The decision to buy a house can lead to an exciting and exhilarating journey. From dreaming about the perfect home, to finding that place to share memories with your family, it’s a process that’s part reason and part emotion. It’s complicated though, and understanding the right steps, and the right order to take them, is critical for successfully getting the home you want.Great tips for buying a house are useful at every step, so we will dive into some well-researched, effective strategies at each interval during the home buying process. Step-by-step, I will take you through the entire life of a real estate transaction from a new home being just a twinkle in your eye, to signing the documents and getting your keys at the closing table.
Get Your Money In Order First
It’s tempting to start online shopping for homes right away. Perusing various websites and day dreaming about moving into your dream home is a great way to pass the time. Try to resist this urge. If you don't focus on personal finance first, trying to find your dream home might turn into a nightmare.
No one likes seeing a beautiful home and then realizing they can't afford it. Conversely, it’s no fun settling for a home that’s not right for you because you didn't know you could have been looking at a higher purchase price point. To prevent these headaches, give yourself a financial health checkup at the very start of the process of buying a house.
Start with looking at how much money you have saved for a down payment. The down payment represents the cash you will pay upfront and combine with a home loan to buy a house. Or, if you have saved up enough, you may be able to buy a house with cash and not need a loan. Either way, understanding how much money you are starting with is critical.
If you don’t have substantial savings, you may want to consider tucking some money away before you begin house hunting. If that isn't feasible, think about other sources of funds that might be available to you. Maybe you have a relative that can help or stocks you can sell? If you are still at a loss for how to come up with a down payment, consider loans that don't require one (more on that later).
Understanding Your Credit Score
Understanding your credit score and some tips and tricks for getting it as high as possible is a great step to take before you talk to lenders about home loans. First, find out what your score is. Next, research what credit score is needed to buy a house.
It’s easy to check your score, as there are a number of free credit report resources online. Websites like FreeCreditReport.com will tell you what your score is and explain how it is calculated. It’s important to note that these sites use a “soft pull” to get your score instead of a “hard pull.” This is important because a hard credit check tells lenders you may be a higher risk to loan money to, so your score will go down.
To calculate your score, information is gathered by the three major credit bureaus (Equifax, Experian, and TransUnion). This information includes a list of all of the loans you have ever taken out as well as your payment history, how much is owed on each loan, and how much available credit you are using.
All of this information is pulled together to determine your credit score, also known as your FICO score. The term FICO score refers to the way credit is calculated with software from Fair Isaac Corporation (FICO).
Knowing the factors that go into your score and the weight each factor holds is important for understanding how to keep your score high or improve it if it’s low. Here is a look at the factors and their respective percentage of your total score.
Once you have your score, understanding what loans you may qualify for is important before talking to a lender. A good mortgage lender will definitely be able to show you all of the loan options available to you, but having a basic understanding going into that conversation is a good idea. Here is a look at a few types of loans and their minimum credit score requirements:
We will cover more details on these loans later, but the important takeaway for now is that if you check your credit score and aren't happy with the results, you should not abandon your quest to buy a house. There are always methods to improve your score before buying a home and you can even learn how to buy a house with bad credit.
Improving Your Credit Score
If you find out your score and it’s making you feel a little uneasy, there are a number of ways to make it better. The most impactful metric is payment history, so consider putting your bills on autopay so they are withdrawn from your checking account each month whether you remember or not.
Next, look at your debt to income ratio and see if you can improve it. Raising your income can mean a raise at your current job or getting a second one. Paying off as much debt as you can and cutting off credit card use can help that debt ratio.
You can also negotiate your debts to improve your score. Many credit card companies will lower your interest rate if you can prove financial hardship. Also, consider paying your debts that have higher interest rates off first. That way, you will focus your funds on paying down the principals on loans instead of interest.
Choosing A Lender And A Loan
There are plethora of lending services out there for you to choose from, which can be daunting. Getting an understanding of what you're looking for in a mortgage lender is the best way to start.
Not all mortgage lenders are the same, so do your research. First, prioritize working with someone you trust. Your loan officer is going to get to know your personal finances in-depth, including your credit score, gross monthly income, debt to income ratio, any outstanding student loans you may have, and much more. They need to be someone you can trust with all this sensitive information.
