How To Buy A House
Most young people eventually reach a point where they look around their apartment one day and realize they could be doing better.
Make no mistake about it — renting an apartment can be great when you’re in your twenties and thirties. In fact, you could actually save a significant amount of money that would otherwise be spent on new appliances and home repairs.
It can also be a lot of fun, not having to take much responsibility for your domicile and not having a monthly mortgage payment bloated with homeowner’s insurance and property taxes.
The problem with renting is that you’re literally throwing money away every month. You’re basically putting it into the hands of a landlord, who gives you very little in return (while also retaining the power to control your monthly payment). Buying a house is also a great way to start investing in real estate.
The trick is to break the rent cycle the moment you get the chance. Today, 43 percent of millennial households own their own homes. With a little bit of work, you can join this group.
How to buy a house: 8 steps
Below is a step-by-step guide to the home-buying process.
- Build a savings account
- Get pre-approved for a mortgage
- Partner with a real estate agent
- Go house hunting
- Submit an offer
- Get a home inspection
- Get a home appraisal
- Make it official: closing!
1. Building a Savings Account
One of the top reasons young, single people struggle to secure a home is because they lack adequate savings.
Remember, if you want to avoid paying PMI, you’ll need to cover 20% of the value of the home with your down payment. But this is just the start. In addition, you will need to cover closing costs, which can be a whopping 5% of the total purchase price.
That’s not all, either. You’ll have to consider a variety of other factors, too. For example, there are repair and maintenance costs to consider — like replacing flooring, painting the walls, buying new appliances, repairing the lawn, and so on. You may have to spend an additional $15,000 over the course of the first year just to make a place feel at home. So, if you don’t have enough capital handy, you could easily spiral into credit card debt by just covering basic home improvement payments.
In addition, a smart homebuyer will want to save up six months of emergency funds prior to buying a home to cover any unexpected expenses — like getting sick and missing work or losing a job.
There’s just no getting around it: buying a home is incredibly expensive. Do a financial gut check, examine which debt-to-income ratio you’re comfortable with, and make sure that you have the spare capital to account for the above-mentioned expenses. Otherwise, you could wind up regretting the decision.
If you have the necessary capital in order, then move onto the next step: mortgage preapproval.
2. Getting Preapproved for a Mortgage
It’s important to remember that buying a house is competitive. It’s important to put yourself in the best possible position when buying a house so that when you find the home of your dreams you can make a quick offer and increase your chances of landing it.
That said, obtaining a mortgage preapproval technically isn’t necessary, but it can make all the difference when putting an offer on a house. A financial company will take your offer much more seriously if you can demonstrate in advance that you are a trustworthy borrower who was first able to obtain a preapproval letter. This will save the bank time while vetting you, expediting the process for everyone involved.
How to get preapproved by a lender
If you’re already working with a real estate agent, you can leverage them to help with the process. The real estate provider will most likely have a trusted partner that they work with who will help process the necessary paperwork that’s required to gain approval.
Otherwise, it’s easy to work directly with your preferred lender. Research trustworthy companies offering the most competitive rates, select who you’d like to work with, and they likely have an online process for preapproval.
Be prepared to provide extensive documentation during the mortgage process, including your Social Security number, tax returns, complete employment history, and credit report history. You’ll also have to provide extensive documentation detailing where your money comes from — including complete transactions over the last few years.
This process can feel invasive. But keep in mind what’s at stake from the bank’s part. They are about to issue a massive loan with a very long payoff period. So, it’s in their best interest to vet you as thoroughly as possible. Be patient, provide the data that’s asked, and you’ll be fine.
Shopping for the best rate
Once you obtain preapproval, don’t be afraid to shop around to other lenders to see if someone can beat that rate. The process is a bit like looking for a car — there’s always going to be a lender who can get you a slightly better deal. So look around for other mortgage options and try to find a loan that matches your specific needs.
Preapproval is not a guarantee
Once you are pre-qualified for a loan, that doesn’t mean that you’re automatically guaranteed to be approved. There will most likely be additional clearance steps that you’ll need moving forward.
All the prequalification letter shows is that you are a trustworthy individual with a demonstrated credit history, indicating that you are likely to pay back your loan. Obtaining preapproval will show a bank that you understand the commitment and take the financial element of the transaction seriously.
3. Working with a Realtor
Before you move forward in the home buying process, it’s vital to find a trustworthy and sharp real estate agent who will walk you through the process.
This is a big step, as the agent you select can make or break the experience. Partner with the wrong agent, and you could wind up getting swindled and closing on a house that you don’t really want or need. Partner with the right agent, and you’ll wind up in your dream house.
