buying a home a complete guide

How to Buy a Home – A Complete Guide

Article Summary: This article reviews in detail the process of buying a home, including:

  • Saving money for a down payment
  • Determining how much home you can afford
  • Getting pre-approved for a home loan
  • Finding a home using a real estate agent or by yourself
  • Legal documents involved in a home purchase
  • Doing due diligence on your home to avoid any surprises
  • What to expect at closing

So You Want to Buy a Home?

Buying a home is exciting, but it can also be an eventful and even stressful process, especially if it’s your first time. Purchasing a new home is a big commitment. For most people, a home purchase is usually the largest financial investment they’ll make in their lives. Because of the cost and commitment, the process of buying a home can be more intimidating than almost any other project they’ll ever take on.

The best way to make purchasing a home a much easier process, allowing you to more fully enjoy the excitement of being a new homeowner, is to be as informed as possible about the critical elements of the home buying process.

I’ve created this How to Buy a Home guide to give you information, recommendations, and guidelines you can use to make the best decisions during the home shopping process so you can be confident in every aspect of the home buying process, including:

  • Preparing yourself before the time comes to purchase a home by saving money and
  • Understanding how much home you can afford and getting pre-qualified
  • Choosing whether to use a real estate agent, and identifying a competent real estate agent you can trust
  • Finding a home that fits your specific needs and interests
  • Placing an offer on a home, including what documents you’ll need
  • Financing the purchase of your new home
  • Doing due diligence to ensure that your new home doesn’t come with any surprises
  • Closing on your home

Preparing for a Home Purchase

Ideally, the process of putting in place the components that factor into a successful home purchase should begin years before you ultimately end up sitting in a title office signing closing documents and being handed the keys to your new home.

The habits that make a person productive, happy, successful, prosperous in general happen to be (not coincidentally) the same habits that prepare you to buy a home. Those habits include being productive, educating yourself, and developing the skills that allow you to earn a comfortable and reasonable income. The habits include being wise with your money and saving a good portion of it. They also include having integrity, keeping financial and other commitments you make, including paying your bills and establishing a reputation of reliability.

This guide to buying a home won’t go into depth on the specifics of how to develop those habits, although I will talk about how to clean up your credit and improve your FICO score if that’s something you need to do to prepare for buying a home. If you were raised in a home where you were taught right from wrong, and if you’ve internalized those values, you’ve obviously had a great start. In general, poor credit scores, lack of savings, and other issues that make it difficult to successfully purchase a home come from making poor life choices about education, employment, financial obligations, and other elements.

If you need help in this area, there are lots of self-improvement programs available that can move you in the right direction, including everything from addiction recovery to goal setting to financial management.

Since buying a home is so closely related to financial aspects of life skills, I’ll mention here that Dave Ramsey’s Financial Peace University is a great place to start taking control of your finances, which many people have to do in order to even begin the process of buying a home.

Am I Ready to Buy a Home?

In the United States, home ownership is often seen as a status symbol. Because of the desire to appear to be living the American dream, there is a temptation for people to jump into buying a home prematurely. If you purchase a home before you are ready for a monthly mortgage and the other expenses that come with being a homeowner, it could set you back significantly financially and end up being a negative experience.

If you have very little savings, if you have a hard time keeping a job or paying your bills, if your living situation is not stable and you tend to move a lot, you’re likely not ready to buy a home.

If your recent life experience includes a solid work history, some significant money in the bank, and a pattern of paying your cell phone, electricity, car loan, credit card, and other bills, then you’re likely ready to go shopping for a home.


Shopping for a Home

Shopping for a house to buy can be an exciting experience unlike any other, especially because of what it represents in terms of moving on to a new life phase.

When you’ve decided you’re ready to buy a home, it’s time to go shopping, but where should you start? To make the best decision, you’ve got a little homework to do before you start looking.

Determine Your Specific Housing Needs

If you’re going to find a home that really suits you and your family, it’s a good idea to start by spending some time defining what would be functional and meet your family’s needs. Begin your home shopping strategy by evaluating your current living space experience, determine what you like and what you don’t, plan ahead for whatever changes you might expect in your family over the coming years – including things like determining the number of bedrooms you need for current family members as well as coming additions, location of and travel to and from schools, your work, and and other elements of your lifestyle – and start off on your home search with some concept of what it is you’re looking for.

How Much Home Can I Afford?

