8 min read | 2020-11-24 | Homeowner Guide |
Covered Home Buying Guide - 10 Steps to Buying a Home
You’ve decided it’s time to buy a home. You’re excited — but you’re also more than a little nervous. As a first-time home buyer, you’re unsure where to begin and what to expect. And it’s the biggest purchase you’ll ever make.
Covered is here to help. We’ve broken down the home buying process into 10 steps, helping you know what to do, when to do it, and why you’ll do any of it. We’ve kept it as simple as possible without leaving out anything crucial. Bottom line, the home buying process isn’t as intimidating as you think. You can be a champion home buyer in no time! Showing the world how adulting gets DONE.
Step 0: Save Diligently for Your Down Payment
“Wait,” you protest. “You said there were only 10 steps!” Well, we’re not really cheating here, because you can’t start the home buying process by starting to save. The saving needs to start years ahead of time.
How much do you need? Most lenders require a 20% down payment. If your down payment is less, you’ll need to factor in the cost of mortgage insurance, which increases your total costs.
Step 1: Figure Out What You Can Afford
Mortgage lenders use credit scores to determine the interest rates and loan terms they offer. So you should begin by checking your credit report. Is everything in order? Does it contain errors? Is your score good enough? Minimum scores vary by mortgage type; the lowest acceptable scores run between 580 and 640.
Next, calculate how much you can afford. Zillow’s tool (if you click on “advanced options”) uses your basic financial information, likely interest rate, and other variables to help you understand how much house you can comfortably afford. Create a budget that accounts for all the variables while giving you some wiggle room for unexpected expenses (e.g., needed repairs).
Step 2: Get Pre-approved for a Mortgage Loan
You want to get pre-approved for a mortgage loan — not just pre-qualified. This means lenders will assess your credit history and financial situation to decide if they’ll offer you a loan, and how much they’ll offer. When you’re ready to secure your mortgage, pre-approval expedites closing. It also verifies how much you can afford, as its dollar amount becomes the high end of your budget.
Get started by reading up on how mortgages work. You just want a basic understanding of the variables at play, like interest rates and types (fixed or adjustable), loan term (e.g., 15-year, 30-year), annual percentage rate (APR), fees, and fine print (e.g., is there a penalty for pre-payment?).
Lenders offer a range of rates, terms, fees, and fine print. So you should take the time to shop around, getting loan estimates from at least three lenders. When you’ve chosen a lender for pre-approval, be ready to provide comprehensive information about your finances, including savings and other assets.
Step 3: Start Figuring Out What You Want
Narrow down what’s important to you in a home. Give yourself a healthy reality check on current market pricing for properties you like. And start identifying your deal breakers. What do you absolutely require in your home (e.g., good schools, walkability)? And what won’t you accept?
Many first-time home buyers go into the process with some fairly gargantuan assumptions about the homes and neighborhoods they want. The reality is that home values, maintenance costs (e.g., HOA fees, lawn care, utilities), property taxes, and finances may point you in a different direction entirely.
Set up a couple of automated searches to send you available properties based on your parameters. Zillow, Redfin, Trulia, and Realtor.com all offer this option. Talk through options and ideas with your real estate agent and people you trust who have experience buying homes.
Step 4: Find a Real Estate Agent Who Gets You
To be clear, you absolutely can find a real estate agent earlier in the home buying process. We’ve only put it here because you must have an agent before proceeding any further.
Finding the right agent is crucial. Your agent will be your advocate throughout the process, so you want to make sure you find a good one. Get referrals. Meet with prospective agents, asking questions to gauge their knowledge and interest. For example, how well do they know the local market? How many homes did they sell last year? Do they seem like they’ll be responsive to your needs and committed to your interests?
Don’t settle for someone who doesn’t seem to get you or your needs. After all, they stand to make a pile of money from selling you a home. (To be clear, YOU don’t pay them. Sellers pay realtor commissions.)
Step 5: Find Your Home
The actual home-shopping process will require significant time and focus. Set aside time each day to review the virtual listings your realtor sends, as well as the listings from your automated searches. Look for “For Sale” signs in target neighborhoods. Let your realtor know ASAP of any homes you’d like to see, and make time to see them ASAP. Depending on how competitive your market is, you may need to move fast.
When touring homes, really look around — and really make sure stuff works. Take detailed notes and photos in each home you’re considering. Consider using a checklist to track your notes.
Once you find a home you like, use the home’s historical data (e.g., property taxes, utilities), the rates and fees from your pre-approval, and closing cost estimates from your real estate agent to run the numbers again. You want to make certain you can afford the house before making an offer.
The best advice we can give? Stay safely within your budget. Your pre-approved amount may be higher. Pretend it isn’t. Have you ever heard the term “house poor”? It’s not something you want to be.
Step 6: Make That Offer
Once you’ve found The One, work with your real estate agent to craft an attractive offer. Your agent will help you determine, based on market conditions, how long the listing’s been on the market, and any visible issues — whether that offer should be above or below the listing price. Your agent will also deliver your offer. Then, hurry up and wait. You may get a straight-up “yes” or “no,” or you may get a counter-offer. If the seller is entertaining other offers, you could be in for a bidding war.
When a seller accepts your offer, the home goes into escrow. Escrow is a little like limbo. It basically means a third party will hold onto your money until you and the seller get all the details ironed out.
Step 7: Get a Home Inspection
Do not skip this step. That beautiful home could be hiding a multitude of costly sins within its walls. The inspection gives you a 360-degree view on the condition of your home, including needed repairs. Do you really want to move blindly forward with a house that needs a new furnace and roof within the next few years?
Here’s the good news: Your inspection report gives you leverage. Post-inspection, it’s common practice to negotiate terms with the seller to address or account for any issues. Your real estate agent can help you figure out what to ask for. Maybe they’ll drop the price by $2,000 to help cover the cost of that new roof. Maybe a repair tech can certify that furnace for three more years.
Step 8: Get an Appraisal
Your mortgage lender will require an appraisal. Fortunately, they’ll usually arrange it for you. An appraisal is an independent, third-party estimate of the value of your home-to-be. It makes sure you’re paying a fair price, given the home’s condition and recent comparable home sales in your neighborhood (aka “comps”).
Step 9: Get Insured
Your mortgage lender will also require that you obtain homeowners insurance as a condition of your loan. So it’s time to find a policy that fits your needs. Get multiple quotes to ensure the right coverage at the best price. Lucky for you, you can pull replacement cost estimates from your fresh-off-the-press appraisal.
Step 10: Sign All of the Things — and Celebrate!
Once you and the seller have worked through any issues arising from the inspection and appraisal, it’s time to get everything signed, sealed, and delivered. At your closing, there will be a literal mountain of paperwork for you to sign. In advance, have your realtor talk you through what to expect and what to bring. Make sure to check all important details before signing. Now, take your sore hand out to celebrate!