Buying a Home Process

Posted October 09 2020
by PenFed
neighborhood of homes with front porches

What are the steps to buying a home?

Here are some questions to ask yourself before you get started. 

  • Have I done my research?
    • Start to research all of the steps — you're doing that now!
    • Understand your credit worthiness — how much you can afford realistically?
    • Understand what's involved with time — requirements like financial data and employment verification.
  • What are my housing needs? 
  • What can I afford?
  • How long will I live in the home?

In this article we'll review all the steps involved in buying a home, and link to additional details for each step. Here is an overview list to help you get a better understanding of each step and where you might be in the process.

Overview of Homebuying Steps:

  • Getting pre-qualified
  • Finding a home
  • Getting preapproved
  • Making an offer
  • Applying for a loan
  • Locking in your rate
  • Getting a loan estimate
  • Getting an appraisal
  • Getting an inspection(s)
  • Underwriting
  • Understanding insurance, HOA, and preparation for utilities
  • Getting your loan closing disclosure
  • Closing on your loan

Getting Pre-Qualified

Getting pre-qualified for a loan is different than getting a preapproval. Pre-qualification is a tool to help you and the lender better understand what you may be able to afford. The information you provide at this point is not verified or validated by your lender, it's simply a way to better understand your financial ability to purchase a home. As a starting point, it will assist with all the following steps as it will likely set the parameters of how much home you can afford and what you should be looking at.

Finding a Home

This is typically the fun part. Armed with some very basic financials from your pre-qualification, you can begin to find a realtor, start looking at areas and houses online, and begin your search.  For some, this process can go on and on as they see all of the different neighborhoods, types of homes, and better understand how their needs fit all of the homes they see.

Really understanding your housing needs is a great way to capture your needs, wants, must-haves, and nice-to-haves.

Getting Preapproved

Once you've found your home, or are getting close, you will want to get a preapproval letter from your lender stating that you do have the financial ability to purchase a home. Some sellers won't even consider an offer from a potential buyer unless they can prove that they have gone through the preapproval process.

With a preapproval, you'll need to actually provide some financial data that can be verified and validated. This will likely include the following: 

  • Proof of income (all sources)
  • Proof of assets
  • Employment verification
  • Good credit score verification
  • Additional information as needed by lenders which can vary from lender to lender

Making an Offer

Armed with your preapproval letter, your search for the perfect home can take the next step in making an offer to the seller. There are lots of things to consider in this offer and your realtor can have a wealth of information here to help you save money. Here are some points to consider with your offer.

  • You don't want to pay too much, so look at the comps — *insert definition used in other articles — in the area and how this home compares in price, location, or amenities — like a pool or size of the home.
  • You also don't want to make an offer too low that might turn the seller off to your offer as potentially being insulting.
  • You want to consider things like the age of the home, things that you see need work, how long the home has been on the market, and how quickly homes in this area have been selling.
  • Is it a buyers’ market or a sellers’ market? For a buyers’ market, there are typically lots of available homes to choose from and you can typically negotiate more. Conversely, with a sellers’ market, the seller may have the upper hand in negotiations.
  • Think of writing a personal letter of why you want the home. Often times that can make the difference in a seller accepting your offer knowing you plan to take care of the home and grow in it.

Applying for a Loan

There are items you'll need to prepare prior to your application for a mortgage. 

  • W2 statements for all borrowers for the last two years
  • Complete bank statement for all of your accounts for at least two months
  • Any investment account data including 401k statements and retirement accounts
  • Recent pay stubs (best to have two months’ worth of data)
  • A copy of the home purchase sales agreement

You may need additional information up front depending on different factors. For example, with a VA loan, you'll also need your Certificate of Eligibility (COE).  Your lender may require more documents during the application process depending on your situation and loan type.

Locking in Your Rate

Once you've applied for a loan, you'll want to keep an eye on rates to estimate when the best time is to lock in your rate with your lender. For example, if interest rates seem to be on the rise, you may want to lock in immediately before rates climb too high. The opposite also holds true if interest rates are trending downwards, you may want to hold out locking in your rate until the last minute to take advantage of any further rate reductions.

Getting a Loan Estimate

In short, a loan estimate is an estimate delivered to you within 3 business days of your application. The loan estimate typically supplies you with the following information about your loan.

  • Projected monthly payment with principal and interest broken out including all taxes, insurance, and other assessments
  • Overall list of expenses, if there is a prepayment penalty, how much and over what periods of time the rate can increase — used with an adjustable rate mortgage (ARM)
  • Estimated closing costs and cash needed at the time of closing
  • Things you'll need like appraisals, inspections, pest inspection, etc.
  • Lender fees itemized
  • Discount points if used

Getting an Appraisal or Inspection

There is a difference between getting an appraisal or an inspection. An appraisal is used to determine the value of the home in order to obtain a loan. The appraisal is completed by an unbiased third party whose job is to understand values of homes in the area, and how yours might compare. The appraisal justifies to the bank the loan amount that could be available for the home. In other words, an appraisal protects the lender from lending more money than the home is worth.

Inspections on your home are carried out by licensed inspectors who walk through all the workings of your home. Your inspection will likely review items like the age and condition of your roof, appliances, heating and air conditioning, windows, plumbing, and more. You shouldn't be surprised if an inspection report is many pages long. A good inspector will document in writing and with photographs, conditions of the various areas of your home. Information about potential wood rot, or items that may be out of current building codes — electric or water heaters — would be included in this report.

After the results of the inspection and appraisal, you may have the opportunity to renegotiate your purchase price, request changes be made to bring the property up to code or fix things that may be broken.

Underwriting

Underwriting may sound scary, but it really is the verification process of your documents, and your property details to justify your home loan. Underwriting happens in the background and during the process you may be asked to supply additional supporting documents, information, or letters to verify your income, assets, or property. Here are some things to take into account during underwriting.

  • Appraisal of the home
  • Income validation
  • Credit score
  • Review of your assets

Getting Your Closing Disclosure

Much like the loan estimate above, a closing disclosure supplies what is now the detailed and expected final information concerning your loan. This document is to be delivered to you within three days of closing so that you completely understand all of the financial requirements and closing costs.

Closing on Your Loan

Closing day is an exciting time and you should have your signature hand well rested as there are a lot of papers to sign. In addition, you'll need to bring whatever necessary cash — cashier’s check — that is required from your closing disclosure to signing. Once all of the documents have been signed and notarized, you will likely be given your keys and your new life in your new home begins.

 

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