Be wary of lenders that encourage you to spend as much as you are qualified for. They should advise you to live well within your financial means, not at their limits. Maxing out your home budget means not having money for all the other things you need and want in your life. A lender should understand this and advise accordingly.
Your mortgage broker also needs to be well versed in all the various ways they can help you. This means understanding all the loan types like FHA loans, conventional loans, federal housing administration loans (FHA), veterans administration loans (VA) and jumbo loans.
Let's look at a few of the options your lender may recommend when helping you with a loan estimate.
Talk to your lender about what types of home loans you qualify for and which ones make the most sense for your specific situation.
Your lender should also be able to explain how your credit report, loan interest rates and your down payment amount will affect what home purchase price and monthly mortgage payments you can afford.
They should explain the monthly payment in detail, including a breakdown of your down payment, mortgage rates, mortgage insurance, homeowners insurance, and more. Some mortgage companies have online mortgage calculator tools that can do this for you as well. You input all the information with a few clicks and it will estimate your monthly mortgage payment.
Once your lender and you choose a loan, you can submit a mortgage application and get a mortgage pre approval. This is not a final loan approval (more on that later) but it does give you a good sense of what mortgage payment you can afford, and thus what house price range you should be looking at.
Finding The Right Real Estate Agent
Unless you are looking to buy a home without a realtor®, finding the right real estate agent is the next step once you’ve found your lender and loan type. The important thing to remember is that not all real estate agents are the same, so choosing the one that’s best for you is essential.
There are many types of real estate agents, so let's do a look at some of the most common types.
A real estate agent who specializes in selling homes and other real estate is called a seller’s agent (or listing agent). They work with sellers to get their property ready to sell (staging, pricing, getting offers, listing the home on websites, etc.) and then represent the home owners throughout the transaction. Seller’s agents should be especially adept at doing a comparative market analysis, which helps them set the price of a home by comparing it to other homes for sale or recently sold in the same area. Some seller’s agents also work with buying clients.
When a real estate agent is working to find real estate for someone to buy, they are operating as a buyer’s agent. This includes searching online for possible homes, accompanying potential buyers to showings, submitting offers for their clients, and representing them throughout the transaction. Buyer’s agents need to have an acute understanding of the local housing market so they know what homes are for sale and that might suit you. Some buyer’s agents work with selling clients as well.
As previously mentioned, many agents work with both buyers and sellers, but usually not during the same real estate transaction. When they do represent both parties on the same transaction, they are operating as a dual agent.
Every real estate agent is charged with representing the best interests of their client, so when they represent clients on both sides of a transaction, things can get messy. For example, buyers want homes for the lowest possible price and sellers want to get as much for their home as they can.
So, if a real estate agent is operating as a dual agent it can be difficult to make that happen for both clients. Because of this, dual agency is illegal in some States.
A real estate agent who specializes in helping people who are interested in selling or buying commercial property is considered a commercial real estate agent and deals with commercial property insurance.. Commercial real estate is very different from residential real estate so if you are looking at these types of properties you want to make sure you have an agent who specializes in them.
Commercial and residential aren't the only specializations for real estate agents. In fact, they are just the beginning. For example, some agents specialize in showing clients how to buy a foreclosed house and others specialize in buying land to build a house. From lake front properties, to horse properties, and even tiny homes, the list goes on and on. Try to find an agent that is uniquely qualified to find you the home you’re looking for.
Regardless of specialization, the realtor you choose should possess some core qualities that are the hallmark of good agents. This includes an understanding of the real estate market and how to navigate it. If inventory is low, houses will be in high demand and your agent needs to have the know-how for getting your offer accepted when there are multiple ones.
In a market when inventory is high and buyer demand is low, they should know how to get you the house you want at a reduced price.
Communication is critical as well. A good agent should be accessible and adapt their communications style to meet your needs. Whether you prefer text, email, or phone calls, your agent should accommodate and be available anytime you need them.
Sometimes choosing the right real estate agent just comes down to trusting your gut. Buying a home is an emotional journey, with many peaks and valleys along the way. Having someone you trust and feel comfortable with is important because you are about to go down a long and winding road together.