Once you obtain preapproval and have partnered with a professional you trust, you’ll be in a position to start looking at homes.
At this point, it pays to be upfront with the agent and lay down the expectations detailing exactly what you want in a house, as well as what you don’t want. Remember that the agent is working for you — and so it’s in their best interest to listen if they want to close a deal.
That said, some real estate agents can be very pushy during the sales process. If you are the type who is easily swayed by others, consider bringing an independent third party with you when you start going around looking for homes. It always helps to have a trusted friend or family member to discuss various options with.
Making time for home buying
One thing to remember when working with a real estate agent is that you are hiring an individual to help purchase a place to live. Real estate agents are busy people, with many different clients and obligations, and their time is limited.
So, if you hire a real estate agent, make sure that you’re fully committed to going through the home search process. House hunting requires long afternoons, nights, and weekends looking for homes. Oftentimes, real estate agents will take clients to look at four or five places in a row over several hours. It can be an exhausting process, especially if it drags on for months (which is often the case).
4. Finding Your Ideal House
One of the hardest parts about looking for a house is coming to terms with your limitations. For many first-time homebuyers, purchasing a home and determining their price range is their first real financial gut check — and the first test in measuring their own wealth and value.
When looking for homes on real estate websites and doing walkthroughs, think about what the ideal house would be for you and be prepared to settle even if it’s not what you may have had in mind.
For example, you may have your heart set on a house that’s $300,000. While you may technically be able to afford this house, it may be a terrible investment long term if it depletes your savings and sends you into massive debt.
5. Putting an Offer on a House
Eventually, you will find the right home for your needs, requiring you to put an offer down. And this is where it pays to have a sharp real estate agent to act on your behalf and negotiate a great home price.
In most cases, the process will go through several rounds of negotiations. A good real estate agent will keep you posted throughout the process, informing you whenever there is an update. After all, you ultimately have the final say to accept or walk away from a deal.
6. Going through the Home Inspection Process
Homebuyers often complain about having to go through a home inspection process and working with home inspectors. But this is actually a great thing, for a few reasons.
First and foremost, the inspection process will buy you extra time to pull the plug on a deal if needed. There are several points in the home inspection process where you can choose to back out of the commitment if you don’t want to proceed.
In addition, a home inspector will alert you to any potential damage or underlying structural issues to your property. Inspection presents a good opportunity to come back with a counteroffer. For example, you might discover that a washing machine or toilet is busted or a countertop needs to be repaired. Items like these can be negotiated into the final contract.
7. Conducting an Appraisal
After you agree to terms and go through an inspection, the next step is to conduct an independent appraisal.
The purpose of this is to provide an independent estimate of the value of the home. The appraiser’s job is to confirm for you and the bank that you are getting a fair price on the home that you are buying.
8. Closing the Deal
The last stage in the home-buying process is closing the deal. This requires having the right paperwork in order, arranging a closing date, and going through a signing process which involves legally transferring ownership and completing the transaction.
In most cases, a closing takes just a few hours — unless there is a last-minute hang-up which can delay the process.
At the end, you leave with keys to your very own home!
Why Buy a House?
If you’re considering buying a house, make sure that you do it for the right reasons. After all, a house is a big commitment. You have to want to be there and be willing to put the necessary work into maintaining it. If you’re into a jet-setting lifestyle — or you’re the type or person who doesn’t like to spend a lot of time at home — buying a house will be a terrible investment that you will come to resent.
Buy a house because you are comfortable in your career, you like a certain area, and you could really see yourself spending a great deal of time in it. If you approach the process with these points in mind, you will be in a much better position to take on the responsibility of homebuying.
Is a House an Investment?
In order to be considered an investment, a house has to generate a strong return. And the fact is that many homes today will generate a rate of return of between 8% to 10% annually — about the same as you could expect from the stock market.
But that’s only if someone is willing to buy it for more than you paid.
And that doesn’t always happen because a home can depreciate in value over time — particularly when it’s not maintained. In many cases, it’s the land underneath the house that can appreciate in value. This is very important to keep in mind.
Most of the time, homes aren’t considered investments because they primarily exist to provide shelter. As a result, this limits your potential for a profitable “exit.” Unless you are working remotely and in a position to sell on whim when the market is most favorable, you will most likely be forced to ride it out until the day comes when the house no longer serves you (e.g., when you get married, have kids, or get a new job in another city).
In addition, homes can be notoriously expensive. You’ll have to pay property taxes and insurance. There’s lawn care, roofing, snow removal, upkeep, and so on. These expenses can add up over time, and eat into your overall profits.
