Did you know that buying a house is one of the top five most stressful things you will do in your entire life? Before you begin shopping for properties or comparing mortgage options, you need to make sure you’re ready to be a homeowner. For most of us, it's going to be the biggest investment we will ever make.
Some people assume they know how to buy a house by themselves because they want to have a yard, be near a better school, or be in a place where it’s conducive to homeworking. But it’s only when the time comes to get started that they realize it can be a surprisingly intimidating and daunting task. It is a sincere commitment.
Fortunately, countless people have successfully bought their houses without suffering through an intricate process. It was pretty enjoyable for them because they followed these steps:
Steps to Homeownership in 2021
Step 1: BUILD YOUR CREDIT SCORE.
You will want your bank to approve your loan application, and you will only be approved if the bank sees you have a good credit standing.
Step 2: GET YOUR FINANCES IN PLACE.
There will be some out-of-pocket expenses that will need to be paid before you even get to the closing: inspection fees, appraisal fees, loan origination, attorney fees, and closing costs.
Step 3: BE AWARE OF THE COMPETITION AND YOUR SURROUNDINGS.
With the crazy market now, you have more buyers than ever to compete with and the inventory is lower and lower with each month. Be mentally prepared to take action when you find the house you like. Consider your pre-approval, how long you will stay in that place, your career goals, family obligations, and more.
Step 4: FIND A ROCKSTAR TEAM.
It is undeniably super exciting to search for homes online like Redfin, Zillow, and Realtor.com. But you need to start your process by finding a top agent that specializes in your area, otherwise, it might cost you losing your dream home.
Step 5: GET A LOAN PRE-APPROVAL.
The very first introduction that your agent should be making is to their preferred lenders. From them, you will be asked to submit several documents that include proof of employment, the last 2 years of your income taxes, and bank statements to make sure you qualify to obtain a mortgage.
There are common loans out there that can help you and the top 3 are FHA, VA, and conventional loans.
They all have different ever-changing requirements and regulations, but the main differences are as follows:
FHA allows lower credit scores, a little higher down payment, has stricter property standards, and always requires private mortgage insurance. Backed by the Federal Housing Administration, FHA loans are less of a risk for lenders because the government insures them if you stop making payments. As a result, FHA loans have credit score requirements that aren’t as strict. You can get an FHA loan with a down payment as small as 3.5%.
VA is a $0 down option for American veterans. Those loans have very competitive rates and require no private mortgage insurance.
Conventional loans, sometimes called conforming laws, require a higher credit score, allow for slightly smaller down payments, are not as strict about property standards, and only require mortgage insurance when your down payment is less than 20% and can be canceled.
Your loan type might require a specialized inspection as well. For example, you often have to get a pest inspection before you take out a VA loan. Most lenders will schedule this inspection on your behalf and pass the cost along to you at closing. These expenses might seem minor when held up against the other costs associated with buying a home, but they can add up, so be sure to budget wisely.
Step 6: Start home searching.
In normal market conditions I would encourage my clients to see a few properties at a time but in today’s market I encourage them to RUN as soon as a property that fits their criteria hits the market. Remember that it is a seller's market, which as a buyer, puts you at a disadvantage. You have lots of competition and it is not the time to be super picky with the conditions of the houses, so when touring homes, pay attention to the big-ticket items vs cosmetics that can easily be changed.
Step 7: Submit the offer.
When you decide to make an offer on a home, you must submit an offer letter in writing. Your offer letter includes details about yourself (i.e. name, current address, etc.), the price you’re willing to pay for the home, and more. It will also include a deadline for the seller to respond to your offer.
You are at a point where you have already found the house of your dreams and you want to present your offer to the sellers. Your agent will prepare the contract for you while you decide on a few factors: the price you want to offer, the earnest money amount - which is a good faith deposit, how big your down payment will be, and the closing date.
Your agent will almost always write the offer letter on your behalf, but you can write it yourself if you choose. Your agent will then get in contact with the seller or the seller’s agent to submit the offer.
