The Home Buying Journey: A Step-by-Step Guide to Finding and Securing Your Dream Home

For those who have never purchased a home, the complexity of the process may come as a surprise. It is important to remember that this involves a significant financial investment, likely the largest one ever made. Therefore, it is crucial to approach this endeavor with care and precision.

Unlike buying shoes, where one can simply select a pair from a store and return or exchange them if unsatisfactory, purchasing a home is a far more involved decision. Even buying a car, which requires more deliberation than shoes due to the higher cost and complexity, pales in comparison to the home-buying process.

Buying a home is a much more consequential decision than buying a car. The financial commitment is substantial, the transaction costs are high, and rectifying a mistake can be both difficult and costly. However, there are several steps to take to ensure the best possible outcome, considering one’s qualifications, goals, and concerns, and to secure the most suitable financing.

This article provides a step-by-step guide to navigating the home-buying process effectively, aiming to help buyers succeed in this significant venture.

Secure Financing First

The initial step in the home-buying process should begin with securing financing. Whether the intention is to purchase a home imminently or to start shopping in a year, consulting with an experienced, competent, and ethical mortgage advisor is crucial.

During this initial consultation, the mortgage advisor will evaluate how an underwriter will view the buyer’s income, assets, and credit. This assessment will determine if any improvements to the financial situation are necessary.

Questions such as whether to pay off debt or retain cash for a down payment or closing costs, or whether to improve a credit score to qualify for a better interest rate, need to be addressed. The correct approach varies based on individual circumstances, and a baseline assessment is essential to identify the best strategy.

Starting with a comprehensive financial consultation is therefore recommended.

Prepare and Evaluate Documents

The initial step in the home-buying process involves collecting the necessary documentation that a lender will require for the application. A mortgage advisor will review these documents in the same manner an underwriter will when the formal application is submitted.

While the request for information and documents may seem intrusive or excessive, it is important to remember that the lender is being asked to lend a significant amount of money. To ensure the loan can be repaid, the lender will thoroughly underwrite the application and documentation.

Identifying any potential issues in the documents early on is crucial, as it is preferable to address them before submitting the application rather than encountering problems later in the process.

Understanding Your Credit Report

Running a credit check is a necessary part of the home-buying process. Even if a prospective buyer has a credit report from an online credit company or a bank, and a credit score based on their algorithms, the lender must run the credit through their own system.

The lender’s credit check often reveals issues that online credit companies might miss. Additionally, the credit score provided by these for-profit credit monitoring websites is likely different from the score the lender will see. This discrepancy arises because the algorithms used by these websites are based on estimations of the credit bureaus’ algorithms, leading to potentially significant differences in scores.

Fortunately, if there are issues on the credit report that are affecting the score, there are usually straightforward methods to resolve them and quickly improve the score. If immediate resolution isn’t possible, there are still strategies that can be employed to improve the credit score over time, often more rapidly than expected.

The Impact of Credit Scores on Mortgage Rates

Credit scores play a crucial role in determining the pricing of a mortgage, significantly influenced by both the credit score and the loan-to-value ratio. Consulting with a skilled mortgage advisor is essential for optimizing one’s strategy.

Regardless of where the mortgage is obtained, it is advisable to meet with a mortgage advisor at the outset of considering a home purchase. Establishing a baseline early on helps identify and address any issues that could incur additional costs during the buying process.

To secure the best possible mortgage pricing, the following credit profile criteria are recommended:

• At least two established tradelines with a history of at least 24 months. A tradeline includes bank credit cards (not store cards), car loans, student loans, mortgages, etc.
• No late payments on any account over the last 12 months.
• No late payments on installment loans (mortgage, car, student loan) for at least 24 months.
• A FICO score of at least 740, with some lenders requiring a score of 760 for their best pricing.
• Bankruptcy discharged at least 4 years ago, rather than the common 7-year period.
• No foreclosure or short sale within the last 7 years.

Meeting these criteria typically qualifies a buyer for the best mortgage pricing available. While it is possible to qualify for a loan without meeting all these requirements, it might result in qualifying for a smaller loan or incurring higher upfront costs for the same interest rate. Analyzing these factors is the next step.

Assess Your Maximum Purchase Capacity

There will come a point when a buyer reaches their maximum qualifying limit—the highest purchase price they can afford. The initial consultation aims to identify this limit. While it might seem like a straightforward calculation, the process is more complex due to various factors. It could be that income, debt, credit, or the amount of available funds for the down payment, costs, and reserves are the most limiting factors. A comprehensive review of the entire financial situation is necessary to determine this limit.

Additionally, there are often strategies to help increase this limit. Understanding these strategies requires insight into the factors that influence qualification amounts.

