Steps to Buying a House: Home Buying 101
Updated: Jun 3, 2023
*Not financial advice - your money, your choice*
Are you ready to embark on the journey of finding your dream home? Me neither! Let’s get started.
House from Creazilla.com
Some things you'll need to know before getting into the nitty-gritty:
What is "Escrow"?
Escrow is a legal arrangement where a third party temporarily holds money or property until a particular condition has been met by one of the two transacting parties
What is a "Credit Score"?
A Credit Score is given to you from one of the 3 credit bureaus: Equifax, Experian, Transunion
You can get your credit score for free from each of them or your full credit report (1x per year, for free) from freecreditreport.com
When you're looking for a home, don't be making any big purchases that may affect your credit (loans for cars, specifically) especially if you're in escrow when this happens it can destroy your debt to income ratio and make the deal fall apart
What is a Mortgage?
The loan that you take out from the lender (see below) to finance the purchase of a property.
These are typically paid out over 15 or 30 years with regular payments that include principal (cash that goes towards the value of the home) and interest (paid to the lender for taking on the risk of the loan).
The terms of the loan like interest rate, length of the loan, and monthly payment amount are determined by the lender based on credit score, income, down payment (how much cash you pay up-front), and the value of the property being purchased.
The property is then collateral for the loan which means that if you fail to make your mortgage payments, the lender has the right to foreclose (kick you out) on the property and sell it to recover their money.
What is "The Lender"?
In the context of getting a home, a lender is a financial institution (bank, usually) or individual that provides you with the funds to purchase a property.
The lender will typically provide you with the mortgage loan, which you will pay back monthly with interest.
The lender will take into account your credit score, income, and other financial info to determine the size of the loan you can receive and the interest rate you will be charged.
An important note here is that a big bank will sometimes offer a lower rate but in return you may get poor communication and a prolonged escrow to closing period among other things; even more so with online lenders like Rocket Mortgage. Local lenders can typically make an easier transaction for the seller and their agent.
What is a "Mortgage Broker"?
The person that can connect you with the lender is often called a mortgage broker (they usually take a fee) and can have relationships with the lender.
They can provide a range of services including assessing the borrower's financial situation, identifying suitable lenders and loan products, submitting the loan application and negotiating terms on the borrowers behalf.
What is a "REALTOR®" vs. "Real Estate Broker"?
A REALTOR® is required to spell the name with the little restricted logo and typically indicates that your agent has done more in the way of education and ethics training
REALTOR®s also need to be members of the National Association of Realtors and as a member they subscribe to the standards of the association and it's code of ethics (basically a REALTOR® is held to higher standards than a "Real Estate Broker").
A Real Estate Broker is someone who has taken education beyond the real estate agent level (as do REALTOR®s which is why I prefer them).
The extra education for brokers includes ethics, contracts, taxes, insurance and legal issues as well as how the law applies to a brokerage, investments, construction, and property management.
Read more on the differences here
THE NITTY GRITTY
Step 1: Finding a Lender / Shopping Around for a Mortgage
Before you jump into Zillow and The Land of Open Houses, you’ll need to know how much you can afford. That’s where finding a lender comes in. But, reign it in, cowboy! Not so fast!
Don’t jump on the first offer that comes your way. This is the biggest purchase and financial decision you’ll ever make aside from getting married and dying, ideally separately. So, take your time to shop.
Also, it may not make sense to buy in your area so make sure to run the numbers in the rent vs. buy calculator from Nerdwallet before doing anything. It's important to remember the people that tell us we need to buy homes are largely people that benefit from you buying (i.e. people working in real estate or people that already own real estate... yes, that includes your parents).
Check out the different lenders' websites to see what kinds of loans they offer and their rates. Make sure you're comparing apples to apples regarding fees and closing costs and do not forget to check out their reviews on Yelp. OR just search "mortgage lenders/brokers" on Yelp for the area you're searching in.
You can also go through a mortgage broker to find a lender but that may cost you some $.
