How To Buy A House: The Home Buying Process In 10 Steps
Denver, CO
Lawrence Family Properties, LLC Denver, CO
Published on December 3, 2021

How To Buy A House: The Home Buying Process In 10 Steps

Buying a house is likely the largest financial decision a person will make in their lifetime. On the other hand, it is also can be one of the most exciting achievements in an individual’s life. However, for a first-time buyer who is not prepared to do so, the process can be intimidating. In this article, we’ll walk you through each step in buying a house, so you know exactly what to expect and how to prepare.

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Step 1: Understand Your Finances

The first step in the home buying process is to truly understand your own financial position. Knowing this information before you begin will help you enter the market with confidence and allow you to set your expectations when you begin to look at properties. Additionally, if you are entering into this journey with a spouse or partner you need to have a full understanding of each other’s financial history.

So, sit down and thoroughly review your finances. Make sure you have a clear understanding of what you earn and spend on a monthly basis, as well as what savings you have readily available to put towards the purchase of a home. Be sure to consider the lifestyle you want to maintain and leave yourself a cushion in case of emergencies. Be sure to include things like retirement, college funds, and other large expenditures. The next step in understanding your finances is to check your credit score.

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Your Credit Score

The vast majority of individuals purchasing a home do so by securing financing. One of the first items your lender will look at is your credit score. However, you can be one step ahead of them and obtain it yourself with a number of free credit reporting sites. Your most accurate report can be obtained annually at Annual Credit Report. Additionally, you can utilize a credit monitoring program such as Credit Karma.

A conventional loan requires that you have a FICO score of 620 or higher. If you qualify for an FHA loan many lenders only require a score of 580. The VA does not require a specific credit score but many lenders who work with the VA will set their own limits, typically somewhere around 620. Buyers with higher credit scores tend to secure better interest rates and loan terms, so make sure you understand your credit before you get farther into the process.

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Understanding your finances and knowing your credit score beforehand will allow you to have more productive conversations with your lender and real estate agent. You will be able to set limitations, manage your expectations, and most importantly have a more enjoyable home buying experience.

 

Step 2: How Much Home You Can Afford

Before you speak with a lender, it’s helpful to calculate how much home you can afford on your own, or with your partner. A lender will always be sure to tell you the maximum amount money you qualify for, however, it is important to know what you are comfortable spending rather than overextending yourself.

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Typically, we recommend spending no more than 30% of your monthly income on housing costs. These costs include:

  • Principal: The money you borrowed to purchase your home.
  • Interest: The fee the lender charges you to borrow the funds.
  • Taxes: You will pay property taxes to the government based on the location and value of your home.
  • Insurance: Homeowner’s insurance protects your home against any damages.
  • Association Dues: These are fees you must pay if your home belongs to a homeowner’s association. (If your home is not a part of a homeowner’s association, you won’t have to pay these fees.)

There are plenty of tools online you can utilize to estimate these costs. With these tools you can determine what home prices you will be comfortable to with. In turn, this can help you refine your home search and allow you to focus on neighborhoods that will fit your financial situation.

 

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Additional Costs: Down Payment and Closing Costs

In addition to the monthly mortgage payment, there will be additional costs you must pay up front upon purchasing your home.

First and foremost is the down payment on your home. In the past it has always been recommended to have 20% of your home’s value available for the down payment. While this is still an excellent goal, it is not a requirement, and it is no longer the standard. The minimum down payment on a conventional loan is 3% and FHA loans can be obtained with a down payment of 3.5%. However, the more you contribute to your down payment the lower your monthly payment will be, and you will have that much more equity in your home.

The other large expense you need to plan for is closing costs. These are the fees associated with processing and securing your loan. The exact amount you need will fluctuate depending on the loan amount and tax requirements in your area.  You can generally expect closing costs to be about 2% – 4% of the homes purchase price.

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Step 3: Finding A Lender and Mortgage Pre-Approval

The next step is finding a lender and getting pre-approved for your home loan. Many first-time home buyers don’t realize they should shop around for lenders before choosing one, so doing your research can make a big difference.

 

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Contact Multiple Lenders

Interest rates and closing costs are not fixed and will vary between lender. When speaking with a potential lender be prepared to answer questions about your finances. Provide them with your current estimated home price and ask for them to provide you with a loan estimate. By providing the same estimated home price to multiple lenders you can easily compare their loan terms and closing costs.

However, be sure consider the additional factors beyond the terms they can offer. A lender might be offering great rates, but it is important to be comfortable with the person you will be working with. Buying a house is a long and often complicated journey, so it’s important to find a lender you enjoy working with and you feel you can trust.