Pricing Factors: Credit Score and Loan-to-Value Ratio

Pricing for a mortgage is significantly influenced by credit score and loan-to-value ratio (LTV), which is the ratio of the mortgage amount to the purchase price (or the purchase price minus the down payment if only one loan is used). The pricing levels are incremental and based on specific thresholds. A typical rate sheet from a lender might show adjustments as follows:

The numbers in the first column represent credit scores, while the numbers across the top denote LTV ratios. The figures in the table indicate the additional cost, often referred to as “points,” added to the upfront cost of the loan to compensate for the higher risk associated with lower credit scores or higher LTV ratios.

For instance, with excellent credit and a 20% down payment, a mortgage could be obtained at a specific interest rate with zero points. However, if the credit score is 725 and the down payment is only 15%, the cost would be 0.5 points higher for the same interest rate. For a typical $400,000 loan, this results in an additional $2,000 in upfront costs to secure the same interest rate as someone with better credit and a higher down payment.

How Does This Relate to Qualification?

The qualification process for a mortgage involves numerous interconnected factors. Your debt-to-income ratio can be influenced by the interest rate, while your down payment affects closing costs. Closing costs can, in turn, be influenced by your credit score, and your credit score may be impacted by the amount of debt you carry. All these elements are interrelated. An experienced mortgage advisor can help navigate how these factors interact to achieve either the highest loan amount possible or the lowest monthly payment, depending on what matters most to you.

For instance, if a buyer has enough for an 18% down payment, mortgage insurance would be required. This insurance might push the debt-to-income ratio beyond acceptable limits. To resolve this, the buyer could either lower the purchase price or, if feasible, cash out some of their 401(k) to increase the down payment to 20%. This adjustment could eliminate the need for mortgage insurance, potentially qualifying the buyer for the desired home and reducing monthly costs while improving the debt-to-income ratio.

Alternatively, if the buyer does not have access to a 401(k) but has excessive revolving debt (typically from credit cards), the minimum monthly payments could make the debt-to-income ratio too high and negatively impact the credit score. Mortgage insurance costs vary based on credit scores and loan-to-value ratios (LTV). For example, mortgage insurance costs increase incrementally at different LTV thresholds, such as at 80.01%, 85.01%, 90.01%, and 95.01% LTV.

In this case, reducing the down payment from 18% to 15.5% could free up funds to pay down credit card debt, improving the debt-to-income ratio. Additionally, this might enhance the credit score enough to lower the mortgage insurance cost.

Clients often ask whether they should prioritize paying off credit cards or saving for a down payment. The answer is not straightforward and depends on individual circumstances, goals, and concerns. Multiple options should be evaluated to provide meaningful advice.

Only after a thorough assessment of these factors can a mortgage advisor determine the maximum amount a buyer qualifies for or, more importantly, what they can comfortably afford.

Assessing Your Financial Comfort

There can be a disparity between what a bank considers affordable and what a buyer personally feels comfortable with. The bank might approve a loan amount that leads to a higher level of debt than the buyer is comfortable assuming.

It is important for buyers to critically evaluate their own comfort level with monthly housing expenses. While homeownership is often a valuable investment, if the financial commitment causes significant stress, it’s crucial to carefully reconsider before proceeding. Meeting with a qualified mortgage advisor will provide a clear understanding of the costs involved, but it’s also essential to create a detailed budget and seek advice from family or financial advisors. The goal is to ensure long-term success, not just to meet immediate requirements until the escrow period ends.

Additionally, for those currently renting, the cost of homeownership will likely be higher initially. While owning a home generally becomes less expensive than renting over time, most people experience a rise in monthly housing costs when they first purchase a home. If home ownership aligns with one’s desires and readiness, the investment can be worthwhile despite the initial increase in expenses.

Secure Your Mortgage Pre-Approval

By this stage, you may already have pre-approval for your mortgage. If not, obtaining pre-approval from a reputable lender is essential for your offers to be considered seriously. Pre-approval can be obtained from a mortgage broker, lender, bank, or credit union. If previous advice was followed and a mortgage advisor was consulted, pre-approval is likely already in place.

If not, the following steps are required to obtain pre-approval from a lender:

Application

To proceed with securing a mortgage, you must formally apply for the loan. This typically involves completing an online application with the chosen lender. Some lenders may also accept loan applications over the phone, filling out the details as you provide them.

Documentation

A pre-approval is only credible if the lender has reviewed documentation that verifies your income, assets, debt, and credit. For most borrowers, the lender will require the following documents:

• Pay stubs covering at least the last 30 days
• W-2 forms for the past two years
• Employment history for at least two years
• Statements for bank, investment, and retirement accounts covering at least 60 days
• Authorization to run a credit report
• Address history for at least two years

For self-employed individuals, those with side businesses, or rental property owners, full tax returns for the past two years will also be needed.

In some cases, additional documentation may be required. While the amount of documentation may seem extensive, it is necessary because, for example, a $500,000 purchase with 20% down means requesting the lender to provide $400,000—an amount often larger than what most borrowers have previously borrowed. In high-cost areas, the amount may exceed $1 million. No prudent lender would approve such a large loan without thorough due diligence. Buyers must understand that providing detailed documentation is essential to demonstrate the ability and willingness to repay the loan.