Keep in mind that your existing bank or credit union may also have some great deals on mortgages too so don't be afraid to give 'em a ring.
Also, for transparency, all home lenders and banks must follow TILA guidelines (Truth in Lending Act). This means a LOT of transparency, disclosures and upfront quotes that are honest about the rates you're going to pay.
Once you’ve narrowed your options down, it’s time to get pre-approved. This will give you a better idea of how much you can spend on a home and help you avoid any heartbreak. So, gather up the financial documents the lenders ask for, fill out the applications, and cross your fingers (a lot of those documents are standardized by the way so a good hack is to share the same Google Docs folder with the lenders)!
Step 2: Finding a REALTOR®
Now that you know what kind of house you’re after and what you can afford, it’s time to find someone to help you find it and get a deal. REALTOR® time! Not all are created equal though, so if you don’t already know them it’s super important to do your homework.
If you don’t know one already, start by asking friends and family for referrals but don’t just take their word for it. Do your own research, check out their websites, and read reviews. If you'd prefer searching for a REALTOR® online, here are some websites you can use:
exp Realty *Disclaimer* I'm invested in this company
When you meet with potential REALTOR®s, ask them some tough questions.
How long have you been in the business?
What’s your success rate?
Can you provide references?
Keep in mind that whether or not you go with a REALTOR® or a Real Estate Broker, all Real Estate Agents must follow Fair Housing Guidelines.
But most importantly, ask yourself if you like them and if you feel comfortable around them. You’ll be spending LOTS of time together!
Step 3: Shopping Around
Now that you’ve got your pre-approval letter in hand and a trusty REALTOR® by your side, it’s time to shop! But don’t let those beautiful professional photos fool you. It’s important to look past the staging and really envision yourself in the home.
Ask yourself:
Does this house fit my needs?
Is it in a good location?
Can I see myself dropping a glass of red wine on my white shag carpet?
And BE PICKY. This is your home. Take your time, see as many homes as you need to, and don’t settle for less than what fits your wants and needs (and budget).
Summary Example
The house is $550K
You get approved for $400K on a 30 year mortgage; $400K + $100K downpayment ($500k total) is the max you could offer on the house.
Your max offer is accepted!
You put 20% down; that's $100,000 for the down-payment
You now have $400K left to pay over the next 30 years, with interest
Your interest rate is 6.909% (today's rates with a 780+ credit score)
Your monthly payment is now $3,031 (includes principal, interest, insurance, taxes & fees)
Given that it is recommended that your home costs not exceed 30% of your pre-tax monthly income, you would need to be making at least $9,093/mo
That said, if you rent out 1 room at $1K/mo you'd need a monthly income of $6,093/mo and if you rent out 2 rooms at $1K/mo you'd need a monthly income of $3,093/mo (using the same 30% rule)
I used the mortgage calculator from Bankrate (pic below) to figure this out and you can too! Click here.
A note from a REALTOR® on marital status and home-buying:
"Although being married vs being two single persons doesn't change what you may qualify for, it's sometimes better to have only one spouse/person apply for the loan vs both.
When applying jointly, lenders usually use the lower of the two credit scores so if one person has a drastically lower score that's a factor.
If both are similar, however, it can be an advantage to apply jointly if the other partner has lower debt to income ratio, and the overall joint income will significantly boost buying power."
- Justin Mucklestone, REALTOR®
justinmucklestone@johnlscott.com 206-914-6861
*Disclaimer* Justin a REALTOR® who is nearing his degree in real estate law & BAR exam & has $17.8MM+ in sales; he knows his sh*t. He also happens to be my REALTOR®, and friend, and was a great help with this article. No-one was paid for this but feel free to reach out to him if you need an agent :)
Buying a home can be a long and sometimes frustrating process, but with a bit of humor and some research, you can make it a fun and exciting journey. So, grab that pen and paper (or Google Sheets if you’re like me), find that lender and REALTOR®, and get ready to find your home!
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