Finding The Right Home
Once you have selected the agent that will help you with the home buying process, you are ready to start the home search. This will be a collaborative effort between you and your agent, and by following the steps below you can ensure it ends with you in the home you want.
Start By Dreaming
Start this process of finding your dream home by talking to your real estate about - you guessed it - your dreams! Tell them how you envision your future and what a perfect home buying experience looks like to you. This can mean sharing information about your career, family, or any other aspects of your life that will be affected by the next place you call home.
Understanding where you want to be in the future will help you and your agent define how to get there. If you know you will be at the same job for a while and don't like a long commute, your search will zero in on neighborhoods near the office.
If you have kids or plan on having them in the next few years, the availability of good schools will be a key factor in your house hunt. If you want to travel more with your kids growing up and leaving home, a small house might be just the right thing for your new “empty nester” lifestyle.
Find Your Size
Speaking of home size, be sure to think about how big of a house you are interested in at the beginning of the search process. Challenge yourself to think about how big of a house you really need. Is a 5,000 square foot house really necessary or would a 2,500 square foot home suit you just fine? Bigger isn't always better, but it's almost always more expensive, so don't buy a larger house if you don’t need it.
Larger homes mean more energy costs, as they take more fuel and electricity to heat and cool. They also come with larger maintenance costs. Replacing a roof, for example, is priced by the square foot. This is true for remodeling bathrooms, kitchens and other parts of the home as well. In a smaller home, projects like these come in at a fraction of the cost.
If you and your agent know the amount of square footage you need, the home hunt becomes much more focused, as you can eliminate larger homes from the search. Don't pass on houses that might seem too small at first though. Sometimes there are opportunities to add some space in a cost effective way. Your real estate agent should be able to identify these opportunities if they exist in each house you see.
Use Technology To Aid Your Search
When a home is listed for sale, the listing agent puts photos, disclosures and other information into a multiple listings service (MLS). This is a system for realtors where they search for homes in the real estate markets they serve. The MLS also feeds information to hundreds of other websites that consumers can browse themselves. Sites like Zillow, Trulia, and Realtor.com all let prospective homebuyers peruse houses before seeing them in person.
Your agent will be searching for houses at the same time you do, sending you properties they think you might like to see. Listen to their assessments of each house, as they have the experience and expertise to notice things you may not. If you send them a link to a house you might be interested in, ask what they think before requesting a showing.
Keep in mind that real estate listings feature pictures of a house that are usually done by a professional photographer with the directive to show the house in the best possible light. This means pictures can be deceiving, so there’s no substitute for seeing a house in person.
Do A Drive By Before A Showing
Before you ask an agent to show you a home in person, do a drive by first. There’s a lot you can tell about a home from the outside. Curb appeal (or lack thereof) is very telling. If someone doesnt maintain the outside of their home, they probably don't maintain the inside either.
In addition, you can tell a lot about the surrounding neighborhood by driving around. There’s no point in walking through a home and deciding if you like it or not when you already know you don't like the location.
Make The Most Out Of Your Showings
When you get to see a house in person with your agent, come prepared, pay attention to all the details and ask lots of questions. This isn't just a walk through a department store to see if there is anything you'd like to buy. It could be your next home, so take it seriously.
Before you go to a showing, do as much research on the house as you can. Beyond what is online, ask your agent to provide as much information as they can. Seller’s disclosures are facts about the house. The seller needs to let everyone know all the crucial information when the listing is made. This can include disclosures about any water that has been in the basement or if some appliances in the house dont work. Ask your agent for these documents as well as any other information they can get from the listing agent. This can include the reason the owners are selling, information on any other offers people have made on the house, and other insights that will help inform your showing.
When you go through the house, focus on the fundamental elements of the home. Is it the right size? Is the floorplan conducive to your daily life? Is the kitchen big enough? Is the back yard the right size for you and your family? Try not to focus on trivial things like paint color, dust, or other things you can easily change after moving in.
If something seems off or doesn't make sense, ask your agent about it. They do a lot of showings, so they know the right things to look for and the answers to most of your questions about the home. If they don't know the answer, they will definitely know the right person to go for to get clarity.