Underwriting

If a loan officer reviews your documents and provides an opinion that you are qualified, this indicates prequalification rather than preapproval. For an offer to be taken seriously, the loan must undergo underwriting. Underwriting is the process where the lender’s underwriter thoroughly reviews your application and supporting documentation to decide whether the loan can be approved. There are two levels of underwriting: automated and manual.

Automated Underwriting

For most borrowers, automated underwriting is sufficient, particularly during the pre-approval stage. The lender must verify income, assets, and credit by examining your documentation and then submit this information to an automated underwriting system provided by Fannie Mae, Freddie Mac, or a lender-specific system not backed by the U.S. government.

The automated system evaluates your information and predicts the likelihood of successful loan repayment. It then generates an underwriting decision: either approving the loan (contingent on documentation supporting the entered data) or referring it for manual underwriting.

Manual Underwriting

If the automated underwriting system suggests a “refer to manual underwriting” decision or if there is uncertainty about how a human underwriter will interpret the documentation, the loan is then submitted for manual underwriting.

For example, manual underwriting might be required if there has been a recent change in employment. While income from a job in the same industry should generally be accepted, switching industries may prompt the underwriter to assess the income differently.

Underwriters need to confirm that income is stable, predictable, and likely to continue, typically interpreted as maintaining the current level for at least five years. If there is doubt about meeting this criterion, the loan will be submitted for manual underwriting.

Manual underwriting may be necessary for other reasons as well, but the key point is that a human underwriter will ultimately need to approve the loan. Identifying any potential issues upfront is preferable to avoid surprises later in the process.

Moving Forward: Next Steps in Buying a Home

With pre-approval in hand and comfort regarding the down payment, closing costs, and monthly payments, it’s time to move forward with purchasing a home. What are the next steps?

Consider your needs and plans for the next five to seven years. You might find that you have more flexibility than anticipated. Aim to invest in a home with the greatest potential for improvement and appreciation.

Create a Wishlist of Features and Amenities

Clients sometimes fall in love with a home on impulse, such as after attending an open house, which can lead to hasty decisions, especially for significant investments like a $1 million home. The most satisfied clients are typically those who thoughtfully consider their needs, identify areas where they are willing to compromise, and then deliberately search for a home that aligns with their preferences.

Compromise is often necessary, so while you may not be able to get everything on your wish list, it’s crucial to list all the features and amenities you desire. This approach will become clearer as you progress.

Additionally, having a detailed list of priorities helps your real estate agent find a home that fits your needs more efficiently. Being specific about what you want increases the likelihood of identifying homes that will make you happy.

Before proceeding, gather some sticky notes and write down every feature you desire in a home as you review the following sections. For example, if a pool is important to you, simply note “pool” on a sticky note. This exercise will help you clarify your preferences and guide your search effectively.

Location

Starting with location is crucial because it is a factor that cannot be changed, no matter what home is purchased. If the location proves unsatisfactory, it can negatively affect enjoyment of the new home. For first-time homebuyers, it might not be immediately clear which location factors are important. Here are some considerations to help guide the decision-making process:

Proximity to Employment

One of the most common concerns is the distance from home to work. Consider how long the commute will be from the neighborhood you’re interested in and whether this is acceptable. Some clients prefer a commute of no more than 15 minutes, while others are comfortable with up to 90 minutes. Think about your preferred commuting method and time, including whether you’ll be traveling during rush hour.

Additionally, consider your job stability. If there is a possibility of switching employers soon, the commute to your current job might be less significant since it could change.

Proximity to Amenities

Beyond work, consider where you like to spend your free time. Do you prefer being close to shopping, religious institutions, beaches, or parks? Determine how important it is for you to be near these amenities and whether you want to walk or drive. For instance, some clients value being within walking distance of restaurants in a downtown area or a temple, while parents of young children might prioritize proximity to schools, which becomes less relevant as children grow older.

For example, the author prefers living near a marina due to a passion for sailing. This personal preference highlights the importance of identifying what needs to be within walking distance or a short drive based on individual interests and lifestyle.

Distance From Negative Factors

It’s important to consider features you’d prefer to avoid when choosing a location for your new home. For instance, families with children and pets might want to steer clear of busy streets, while others may want to avoid living near industrial properties or in the flight path of a major airport.

Sensitivity to such negative influences varies from person to person, so what might be a problem for some may not affect others. Identifying these factors that you wish to avoid is crucial. Here are some examples to get started, though your list may include other “can’t-haves” that are specific to you:

• Heavy traffic
• Noise from uncontrollable external sources
• Unpleasant or toxic odors (e.g., from an auto body shop)
• Proximity to a school (preferences vary widely)

As you explore neighborhoods, be attentive to any issues or features that might not be typical in a residential area. Ask yourself whether these factors would be bothersome and if you can live with them. Document these observations promptly to keep track of your preferences and concerns.

