowners insurance, should not exceed 28 percent of your gross monthly income." This is the front-end ratio banks use to decide if you qualify for a mortgage.
There is also a back-end ratio that includes the house payments mentioned above plus other debts that you pay month to month. In total, the sum of your house payments, car payments, credit cards, alimony and other monthly debt payments should consist of less than 36 percent of your gross monthly income.
4. Build Your Dream Team
The most important people to have on your side in the home buying process are a good mortgage broker and a real estate agent (or broker) you can trust. You may wish to use the agent a friend recommends or find your own. CNN's Personal Finance Editor and author, Gerri Willis, advises that you look for an agent who has been closing sales every year for eight years or more and who is active in the neighborhoods that interest you. Once you find an agent you trust, you may want to ask the agent to recommend a mortgage broker. If the agent already knows a broker who works quickly to help clients close, that person could be your best bet for a successful escrow process.
5. Create Your Ideal House List
This is one of the easiest and hardest steps to buying a house. Write a list of all the things your house absolutely must have and all the things you wish it had. Do you need a big kitchen to feed a horde of football fans every weekend? Are you concerned with office space for your home business? Do you want a big yard for the kids and dog to run? Put all of these things on your list and then prioritize the ones you need most. Later, when you're swimming in a list of prospective homes, you'll know which features you can compromise on and which ones you cannot do without.
6. Shop Homes in Your Target Area
Here are some factors to consider as you scroll through endless listings on the Internet:
Is this a good school district? This will be important for resale value later, even if you don't have kids of your own.
Can we really afford it? CNN Money says, "The rule of thumb is that you can buy housing that runs about 2.5 times your annual salary." A mortgage broker can give you a more exact number, based on your debts and other factors.
Does it have enough bathrooms/bedrooms/living areas? Will it have enough five years from now, when the family has grown?
Is the location workable for commuting, shopping, school and family gatherings?
When you and your realtor locate homes that could be a good fit, make sure to drive by at different times of day and see how traffic and noise change in the neighborhood. You don't want to find out after you've signed the contract that your new street turns into a speedway at rush hour.
7. Show Up for the Inspection
When you find a house you like and decide you're ready to move forward in the home buying process, make sure you hire the best inspector you can find, usually for around $400 to $500. Zillow says it is best to hire this person on your own rather than based on your real estate agent's recommendations; your realtors may be more concerned with moving things along quickly than with getting an in-depth evaluation. This isn't always the case.
Most homes will pass inspection, but a thorough inspector will tell you much more than whether it passes or fails. When the time comes, be at the house with the inspector to hear all the details on the state of the plumbing, walls, roof, shut-offs, foundation, energy efficiency, etc. This is invaluable information. It may lead you to decide you don't want to deal with the troubles at hand and to move on to another prospect. And if you do buy the house, go in armed with a wealth of intel about your new home and how to deal with its weaknesses and strengths.
8. Make an Offer
Depending on how things go, this step may come before or after the inspection. At this point, it's a good idea to rely on the expertise of your real estate agent who knows all about the politics of how to buy a home and can help you make a first bid that is both fair and economical, usually around 5 percent below asking.
Zillow explains, "Once you've made your offer, don't think it's final. The seller may make a counter-offer to which you can also counter-offer. But you don't want to go back and forth too much. Somewhere, you have to meet in the middle." When you agree on a price, you will usually need to put some "earnest money" down immediately to show that you are ready to seal the deal. Zillow says, "Depending on the agreement, it becomes part of the down payment if the offer is accepted, may be returned if the offer is rejected or may be forfeited if the buyer pulls out of the deal." Earnest money may be unnecessary if the local market is very favorable to buyers.
The escrow process can take weeks or months depending on your location, the type of sale and the speed of your mortgage broker, bank and government offices and other players in the deal. Some states require that you hire a lawyer to help with the final paperwork, but unless you live in one of these states or are working with a home that is in foreclosure or probate, you can probably make do with your real estate agent and mortgage broker.
In a best-case scenario, escrow goes through smoothly and you have the keys to your new home in your hand before the month is over. Here's hoping your home buying process is as smooth and simple as can be.