The seller will also provide you with disclosures that you will read and acknowledge. Around here, the most common disclosures are mold, lead-based paint, radon, and the standard property disclosure.
To present yourself as a strong and capable buyer, you will want to attach your pre-approval for a loan or proof of funds if this will be a cash transaction to the offer.
After submitting an offer there are a few various outcomes:
Your offer gets accepted and you move to the next step.
Your offer gets declined, at which point you need to start searching for a new home again.
You are in a multiple offer situation and the seller will ask for your best and final offer by the deadline. In this situation you want to check your finances, talk to your lender and then remember to make an offer based on what you feel comfortable with - it will be easy for your ego to get in the way and I see so many buyers overpaying for their homes.
Step 8: Accept the offer.
This is the time you will be the most involved. At this point the sellers and you as the buyer have agreed to the terms of the contract, the contract is executed and you have delivered the earnest money to the party that will keep it in their escrow account.
Step 9: Attorney and Inspection Review
In some states, using a real estate attorney is required; in others, the title company is allowed to prepare all the transfer documents. Even though an attorney may not be required in your state, I highly recommend using one. There is so much more to buying real estate than just preparing transfer documents and pointing out the signature line on the closing documents.
This step varies from state to state. In the contracts utilized by realtors in our area, we enter what is now called the attorney and inspection review. The wording in our contract gives buyers 5 days to perform a professional inspection and have the attorneys review the contract and make any necessary changes. If they need more time to review or agree on specific terms the attorneys can easily extend the review period to ensure you are protected.
During a home inspection, an inspector will go through the home and specifically look for problems. They will test electrical systems, make sure the roofing is safe, make sure appliances are working, and much more. After the inspection closes, the inspector will give you a list of problems they find in the home.
One very important item negotiated during that time with the help of the attorneys is the inspection report. In the state of Illinois, you hire a licensed inspector to examine the property and make sure that the condition of the real estate you are purchasing satisfies you. It’s common for homebuyers to include a home inspection contingency in their purchase offer. A contingency gives buyers the option to back out of purchase (or negotiate repairs) without losing their earnest money deposit if the home inspection reveals issues with the home. The sellers will make the house available for this inspection. The inspector will look for any issues on both the exterior and interior. I highly encourage all my clients to be present at that time because, at the end of the day, it will very likely become your home. The inspector will point out things to look out for in the future. It typically takes about 24-48 hours for the inspector to write a full report and deliver it to you.
If something concerning comes up, there are a few different outcomes that can happen:
You can back out of the deal and move on to the next property.
You can request the seller to take care of the repairs; or
You can ask for credit at the closing for you to be able to take care of the repairs.
Step 10 - Apply for your mortgage.
When you approve the condition of the house, and while the attorneys are sorting out things, you want to be sure to start the process of applying for the loan. You want to make sure that the lender has all the most recent documents, and your loan application is complete. At this time, they will also order the appraisal.
Step 11 - Appraisal
A home appraisal is a review that gives the current value of the property you want to buy. You must get an appraisal before you buy a home with a mortgage loan. It is done at your cost and it ensures the bank that you are not borrowing more money than the property is worth. The appraisal is typically done within the next week or so.
Lenders require appraisals because they can’t lend out more money than a home is worth. If the appraised value comes back lower than your offer, you might have trouble getting financing. Be thoughtful about your offer and consider contesting the results of the appraisal if you believe the appraised value is too low.
In case the appraiser does not believe that the property is worth what the buyer is offering, here are a few things you can do:
Renegotiate the purchase price with the seller,
Come up with the difference in cash,
Challenge the appraisal; or
Back out of the deal. Take note that if you choose to move forward with this option, your cost of inspection and appraisal will not be recovered.