Property Type

Once the desired location is determined, the choice of property type often becomes clearer. While many families prefer a detached single-family home with a yard, this may not be feasible for everyone, either due to budget constraints or personal preference. Like location, the type of property is a fixed aspect of your home, so it’s important to weigh the pros and cons of different housing types.

Single Family Detached Housing

A single-family detached home is designed for occupancy by one family, is separate from other structures, and usually includes some land.

Pros:

• This type of housing often represents the American Dream, complete with a spacious lawn and perhaps a white picket fence.
• Owners enjoy a private piece of land, greater freedom in home customization, and less restrictive homeowner association (HOA) rules compared to condos.

Cons:

• Maintenance responsibilities fall entirely on the homeowner, which can be a significant commitment.
• Generally, a detached home costs more than a condo, both in terms of purchase price and ongoing upkeep.

For those who envision living in a suburban setting with ample space, a single-family detached home may be the ideal choice.

Condominium

A condominium often resembles an apartment in its living experience. This type of housing might be appealing if the communal lifestyle suits your preferences. Condos are typically found in multi-story buildings and offer shared amenities such as a pool, clubhouse, or even a park and children’s play area. Unlike a single-family home, condo owners do not own the structure itself but rather the airspace between the walls, floor, and ceiling. The land beneath and the sky above are not part of the individual ownership.

Condo owners share ownership of common amenities with other residents, proportionate to the number of units in the development. This means each owner has a fractional interest in shared features like the pool and clubhouse.

Pros:

• Exterior maintenance and repairs are handled by the homeowners’ association (HOA), reducing personal upkeep responsibilities.
• Access to communal amenities is typically extensive.
• Condos foster a community living environment.

Cons:

• The HOA enforces community rules and bylaws, which might sometimes be restrictive.
• Monthly HOA dues are required to cover upkeep, insurance, and other communal costs.

Condominium living might be ideal for individuals who are young and social, or even for active seniors looking for a vibrant community with maintenance-free living. Some condos come with small yards and may resemble single-family homes but still include shared amenities. The term “condo” specifically refers to the type of legal ownership rather than the architectural style.

The term “townhouse” refers to an architectural style rather than a type of legal ownership. Townhouses, often described as row houses, are attached homes arranged in a row. Unlike condos, the term does not denote a specific ownership model. Townhouses can be single-family homes, condos, or part of a planned unit development (PUD), so the ownership structure varies.

Planned Unit Development (PUD)

A Planned Unit Development (PUD) offers a blend of community living with more ownership rights compared to a condominium. Unlike condos, where you own only the airspace within the walls, a PUD allows you to own the land beneath your unit, the airspace above, and often a defined patio or small yard area. This means PUDs are not stacked like condos, and you have more control over the land surrounding your home.

Pros:

• Ownership includes both the land and the living space, providing more personal property than a condo.
• Community living with additional personal space, such as a yard or patio.

Cons:

• Maintenance and community rules may still be managed by a homeowners’ association (HOA), similar to a condo.
• HOA dues and rules may apply, and community amenities and upkeep are shared.

If you value community living but prefer owning more than just the airspace of a condo, a PUD might be a good fit for you. The advantages and drawbacks of PUD ownership are quite similar to those of condo ownership, with the key difference being the greater extent of personal property ownership.

Cooperative (Co-op)

Cooperatives (or co-ops) are less common in the western part of the United States but are more prevalent on the East Coast. In a co-op, residents form a corporation to purchase an apartment building. Each resident buys shares in the corporation, which grants them the right to occupy a specific unit. Unlike traditional homeownership, you do not own real estate directly but hold shares in the corporation that owns the building.

Pros:

• Similar community benefits and living arrangements as condos, including shared amenities and maintenance.

Cons:

• Financing a co-op can be challenging, as lenders may be hesitant to accept shares in a corporation as collateral instead of actual real estate.
• Ownership involves holding shares rather than owning real estate, which can limit traditional mortgage options and create potential complications in securing financing.

Co-op ownership has similarities to condo ownership, including shared community features and maintenance responsibilities. However, the unique financing challenges and ownership structure may influence whether this option suits your needs.

While there are other forms of property ownership, such as mobile homes and land leases, the four types described above—Single Family Detached Housing, Condominiums, Planned Unit Developments (PUDs), and Cooperatives (Co-ops)—cover nearly all residential real estate options in the US.

Just like the location of your property, the type of ownership you choose is a fixed decision. It’s essential to consider what aspects are most important to you before making a purchase. Once you’ve chosen a property type, you will be committed to it, so take the time to evaluate your options carefully.