The major limitation that will affect which assortment of houses on the market that fall within your list of potential new homes is how much home you can afford. Most new home buyers (pretty much everyone except those who come from wealth or who have been very successful and disciplined financially) are constrained by how much they can afford for a home loan. The amount you can afford to borrow to purchase a home essentially depends on:

  • your income
  • your debt obligations
  • your monthly payment – this is determined by your down payment, the loan interest rate, length of time for the loan, and other factors directly related to the loan

Get Prequalified

There is a particular step you’ll take to formalize (essentially giving yourself a target number) your understanding of how much you can afford to pay for a home. The process is referred to as getting prequalified for a home loan. Becoming prequalified involves talking to a lender and sharing basic information related to your income and creditworthiness with them that they can use to determine how much of a loan you qualify for.

Having this prequalification step completed will allow home sellers to take you much more seriously, because the process typically separates those home shoppers who are just kicking tires from those who have legitimately begun the process of purchasing a home. Usually you can obtain a prequalification letter from whichever lending institution you’re working with. Getting prequalified can be done in person at your local bank or through a loan officer. You can also get prequalified online with lenders like Quicken Loans or SoFi.

I highly recommend that you don’t max out the amount you’re qualified to borrow. Stories abound about new homeowners quickly becoming “house poor” and feeling like slaves to their mortgage payments. You’ll save yourself a lot of stress (and possibly your marriage) if you stay well under the amount that a bank or lender tells you is available to borrow for purchasing a home.

Should I Use a Real Estate Agent or Go It Alone?

The traditional model for house shopping involved working with a real estate agent or a realtor. Realtors have historically been the gateway to buying and selling real estate, but that model has been changing quickly in this century as more and more information is available online, making it easier for people to do their own self-service real estate activities, including finding homes through websites that publish MLS (Multiple Listing Service) listings. Prior to the internet becoming so popular and accessible, homes listed by seller agents (which represent the majority of homes for sale) were accessible almost entirely only through real estate agents who represented buyers.

Now that you can find almost anything online that you need regarding homes that are currently for sale, their value history and other information, it’s much less necessary to use a real estate agent than it was in the past.

For those who feel comfortable with the home purchasing process or feel like they can be thorough enough with the home buying process – including understanding legal documents and doing the due diligence that’s required to protect yourself from potential pitfalls – I’d recommend that you seriously consider not getting an agent, but instead think about representing yourself as you shop for a home. From my experience (I’ve witnessed multiple situations in which realtors do more harm than good both intentionally and unintentionally), unless there are particular reasons you feel like you need a real estate agent to help you buy a home, you can do what a buyer’s agent does for only a portion of the 3% commission ($9,000 on a $300,000 home) that comes with using a buyer’s real estate agent. Most real estate agents will tell you that it doesn’t actually cost you anything to use their services because it’s the seller who technically pays the commission. However, when negotiating an offer for a home, the seller will almost always look at what they will net after commissions are taken out, including the buyer’s agent’s commission.

Choosing a Buyer’s Agent

If you decide to choose to work with an agent, you’ll want to make sure that the agent sincerely has your best interest as a priority. I worked as an agent for a short time in a Coldwell Banker office in Utah. The things I saw agents do with their buyers while working in that office gave me a really sour taste for what motivates them. In one case, a real estate agent told me of a “trick” he used to improve his commission. His trick included lying to his clients and telling them there were no condos available in a new neighborhood where they wanted to live. Instead, he took them to look at homes in another less convenient and less desirable neighborhood solely because the builder there paid a 3% commission to buyer agents instead of a flat $2,000 referral fee offered by the builder in the neighborhood these people preferred.

Before choosing a buyer’s real estate agent, start by getting referrals from people you know and trust, and make sure that you get references, check reviews, and thoroughly interview whoever you ultimately decide to partner with as your agent.

Exclusive Buyer-Broker Agreement

In many states, real estate agents will require a potential home buyer to sign an exclusive buyer-broker agreement, which normally stipulates that the buyer will only buy a property (over a set period of time) using the designated agent. The agreement also outlines the compensation structure, normally a percentage of the purchase price but sometimes a set amount. Before you enter into an exclusive buyer-broker agreement with a real estate agent, you need to be sure that you’re willing to be essentially married (as far as home shopping goes) to that person for the time period over which you plan to look for a home. If the relationship sours, agents will sometimes allow you out of the agreement, but often not without paying them for their time and services already performed.

The Real Estate Commission Structure and Price Negotiation

When shopping for a home, and especially if you’re using a buyer agent, it’s important to know how the real estate commission structure works so that you understand where there is room for negotiation.

The most common residential real estate transaction process works like this. When a home is listed with an agent, the seller enters into an agreement (usually referred to as a an “Exclusive Right to Sell Agreement” or some variation of that phrase) with the agent’s brokerage and agree to pay a percentage of the sales price, a commission, when the sale closes. The percentage is usually 6%, but can be higher or lower depending upon a range of factors.