 

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Mortgage Preapproval

Many first-time home buyers confuse the following terms: Prequalification vs. Preapproval.

Being prequalified for a loan is not a guarantee that you will be able to obtain a loan. Prequalification is merely an estimate as to whether or not your mortgage will be underwritten based simply on the information you provide.

However, when preapproved for a loan you are guaranteed that you’ll be able to obtain the loan, as long as your finances don’t change between preapproval and closing on the home. A preapproval requires the submission of financial documentation by you. Then there is a formal review of your finances, the verification of your income by your employer, proof of assets, and a hard pull of credit rating.

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We highly recommend obtaining a preapproval on your loan. Not only does it tell you exactly how much the lender is willing to let you borrow, it also specifies the costs of obtaining the loan. Being preapproved tells the seller you’re serious about buying, which can make a difference when you begin to make offers, or it you find yourself in a bidding war.

If you want to separate yourself from other home buyers our partners at Versatile Lending make the preapproval process as simple as possible.

 

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Step 4: Finding A Real Estate Agent

Although there are some home buyers who decide they want to do it on their own, having a trusty and reliable real estate agent can make things a lot simpler. It should be known that in most cases the buyer is not responsible for paying their real estate agent. Your agents’ fees will come out of the sellers’ costs. So, as a buyer there is really no reason not to obtain the help of a qualified agent.

Your real estate agent will ensure you find the right home, ask the important questions, make an appropriate offer, and have the power to negotiate. But perhaps even more crucial is that having a real estate expert in your corner can provide you with peace of mind. A real estate agent is, by law, a fiduciary, or someone who always acts in your best interest. Because of this, they are required to be an honest sounding board throughout your decision-making process.

To find the right real estate agent we recommend asking some of these important questions:

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  • What makes you different from other agents?
  • How many clients are you currently working with?
  • What experience do you have finding homes in my price range?
  • How knowledgeable are you about my desired area?

Once you select the best agent for you, they will look over your approval letter, discuss your budget and help you set your priorities.

 

Step 5: Finally Begin Your Home Search

In your first meeting with your real estate agent you should begin to determine where and what type of home you are searching for. Come prepared with a list of exactly what you are looking for in a property. Break this list into Needs vs. Wants.

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Needs are things you are not willing to bend on, such as the type of property (single family home, townhome, condominium, etc.), the minimum number of bedrooms, general location, and the quality of the school district if you have children or plan to down the road. Be as specific as you feel necessary with this list, but keep in mind the more items you denote as must haves the fewer homes you agent will be able to bring to you.

Wants are items that you would like to see in a home but will not be considered deal breakers when you agent brings you properties to review. These might include things such as the number of bathrooms, garage space, or lot size.

With this information your agent will begin your home search. Ideally, they will be sending you any and all listings that fit within your criteria. Then, finally, you can begin looking at homes!

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Touring Neighborhoods and Homes

Hopefully your agent is providing you with plenty of properties to look at. This can be overwhelming, so it is important to be organized and make sure you discuss the various things you like and dislike about each property with your real estate agent. When visiting a listing, take notes and reflect on the house itself as well as the surrounding area. Some things to consider are:

  • The size, style and physical condition of the home
  • The neighborhood the home is in
  • What your commute would be like
  • The schools in the area

The most important thing we tell our clients is do not settle. Sometimes the home search can be exhausting, but in the end, a home buyer who is prepared to look objectively at each property and consider their Needs and Wants will be happy with their decision on the long run.

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Step 6: Making an Offer

When you find a house you want to buy, it’s time to begin the process of making an offer. Ask your real estate agent to run a comparative market analysis to determine a fair price based on recent sales of similar homes in the area. Just because a home is listed at a certain price does not mean it is worth its asking price.

Beyond the price you plan to offer, you should speak to your real estate agent about whether it makes sense to include any contingencies in your offer. A contingency is a stipulation included in an offer that states that if a particular condition is not met, the buyer is free to break the contract without any repercussions.

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Although sellers sometimes balk at offers made with contingencies, there are some contingencies worth making regardless of the seller’s feelings about them.

 

Mortgage Contingency

If your ability to afford the home is dependent on your ability to obtain a loan, you must include a mortgage contingency in your offer. This contingency will make it possible for you to back out of your offer if, for any reason, you’re unable to receive financing.

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Even if you’ve been preapproved for a loan, you should still write this contingency into your offer. If you don’t, you’ll find that you’re still on the hook for the purchasing price regardless of whether you’ve obtained a final underwriting of the mortgage.