Size and Rooms

Everyone desires some elbow room, but you might find you don’t need as much space as you think. More space typically means a higher purchase price and greater maintenance costs. If having plenty of room is important to you, jot down a minimum square footage number on your sticky note. However, space might be an area where you can afford to compromise more than you initially think. Here’s why:

Historical Perspective on Space

In the past, families managed with less space. For instance, a typical American family used to comfortably raise two children in a two-bedroom home. Over the years, homes have grown significantly in size. According to 24/7 Wall-Street, the average size of a new home in the US increased from about 1,048 square feet in 1920 to 2,657 square feet in 2014. At the same time, the average household size decreased from 4.34 people to 2.54.

In 1920, the average space per person was 242 square feet. By 2014, it had grown to 1,046 square feet per person. Do we really need over four times as much space per person now compared to our grandparents? Probably not.

If the cost of homes feels prohibitive, consider opting for a smaller home. With the right approach, you can make a smaller space work effectively.

What to Look For

When searching for a smaller home, it’s crucial to start by evaluating how one currently uses their existing space. Consider where most time is spent and what activities are engaged in during that time. Identifying moments of happiness in the current home can also provide valuable insights.

The key to a successful smaller home lies in an efficient floor plan. A well-designed, compact space can offer more livable room than a larger home with poorly utilized areas. It’s advisable to avoid “wasted” spaces such as expansive hallways and excessively large rooms, as well as unnecessary rooms like a formal dining area, unless frequent entertaining is a priority.

For those who enjoy cooking, an efficient kitchen is essential. However, if cooking together is a frequent activity, additional space may be needed.

A large master bathroom can be appealing, but consider how much time is actually spent in this space. A combination of a tub or shower, double sink, and a commode typically meets the needs of most families.

Maximizing natural light can make a small home feel more spacious. Homes with ample windows are ideal, but adding features like skylights or light tunnels can also enhance brightness if additional windows aren’t feasible.

Effective use of outdoor space can further expand the feeling of a small home. Access to a front porch, back patio, or deck that extends the living area can significantly enhance the overall living experience.

Why Buy a Smaller House?

The primary advantage of purchasing a smaller house is cost. Smaller homes are less expensive to construct, which allows builders to offer them at lower prices. Additionally, smaller existing homes typically sell for less than their larger counterparts. This translates to a reduced down payment requirement, lower mortgage payments, and decreased property taxes and insurance costs.

Energy efficiency is another significant benefit. A smaller home generally incurs lower heating and cooling expenses compared to a larger house of similar construction. Moreover, for those concerned about environmental impact, a smaller home results in a smaller ecological footprint.

An additional, though less obvious, benefit is the tendency to accumulate fewer possessions. With limited space, there is less room for unnecessary items. This can lead to fewer belongings, which is advantageous when eventually transitioning to a larger home. Less clutter means more financial savings and a more organized living environment.

Lastly, embracing the benefits of a smaller house allows individuals to stop spending on rent and start building equity in their own property sooner.

Amenities

Everyone desires certain luxuries in their lives, and having these features available in one’s own home can be truly appealing. However, many of these amenities come with an added cost, leading most individuals to make compromises. Common amenities that many clients have sought include:

• A gourmet kitchen for culinary enthusiasts
• A large backyard for entertaining guests
• A pool for exercise and relaxation during summer
• A fireplace for cozy winter nights
• A master bathroom with a soaking tub

As expected, incorporating more luxuries increases the overall cost. Before beginning a home search, it’s advisable to make a list of desired features and categorize them into must-haves, desirable items, and those that can be reasonably omitted.

Consider also the feasibility of adding certain features later. While remodeling a kitchen can be expensive but generally achievable, installing a pool can be costly and complicated, especially if backyard access is limited. Conversely, adding a covered patio and built-in barbecue is relatively straightforward and cost-effective.

Evaluate the importance of each amenity and the practicality of adding it later if it is not present in the initial home search. Determine not just what is wanted, but why it is desired. Sometimes, it is possible to find alternative solutions that meet the core needs while still achieving the overall goals.

Style

When it comes to architectural design, the significance of curb appeal may become more apparent during the home shopping process. While style can be modified, it often comes with a significant expense. In real estate terms, the initial visual impact when arriving home is referred to as “curb appeal.”

Initially, one might not have a clear preference for architectural style, but as they explore various homes, their taste will start to emerge. If style becomes an important factor, it’s beneficial to be specific rather than just noting “style” on a list. For example, indicate preferences such as “ranch style” or “bungalow” if those are desired. Personal preferences vary; for instance, a fan of Cape Cod-style homes might find joy in the classic charm of this style, enjoying the aesthetic appeal each time they arrive home.

Organize Your Priorities

To consolidate your preferences, start by using the sticky notes you’ve been compiling. Find a wall or another vertical surface to work with. Review the notes and identify the ones that hold the most significance. It might be helpful to begin with location factors and property type, as these are aspects that cannot be changed. Position the most critical feature at the top of the wall. Place the next most important feature directly beneath it, and continue this process until all the sticky notes are displayed.

After arranging the notes, step away for at least an hour. Return to reassess and adjust the priorities if needed, as it’s common to reconsider their importance. Repeat this process the next day to ensure a refined list.

