Your One Stop Guide to Buying a Home
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UPDATED: Apr 1, 2013
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Getting a home is perhaps the defining feature of the American Dream. While the country has certainly seen better days, people are still buying homes and trying to build the life they want for themselves.
Unfortunately, not everyone has the money to pay for a home in cash. The Great Recession gutted most people’s savings, which means most home shoppers have to borrow a home loan in order to buy a house.
With all the complex interest rates, mortgage documents, offers, negotiations, and handshaking, buying a home can become a real headache for the uniformed. No need to worry though, because here is the One Stop Guide to Buying a Home; from start to end.
It’s important to start at the beginning so let’s take a look at the necessary steps in the home purchase process.
The first step isn’t so much a financial process as it is a personal one. Homebuyers need to ask themselves why they want to buy a home in the first place.
Cathy Blaszyk, Vice President of National Account Sales at ClosingCorp Inc., told us the exact questions that homebuyers should ask themselves.
“Are you trying to get out of the renting trap?” she said. “What is going to make you and your loved ones happy today as well as 10 years from now? Having a clear sense of your reasons behind the decision will help you stay focused in choosing the right home.”
While homeownership is certainly part of the American Dream, it is by no means the right choice for everyone; financial capability or not. For example, a wealthy travelling consultant who moves frequently may not even be interested in owning a home. Homeownership, being the result of the largest purchase most people make in their lifetimes, isn’t a purchase that necessarily needs to be made by every man and woman.
Personal reasons aside, the next step is to prepare the actual financial aspects of purchasing a home.
Papers, Preparation, and Pre-approval
Since a home is the largest purchase most people make, and most people borrow a home loan in order to finance the purchase, it is important for homebuyers to review their credit score at the onset of the process.
Fortunately, everyone gets a free credit score check once a year. When viewing their credit score, borrowers have the chance to dispute mistakes or even notify the authorities and their bank about possible fraud.
If everything on the credit score seems fine, then homebuyers can move on to preparing for a down payment.
“Depending on the loan size and other factors, you will need to come in with anywhere from 3.5% down-payment to 25% down payment,” said Joe Chatham, President of Chatham Mortgage Partners, in an email.
He continued to explain that most lenders will expect the borrower to have at minimum two months of the estimated, principle, interest, taxes, and insurance minus the cost of the down payment and closing costs.
Next, the borrower needs to get pre-approved for a home loan. Armed with the knowledge of their credit report, and with enough savings for a down payment, this should be a straightforward process. Homebuyers should approach their personal bank or credit union, especially if they have been long-time customers. These lenders will be more inclined to show favor to a long-time customer in order to keep their business.
“I suggest using a broker because brokers have several lending resources available to them versus a direct lender,” said Chatham. “Be wary of the ‘Direct Lender’ who also says they broker. They have a financial interest in using their direct lender monies before shopping the file…often at the expense of the borrower.”
Chatham noted that a loan officer would handle the necessary information and paperwork that borrowers need in order to get pre-approved for purchasing a property.
Cathy Blaszyk does offer a word of caution regarding pre-approval though.
“You should consult with your tax professional as well as mortgage professional to get pre-approved and review all your documentation together,” she said. “The key to this stage is to have the discipline to not necessarily buy as much as you’ve been pre-approved for if it alters your ability to stay on target with your other financial goals, such as retirement planning.”
Assuming the loan officer at a bank or credit union approves the homebuyer after a careful review of their personal financial information, the buyer can begin shopping for a home.
When it comes to house hunting, borrowers will need the aid of a real estate agent. These agents will be experienced and well versed in helping prospective homebuyers find the right home.
“Once pre-approved, contact a reputable Realtor: duly licensed, referred by trusted advisers, no regulatory complaints, etc,” said Chatham.
He also advises homebuyers to use trusted advisors, such as attorneys, accountants, and friends or family during the course of the home buying process.
Blaszyk agrees, saying that real estate agents help keep buyers on track with the personal and financial objectives they defined earlier on in the homebuying process..
“Make sure you align yourself with a professional that is focused on YOUR objectives and not their ability to maximize their commission,” she added.
Blaszyk recommends that in the “shopping” process, home buyers should keep their goals in mind while photographing properties that interest them. Driving by properties at different hours of the day to see if there are hidden issues with traffic is a wise practice. Walking the neighborhood and meeting neighbors is also recommended.
When it comes to actually bidding on a desirable home, many sellers who are emotionally attached to their homes may prefer an owner-occupant who is going to continue to care for the newly purchased house. Demonstrating or explaining this to sellers is an excellent way to improve the chances of having an offer accepted. It is not unheard of for sellers to even accept a lower bid from a buyer who is going to move into the home and tend to it, rather than a buyer who is a property investor.
Bidding and Closing
Since buying a home is a competitive process, borrowers should not be surprised if they enter a bidding war.
“Negotiation can be interesting in this world of low inventory but also tight lending,” said Daren Blomquist, Vice President and Spokesperson for RealtyTrac, told us in an email. “That means most folks can’t just outbid others by going out and getting approved for a higher loan amount.”
The game isn’t over even if the home buyer’s offer is accepted.
Once a bid is accepted then a borrower should contact their loan officer immediately. The loan officer and buyer’s agent would then coordinate purchase and sales agreements, the appraisal, and a review of the title records.
“The lender will underwrite the file to insure the loan meets all guidelines (they change frequently),” said Chatham. “If there are any questions or concerns, your loan officer will address said concerns with you.”
Once everything checks out, then the loan papers will be signed and the homebuyer will transform into a home owner. After that, the home owner gets to enjoy the final step: moving in.
Unfortunately, not everyone gets a slice of the American Dream. While, income, savings, and poor credit are common reasons for this, many people simply make mistakes in the home buying process.
“In this market, the top two mistakes are lack of persistence and not having financing in order before making an offer,” said Blomquist.
Blomquist cautioned homebuyers to protect themselves during the home loan borrowing process.
“Shop around and don’t allow yourself to be pressured into a quick decision,” said Blomquist. “Even though there is this sort of frenzied nature in the market because of the low inventory, it is not worth getting into a bad loan just to buy a house a little quicker.”
Purchasing a home can be complicated, but by using this guide, homebuyers will better understand the road ahead of them. If borrowers remain alert during the home purchasing process, then they should be well on their way to enjoying a piece of the American Dream.