 

Inspection Contingency

An inspection contingency is also a worthwhile addition. After you make an offer, you’ll want to get the home inspected to ensure you have a full understanding of the home’s condition. With an inspection contingency, you’ll be able to not only negotiate the offer based on any needed repairs, but you can break the agreement if the home needs more work than you can handle.

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Earnest Money Deposit

Along with your offer, you will be required to provide an earnest money deposit, also known as an escrow deposit. This deposit is money that you provide upfront to show the seller you’re serious about the offer, making the seller feel more comfortable taking their home off the market.

The amount of money included in this deposit can be negotiable. However, an earnest money deposit is typically 1% – 3% of the purchase price. The money is held in an escrow account and applied to your down payment and closing costs at closing.

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If you decide you won’t buy the home for any reason that is not specified in a contingency, the seller gets to keep your earnest money deposit. Therefore it’s vital that you consider the conditions in which you may need to pull out of the contract before submitting an offer.

At the end of the day, including a contingency can be the difference between keeping and losing your earnest money.

 

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Step 7: Request A Home Inspection and Appraisal

You may think you’ve reached the finish line when your offer is accepted, but a few critical steps remain. From here, you’ll need to arrange for a home inspection and appraisal.

 

Home Inspection

The home inspection is important, as it will identify areas where major repairs or renovations require immediate attention as well as any work that needs to be completed in the future. Be sure to hire a professional, third-party home inspector to examine the home you’re preparing to buy.

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If significant repairs are needed, you can request that the seller complete them before closing. If the seller declines to handle the repairs and an agreement can’t be reached, you may be able to withdraw your offer.

If you’ve included an inspection contingency in your contract, you’ll be able to guarantee that either repairs are made, the cost is deducted from the purchase price, or the contract is broken and your earnest money is returned.

 

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Home Appraisal

At this point in the process, your lender will require the home to be appraised before they agree to release any funds. A home appraisal provides an estimate of how much a home is worth based on comparable sales in the area, market trends, public records and a comprehensive inspection of the property.

Keep in mind the lender will only provide funds to cover the appraised value of the house, so if the appraisal comes in below the purchasing price, you’ll have to either negotiate the price or come up with the difference, which is one of the many reasons having a mortgage contingency is in your best interest.

 

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Step 8: Homeowners Insurance

Also in your best interest is homeowners insurance, which works as a safety net to protect your home and finances. Although homeowners insurance isn’t legally mandated, most lenders will require you to have an insurance policy on the home before giving you a loan.

Homeowners insurance covers damage to your home and its surrounding structures as well as stolen or damaged personal property. There are varying levels of coverage, ranging from basic to comprehensive, so be sure to do some research into all available options before deciding which home insurance product is right for you.

 

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Step 9: Final Walkthrough

At this point in the home buying process, you’re probably eager to be done – but don’t neglect the final walkthrough. One last walkthrough of the property can help the buyer if something needs to be fixed by the seller before purchasing the home.

Final walkthroughs typically take place a day or two before closing after the seller has moved out, allowing you to ensure all agreed upon repairs have been completed.

 

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Step 10: Closing on Your New Home

Congratulations! You’ve made it to the final step of the process. When the time comes, make sure you review your Closing Disclosure, which will outline the terms, final closing costs and any outstanding charges or fees included in your loan. Your lender will send the disclosure to you at least 3 days before closing.

During closing, the property title will pass from the seller to you. A closing agent will oversee this process, which typically takes place at a title company, management firm, escrow office or your home.

The closing agent will ensure that all necessary parties are present at closing. The agent acts as a mediator between you and the seller and confirms that all required documents are signed. Once documents have been signed, the agent will ensure that all funds – including closing fees and escrow payments – are paid and properly disbursed.

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During closing, you have two major responsibilities:

  1. Signing legal documents: This includes the Closing Disclosure, promissory note, deed of trust and certificate of occupancy.
  2. Paying closing costs: This may include fees for your mortgage application, appraisal, survey and title search as well as paying your down payment.

 

Know The Home Buying Process Before You Buy

Being a first-time home buyer can be intimidating, but by arming yourself with the necessary knowledge and resources, it doesn’t have to be. By following the steps outlined in this article and working with a trusted real estate agent, you can focus on what really matters: enjoying your new home.

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Our agents at Lawrence Family Properties, LLC assure that you will have a full and complete understanding of each of these steps before you make any decisions. We are confident that while this seems like an intimidating process, we will be by your side the entire time. Please reach out to our team with any questions you may have, we are here to help with any of your homebuying needs and we strive to give you the confidence you need to purchase your fist home.

 

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Lawrence Family Properties, LLC
Lawrence Family Properties, LLC Denver, CO
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(303) 578-9142
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