This exercise will help outline the ideal characteristics of a new home. While it’s likely that the budget won’t accommodate all desired features, focusing on the top few essential aspects will increase the likelihood of long-term satisfaction with the new home.

Starting the Home Search

With a clear idea of the ideal home in mind, it’s time to start the search for a new residence.

Choosing a Realtor

If a realtor hasn’t been selected yet, now is the time to do so, especially since pre-approval is in place. This realtor will be a crucial partner throughout the home-buying process, representing the buyer in one of the most significant financial transactions of their life. The chosen realtor should be someone whose company is enjoyable and whose professionalism and ethical standards are trustworthy. Additional factors to consider include:

• Referral: An agent recommended by someone trusted.
• Local Knowledge: An agent familiar with both buyers and sellers in the desired city and market area.
• Experience: An agent with substantial experience or strong support from a seasoned broker or mentor.
• Business Volume: An agent with a balanced number of transactions—enough to be experienced but not so many that they cannot provide personalized attention. The ideal number of transactions will vary by region; inquire about the agent’s transaction history over the past three years to gauge their suitability.
• Broker/Company: While national real estate firms may have strong reputations, it’s important to assess the local branch and managing broker. The quality of the local office often reflects the overall reputation of the company, so choosing a reputable broker can be indicative of the agent’s professionalism and competence.

A Few More Important Points

While it is possible to represent oneself and seek out a for-sale-by-owner (FSBO) property, there are limitations to this approach. The selection of properties will be quite limited, and it is unlikely that the buyer will find a home that meets all their key criteria. Additionally, there is no assurance that the price will reflect the absence of a commission paid to a seller’s agent.

Attending open houses or searching online for homes and working with the listing agent is another option, but this means the agent will be balancing the buyer’s interests with the seller’s. This dual representation may not offer the best outcome for the buyer, potentially impacting the price and terms of the deal.

The true value of a realtor extends beyond access to listings. It includes their knowledge of the neighborhood, market trends, competitive listings, home evaluations, negotiation skills throughout the process (not just initially), and their ability to guide the buyer through every step.

Prospective buyers should request a buyer orientation from their realtor. This session will cover important documents, address questions, and provide an overview of the process and strategies for purchasing a home. Even for those who have bought a home before, understanding current contracts and market conditions can streamline the process and ensure a smoother experience.

Time to Tour Listings

It’s now time to start visiting homes. With the neighborhoods selected based on affordability and preference, the next step involves the realtor searching current listings and selecting approximately 5 to 10 homes to show. From this selection, the buyer should narrow down the list to no more than four homes, as viewing more in a single day may not allow for a thorough evaluation of each property.

If none of the homes initially seem appealing enough to make an offer, there is no need to rush. The combined cost of buying and selling a home typically amounts to 8 to 10% of the property’s price, making it a significant decision. There will be additional homes to consider later, including new listings and those previously dismissed upon re-evaluation.

It’s important for the realtor to better assist the buyer if their preferences and reasons for choosing them are clearly communicated. If no suitable options are found after the first weekend of viewings, revisiting the list of needs and wants might be necessary, as outlined earlier.

In competitive markets, some homes may sell before they are listed on the MLS. Agents with strong networks and connections often have early access to these properties.

When a desirable home is found, it’s time to make an offer!

Making Offers

The approach to making offers can differ based on location, housing type, and current market conditions (whether it’s a buyers’ or sellers’ market). It’s essential to remember that real estate is often unique. If a particular home stands out as the ideal choice, it’s important not to hesitate with the offer. The most satisfied homeowners are usually those who found a home they love, rather than those who focused solely on negotiating a deal.

The realtor will play a crucial role in this process. With their knowledge of the local market and their experience, they likely have connections with other real estate agents, including those representing the sellers of the desired property. This network can be valuable as the realtor can communicate with the listing agent to understand the presence of other offers and the sellers’ true priorities.

A less-known aspect of real estate is that sellers may not always prioritize the highest price. Factors such as a quick or guaranteed closing, the option for a rent-back period to allow time to move, or even the identity of the buyer can influence their decision. While it is illegal to discriminate based on protected classes, sellers might prefer buyers who intend to live in the home over entities like large hedge funds that may convert properties into multi-family units.

An offer crafted with thorough knowledge is often more successful. This is why a skilled agent is essential—they know how to present a compelling offer for the specific home and manage the entire transaction through to closing.

The Offer and Escrow Process

Here is an overview of the process from making an offer to closing the deal.

Initial Offer

The initial offer will include key details such as the purchase price, down payment, loan terms, and who will cover the various costs in escrow, as well as who will handle escrow and title services.

It’s important to view the initial offer as just a starting point. While it’s possible the seller might accept it outright, it is more common for them to counter with adjustments to the price, terms, or both.