Plus, unless you’re able to put down 20% upfront, you will also likely have to pay private mortgage insurance (PMI), depending on your mortgage lender or mortgage broker. This is why it’s so important to do your due diligence and really study your mortgage options during this process.
Beyond these costs, there might be additional costs, like homeowner’s association fees. And all of this is in addition to any student loans you might have and regular living expenses.
How to Make Money With a House
Before you buy a house, think about its primary purpose. If you just want to make a profit, consider buying an investment property.
If you take this approach, you can buy a house below market rate (like a fixer-upper, or a foreclosure), put some work into it and sell it at an above-market rate when the housing market is right.
The other option is to buy an investment property in a place that gets a steady amount of tourism around the year. For example, you may want to look into a ski town or tropical area near a beach, buy a cheap house, and convert it into a place that could serve as an Airbnb. Look for a house that will earn income year-round, enabling you to pay down your mortgage.
If you plan on flipping a house, you may want to look into adjustable-rate loans instead of traditional fixed-rate loans. You may be able to lock down a lower interest rate for the first couple of years, which then shoots up later on in the loan. If you’re planning to sell the house fairly quickly, this may be worth pursuing.
Once you have a clear understanding of why you want to buy a house, it’s time to put in the groundwork to help make this dream a reality. This is not an overnight process or an easy one, so make sure that you’re in a position to put in the time and energy required to make it happen.
Why a Credit Score Matters
If you want to buy a house, it’s a good idea to have an understanding of your credit score before starting the mortgage process.
This is because home loan eligibility will vary depending on your credit score. For example, Federal Housing Administration (FHA) loans will require you to have a credit score of at least 500 to secure funding for a home purchase. If you’re a veteran, you may want to look into VA loans in addition to an FHA loan.
Best practices call for continuously monitoring your credit using a service like Credit Sesame or Credit Karma. That’s not to say that you can’t buy a house and secure a conventional loan with a poor credit score. But, generally speaking, you will generally receive much higher interest rates if you have a low score.
If you have a poor credit score and you aren’t looking to buy a house overnight, it’s worth spending a few months doing whatever is in your power to improve your rating. Pick up a second job to pay down your credit if needed so that you can be in a better position to ask a bank for a loan.
Keep in mind, too, that banks will tend to look at credit score over time — which is why it’s in your best interest to maintain a positive history of repayment.
What is an open house?
An open house is like an exhibition for a home. Oftentimes, a seller and the seller’s agent will host an open house to connect with other buyers and network. This is a chance for buyers to also walk through independently without a real estate agent. The purpose of an open house is to gauge overall interest from buyers. This can help determine the selling price.
Is buying a home worth it?
It largely depends on the buyer’s personal situation. Buying a home can be a great decision if you are in a strong financial position to fund it. However, it can be a financial disaster if you are unprepared.
That being the case, buyers should spend a considerable amount of time determining whether they want to take on the responsibility of purchasing a property before diving in and securing a mortgage loan for 15 or 30 years.
How does escrow work?
One of the nice aspects of working with a lender is that you don’t have to worry about making monthly homeowners insurance or property tax payments. Instead, you typically pay a monthly escrow fee, which is tacked on to your mortgage bill and is used to make payments on your behalf. Most lenders tend to have a cushion in place, requiring you to keep a certain amount in the account to cover unexpected changes like tax increases.
Is a 15- or 30-year mortgage better?
It largely depends on how much you are looking to pay and for how long.
Securing a 15-year mortgage will cost more per month, but you will pay down the loan faster. Plus, you will pay less over the course of the loan.
Most buyers tend to choose a 30-year fixed loan vs. a 15-year in order to pay lower monthly installments.
How can you pay down a mortgage faster?
The way to pay down a mortgage faster is to pay more on the principal every month. In fact, applying an extra $100 every month towards the principal can reduce the length of your loan by a few years.
Do houses appreciate in value?
Unfortunately, houses don’t always appreciate in value. In most cases, they depreciate over time as the house gets older. However, the land underneath the house can appreciate even if a house depreciates.
The Bottom Line
Buying a home is a long, hard process. But the truth is it will almost certainly be one of the most rewarding things that you ever accomplish in life.
Homeownership, after all, requires a tremendous amount of work and responsibility, as well as sacrifice. At the same time, you’ll be investing in your future and building a better and more secure life for yourself. And as soon as you step foot into your new home as the proud owner, you’ll realize that you are making the right decision.
So, if you think buying a home is right for you, move forward with the above-mentioned points in mind. Just remember to be smart about making the right purchase so that you don’t regret your decision. Good luck!