Try not to get high or low at a showing if you can help it. Getting too excited about a home when you first see it in person might lead you to overlooking serious problems with the house if you find them. Conversely, if you don't like something about a home early in a showing and get turned off for the rest of the showing, you might miss out on the perfect home that just needed a few fixes. You also want to stay balanced with your emotions so they don't affect negotiations if you decide to make an offer on a house. If you fall deeply in love with a home, you are much more likely to over pay for it.
Making An Offer
Once you find your dream home, or just your “good enough for now” home, it’s time to talk to your agent about making an offer. The purchase price you initially offer will be recommended by your agent based on a number of factors.
If there are a lot of other buyers interested in the home, you will likely need to come in at or above the asking price. 2021 was a seller’s market - one where inventory is low and buyer demand is high - and home prices were incredibly high. This meant buyers had put in offers well over asking price.
A seller’s market also means getting creative with the other aspects of your offer as well. Adding an escalation clause is one example. This means you commit to paying a certain amount more than any other verified offer. If you do make an offer over asking, consider an appraisal gap. This is an addendum that indicates you will pay the price you are offering even if the home doesn't appraise at that value. Keep in mind that your lender will only lend you what the house appraises for, so you will have to cover the difference with cash.
Writing a personal letter to the seller is another tactic for enhancing your offer. Sometimes called “love letters” these notes from the buyer to the seller explain why they love the home and why they are so excited at the possibility of living in it. This needs to be done carefully though, because if you share too much personal information the owner of the home might choose you for the wrong reason. Sellers cannot select or reject an offer based on the race, color, national origin, religion, sex, familial status, or disability of the buyer, according to the National Association of Realtors®.
To show your commitment to consummating the deal, consider a large earnest money deposit (EMD). This is money you place in your real estate broker’s escrow account once the offer is accepted and you don't get it back until you get to the closing table or the contract is canceled with signatures from both you and the seller. EMDs are usually in the range of 1 to 2 percent of the purchase price, but upping that to 10 percent or more shows the sellers you are serious.
After your offer is accepted, you should always get a home inspection done. Inspectors go through every part of the house, inside and out, to determine if there are any defects. They will provide you with a detailed report covering everything from small things like peeling paint to large issues like a leaky roof.
Go over the report with your agent and think about what problems you want to ask the seller to fix or pay for. Try to concentrate on safety issues or high priced repairs. This isn't the time to decide you're not happy with the color of the bathroom counters. Instead, if the home needs a new roof, that is something you should ask the seller to address.
Once you and your agent decide what inspection items to ask the seller to address, you provide them with a notice of objection addendum. This addendum can ask the sellers to fix the problems, provide you with cash or credits at the closing, or reduce the sale price of the house. The sellers will respond to each item and, once negotiated, a resolution is agreed upon or the contract becomes null and void.
Once the inspection is done, the last big hurdle on the way to closing is the appraisal. This is a valuation of the home ordered by your lender to make sure it’s worth what you are paying before they lend you the funds to buy it. If you are paying cash, there is no appraisal needed.
A professional appraiser reviews the home and compares it to recent sales in the area to determine it’s worth. If it appraises at or above the sale price, things keep moving along toward closing. If it’s value is determined to be under the contract price, negotiations resume.
If this happens, you can ask the seller to reduce the sales price to the appraised value. They don't have to, but they usually will come down on price a bit. This is because if they walk away from the deal and work with a new buyer, the same thing will probably happen again.
After a quick final walkthrough of the home to make sure everything is as you remember it, you are on your way to the closing table. Your lender will have taken you through your payment and closing costs, so there shouldn't be any surprises here. Make sure you talk to the title company, your agent, and your lender about property taxes, as these can change considerably when real estate changes hands.
Again, there shouldn't be any surprises, but you should still pay attention to all the documents you will sign at closing. The title company representative will be able to answer any questions, so make sure you speak up if something doesn't make sense.
Buying a house is a complicated endeavor, but, with the right information, you can be successful. By following the steps outlined here and continuing your research to find more tips for buying a house, you can ensure a successful home hunt.