In some cases, listing agents may instruct selling agents (the buyer’s agent) to submit the “highest and best” offer from the beginning, especially in competitive markets with multiple offers. Even when asked for the best possible offer initially, sellers might still counter with a higher price. A knowledgeable agent will help craft a competitive first offer based on current market conditions, increasing the likelihood of either securing the home with the initial offer or remaining a strong contender if the seller decides to negotiate further.

Counteroffers

After submitting an initial offer, the seller will have a specified period to either accept or counter it. The duration for this response varies based on regional customs and strategic advice from the agent. If the seller chooses to negotiate rather than accept the initial offer, they will issue a counteroffer. It’s important not to take this personally; it’s simply part of the negotiation process. At this stage, the buyer can decide to either accept the seller’s terms, make a counteroffer in return, or walk away from the deal.

Counteroffers can provide valuable insights into what the seller truly desires. For example, if the counteroffer focuses on terms rather than price, it might indicate the seller’s preferences for a quick closing, a longer timeline, or selling the property as-is to avoid repairs.

While multiple rounds of counteroffers can occur, they rarely lead to successful transactions if negotiations drag on excessively. If the buyer is keen on the property, they should seriously consider accepting the terms of the counteroffer promptly. If the buyer is indifferent, they might counter the counteroffer, specifying their desired price and terms or choosing to walk away. However, it’s important to note that after a counteroffer, further negotiations often decrease the likelihood of a successful outcome if additional counteroffers are made.

Moving Forward: The Escrow Process Begins!

Congratulations! A mutual agreement has been reached, and one party has accepted the terms proposed by the other. At this point, the deal moves forward, and the real work begins, with the realtor playing a crucial role.

Once an offer is accepted, it transforms into a legally binding contract. While your realtor is likely not a lawyer, they should be able to provide guidance on the fundamental aspects of the contract’s clauses. It’s important not to overlook or disregard this valuable resource.

Inspections

The contract will likely include contingencies for various inspections. This stage allows the buyer to confirm that the property meets their expectations or to identify issues that may necessitate further negotiations. Since most buyers may not be familiar with these inspection reports, it’s important to understand what to expect.

Title Search

When purchasing a home, buyers are acquiring a bundle of rights along with the property and house itself. This bundle comes with certain restrictions and potential claims on the title that may not always be immediately obvious.

Typical restrictions include easements for utilities or public access, such as sewer lines, power lines, or walkways, which allow others to use parts of the property in designated ways. Even if the buyer owns the entire property, others may have rights to use portions of it.

Liens on the property represent specific claims on its equity. For instance, the county tax collector has a lien to ensure that property taxes are paid. This lien remains even after taxes are paid to guarantee future payments.

Additionally, there may be less obvious claims against the property’s equity. For example, if a contractor has performed work but hasn’t been paid, they might file a lien to secure payment. If the lien remains unpaid by the time of the property transfer, it becomes the new owner’s responsibility.

In community property states, a seller’s spouse may have a legal interest in the property, even if they are not on the title. The title officer will ensure that any such claims are addressed to prevent future disputes.

The title agent conducts a thorough search of the property’s title history and requests additional information from the seller to uncover any hidden claims or limitations. They then issue a homebuyer’s title insurance policy to protect against such issues.

The cost of this insurance is covered by a one-time premium paid at the close of escrow. Although legally optional, the lender will typically require this insurance to protect against any senior liens that could affect the new mortgage.

The title search may be one of the most critical inspections in the home-buying process, yet it is often the least understood. Buyers should review the Preliminary Title Report carefully and consult their realtor for clarification on any unclear points.

Termite Inspection

A pest inspection, often referred to as a termite inspection, must be conducted by a licensed and qualified contractor. This professional will examine the property for signs of termite damage, dry rot, mold, and other issues that could lead to accelerated physical deterioration or pose health risks to occupants.

The findings from this inspection may affect the mortgage process, depending on the type of loan. For instance, with a VA loan, the seller is typically required to complete and pay for any necessary repairs before closing. In other cases, negotiations between the buyer and seller, facilitated by their realtors, will determine the timing, responsibility, and cost of any required repairs.

In such situations, the realtor plays a crucial role in advising on the importance of various repairs and assisting in negotiating with the seller to ensure that necessary issues are addressed appropriately.

Property Inspection

Unlike a termite inspection, which focuses on specific pest-related issues, a property inspection provides a comprehensive evaluation of the home’s overall condition. A property inspector examines all major components of the structure, from the foundation to the roof. They assess the materials, condition, and any necessary repairs for each component.

For example, the inspector might report that the property has a 40-year-old concrete perimeter foundation that is still in good condition, or that the electrical system is a paired copper wire setup requiring upgrades, such as additional grounding or a special outlet near a sink.

The property inspection report can be extensive and may include technical terms that are unfamiliar. If any areas of concern arise, it is important to note them and discuss them with the realtor. While no home will be in perfect condition, understanding the current state of the property and potential future repairs will help in making informed decisions.