Step 12: Loan underwriting
Depending on the type of loan you are applying for, the bank will ask you for different types of documents. You will be on a very close watch so do not make any big purchases, deposit large amounts of cash, change jobs or take on loans or additional credit card debt. This can all hurt you in obtaining final approval of your loan and this is true up to the closing day.
One of the requirements to get approved for a loan is obtaining home insurance, so make sure you shop around for the rate and coverage, and also make sure that the property does not have any open claims and history that will affect how much you pay moving forward.
USDA Loans
Another type of government-backed loan, a USDA loan, helps people in rural and suburban areas buy homes. You can get a USDA loan with 0% down, but your home must be in an acceptable rural area and you must meet income eligibility rules
Step 13: Clear to close
Once the bank approves you for a loan, the attorneys will be able to officially schedule the closing. In Illinois, the closing takes place at a title company typically chosen by the seller’s attorney.
Your lender is required to give you your Closing Disclosure, which tells you what you need to pay at closing and summarizes your loan details, three days before closing. The lender will give you the exact amount that you need to wire to the title company. Be warned that there is a lot of wire fraud happening so please ensure to verify all wire instructions with your attorneys or the title company by phone.
Step 14: Final walkthrough
You should do a final walkthrough in your new home before you close, even if you’re 100% committed to the property. This time allows you to check and make sure that the seller has made the repairs you requested and cleared out the property. I encourage all of my clients to do a final walkthrough right before the closing. Remember, you are the owner of the property after signing the closing documents, so make sure that you look thoroughly. If some issues come up, notify your attorney immediately and they will address these issues with the sellers’ attorney before the signing begins.
Walk through the home and make sure the seller hasn’t left any belongings. Check your repair areas if you requested them and keep an eye out for pests. You may also want to double-check your home’s systems one final time to make sure everything is in working order. If everything looks good, it’s time for you to confidently move toward closing.
First, you’ll need to be ready to be a homeowner and set a budget. Next, you’ll work with a lender to get preapproved for a mortgage. Then, you’ll start shopping for properties, ideally with a trusted estate agent at your side. Once you find a home, your agent will help you submit an offer and negotiate with the seller.
When you reach an agreement, you’ll get an appraisal and inspection. If the inspection turns up a major issue, you may want to negotiate repairs or credits with the seller. You’ll also do one more walkthrough in the house before you buy it. If everything looks acceptable, you can finally move to close and enjoy your new status as a homeowner.
Step 15: Closing time
Times have changed a bit and sellers typically do not show up at the closings. They pre-sign all the documents ahead of time. The seller’s attorney works remotely and because of the pandemic, the agents not being essential at the closing are asked not to come to minimize contact. It is most likely that you will be sitting at a closing table with your attorney and the closing agent from the title company. Your Attorney will review all the documents with you. After signing all of them the documents will be sent to your lender and at that point, you will be just waiting for the deal to be funded!
Read through your Closing Disclosure and make sure the numbers don’t vary too much from your Loan Estimate, which you would have received three days after your initial application. Once you’ve reviewed your Closing Disclosure, it’s time to attend your closing meeting. Bring your ID, a copy of your Closing Disclosure, and proof of funds for your closing costs.
You’ll sign a settlement statement, which lists all costs related to the home sale. This is when you pay your down payment and closing costs. You’ll also sign the mortgage note, which states that you promise to repay the loan. Finally, you’ll sign the mortgage or deed of trust to secure the mortgage note. After closing finishes, you’re officially a homeowner!
Conclusion
For all of you that are sticking to the end, I want to give you this last BONUS step that I believe is the most important first step as a brand new home owner, and that is Estate Planning!
I know we do not like to talk or even think about this, but I truly believe that we owe it to our family to plan for those inevitable situations. As I mentioned in the very beginning, your home is one of the biggest investments of your life and you want to make sure that when the time comes, the last thing that your family should be worried about is your assets, death taxes, courts, and legal fees. I strongly encourage you to take some time and meet with an attorney that specializes in estate planning that will walk you through options that are right for you.