Appraisal

The appraisal report aims to determine the fair market value of the property. While the appraiser does conduct a physical inspection, their primary task is to evaluate recent sales of similar homes in the same area and use this data to estimate the value of the home in question.

The process is straightforward: the appraiser reviews sales and current listings of comparable properties and considers what price would have been agreed upon if the transaction involved the home being appraised. By analyzing between four and six comparable properties, the appraiser establishes a range of fair market value and then, using their expertise and current market trends, assigns a specific value to the home.

If there are questions about the appraisal report, it is advisable to consult with the realtor. In cases where the appraisal value is lower than the agreed purchase price, it’s important to note that the appraiser relies on historical market data (sales that occurred weeks or months earlier), whereas the realtor considers current market conditions and future trends. Consequently, there might be a discrepancy between the appraiser’s valuation and the realtor’s opinion, and the appraiser’s assessment may or may not accurately reflect the home’s current value.

Survey

In certain states, a survey is mandatory for every home sale. This report defines the legal boundaries of the property and determines whether any structures on neighboring properties encroach onto yours, or if your structures encroach on theirs.

For most suburban tract homes, surveys are generally not a concern. However, in rural areas, surveys can be crucial. There’s an old story about a surveyor in early 20th-century Monterey County, California, who allegedly didn’t physically conduct most of the surveys he claimed to do. Instead, he purportedly spent his time socializing at local bars and drew assessor’s maps based on what he heard.

Whether this tale is factual or not is uncertain, but it highlights the potential issues that can arise from inaccurate surveys. For example, a property appraised in a remote coastal area had a legal description that didn’t align with the survey marks, leading to a situation where the house was not even on the legally defined property.

Therefore, if a survey is required in your state, it’s likely for good reason. If purchasing an irregularly shaped rural property, consider obtaining a survey even if it is not mandatory.

Closing

After thoroughly reviewing all inspections and being satisfied with the property, the next step is to prepare for closing. Depending on the state, this step might involve a final walk-through or signing documents.

Final Walk-Through

During the final walk-through, the agent will accompany the buyer to inspect the property one last time. The objective is to ensure that the property’s condition remains unchanged and that all items promised in the listing are still present. For instance, if the listing specified that a dishwasher, washer, dryer, fridge, chandelier, or other items would remain, they should still be there. Additionally, the buyer should check for any new damage, such as scuffs on walls, that was not present previously.

This step is crucial, as it is the last opportunity to request corrections or repairs before officially taking ownership. It is important to take this process seriously, avoiding any rush. Taking detailed notes and photos can be helpful during this final review.

Signing Documents

The day has arrived for one of the most exhilarating and nerve-wracking moments of the entire process: signing the documents to become the proud owner of a new home. As you prepare to take on a significant financial commitment, it’s natural to feel a mix of excitement and anxiety. Remember, whether you buy or rent, you will always have a monthly housing obligation. Given that renting isn’t a permanent solution, purchasing a home can be a worthwhile choice.

From this day forward, you’ll start building equity, which is something you can’t achieve just by saving money in a bank account. You’ll also gain ownership of your own piece of land.

When you arrive at the closing table—whether it’s at the escrow company, your kitchen table, or a local coffee shop—you’ll be presented with a substantial stack of documents to sign. Although the volume might seem daunting, most documents fall into one of four categories:

• Certification: Confirmation that the information provided to the lender remains accurate.
• Authorization: Permission for the lender to verify your information and share it with the investor purchasing your loan.
• Disclosures: Information about your rights and the costs associated with the transaction.
• Key Documents: The Grant Deed, which transfers title to the home; The Note, which outlines your repayment obligations; and the Deed of Trust or Mortgage, which uses the home as collateral.

Key Documents at Closing

During the closing process, it’s crucial to pay close attention to four key documents:

1. Settlement Statement: This outlines the costs that need to be paid.
2. Note: This document specifies the terms of the mortgage.
3. Grant Deed: This transfers the title of the property to the buyer.
4. Deed of Trust or Mortgage: Depending on the state, this document pledges the home as collateral for the mortgage.

While at the closing table, it’s unlikely that one will read through all of the terms in the deed of trust or mortgage, as many terms are standard and necessary for securing the loan. However, it’s important to ensure that the names are correct on the deed and that the vesting (title holding) is as desired. Although realtors can provide guidance on vesting, they generally cannot offer legal advice unless they are also licensed attorneys. For any uncertainties, consulting with an attorney and a tax expert is advisable before finalizing how to hold title.

In some states, like California, ownership of the home doesn’t occur immediately after signing. The closing documents must be sent back to the lender for a final review. Once the lender funds the loan and sends the funds to the escrow company, the property is recorded through the County Recorder’s office, usually within a day or two, at which point the buyer officially owns the property.

In other states, known as “wet-funding” states, the process is more immediate. At closing, all parties sign their documents simultaneously, and ownership is transferred as soon as all signatures are completed.

Congratulations on the new home!