It is common for the selling agent to offer half of that commission, typically 3%, to buyer agents to induce them to bring their clients to shop for the home that is being offered for sale.

Depending upon the circumstances, it is possible for a home buyer to negotiate down the commissions amount for either the seller or the buyer to ultimately lower the price you’ll have to pay for the home.

How to Get a Good Deal on a Home

Getting a home for a good value is one of the of biggest victories a new home buyer can have. If you can score a home for less than its current value, you start off with some equity, a scenario that makes your move-in that much more satisfying.

If you’re shopping in a seller’s market, meaning that there is high demand for a limited amount of homes, you may not have much leverage to negotiate. If the market in your area is currently a seller’s market, and you expect that it will cool off (which they normally do in off-peak periods during the winter), it may be best for you to wait. If your local economy and national economy are strong and seem to be primed to grow consistently, pushing house prices up with lowering employment and growing job opportunities, you should probably find the best deal you can sooner than later. You can still get a good deal if you’re patient and flexible. If your requirements cause you to be limited to a narrow geographical area and specific home features, you’ll normally have to pay the asking price for a home, sometimes even more when there’s a bidding war. However, if you loosen your home purchase requirements, you have more chances to make an offer and have it accepted.

In a seller’s market, there is still room for leverage depending upon how strong your offer is in terms of your ability to complete the purchase after making an offer. When my wife and I bought our first home, the seller already had received three other offers for more than the asking price of the home. However, since we were planning to put down more money as a down payment and had much stronger employment and credit history, the seller chose our offer. In his situation (which is a common one), he was planning to buy a bigger home contingent on selling his current home, and he didn’t want to be delayed any longer (a previous offer had fallen through) because of his current home not selling.

In a buyer’s market, you have many more options, which means you should be able to pick up a house for less than its appraised value. If you pay attention to factors such as how long the house has been on the market (the longer the time on the market, the more the price can come down) and how motivated the seller is, you can submit a low offer that seems reasonable enough but gives you a chance to have equity in the home. A very low offer can sometimes be offensive and kill the deal from the beginning, but there are times when sellers are willing to accept tens of thousands of dollars less than their asking price.

Don’t be afraid to submit a low offer. The seller can always counter your offer.

In any case, you’ll likely want to spend several hours looking through MLS listings, comparing home features, neighborhoods, and location information for the homes that are on your short list. You’ll also want to information from real estate professionals in the area about the local economy, planned developments in the area, and other factors that will directly affect the value of your potential new home.

Treat this experience almost like you are going to school, and you’re majoring in that particular real estate market. The more information and education you have, the better you’ll be primed to make a good decision and get a good deal. This is especially true when you add being patient to the formula.

Bank Owned Properties and Foreclosures

Buying a bank owned home or other foreclosure can be a great way to buy a home with built-in equity. When a property has been foreclosed on and repossessed by a financial institution, their motivation for selling the property is much different (less emotional) from a personal seller. They often just want the property off their books, and are sometimes willing to settle on what the rest of the market may consider an undesirable property. Sometimes these properties need a little fixing up, but they can be great values.

To find these homes, you can normally Google “REO homes” along with your city, county, or state to find websites that list those homes. You can also specifically search Google for your local bank name and add “REO properties” to your search to quickly navigate to their foreclosure listings.

Another good place to find foreclosed homes is the HUD homes for sale page, which links to listings of homes for sale from the Department of Housing and Urban Development and other government departments.

Making an Offer on a Home

Once you’ve found the home you’re interested in, it’s time to make an offer. The components of an home purchase offer typically include:

  • property identification and description
  • purchase price
  • earnest money provision (this is money you put into an escrow account to show you’re serious about the offer)
  • financing arrangements and contingencies
  • timelines for due diligence
  • closing and settlement arrangements

If you’re working with a real estate agent, he or she will help you prepare an offer. If you’re representing yourself, you can normally find the required contract documents on your state’s website (at least the most generic version), or you can purchase standard real estate forms from online legal form repositories like US Legal Forms or LegalZoom.

After Offer Acceptance, Working Towards Closing

Once your offer has been accepted, it’s time to hone in on the property you now have “under contract” and perform the due diligence that ultimately should lead to your becoming the new owner of the home. With a home purchase contract in place, you can now move forward with securing a loan (if you’re not paying cash), inspecting the property, and doing the other checklist items that are normally listed in the purchase agreement.

Closing on a home after a contract is in place normally happens within a 30-45 day window. If you have good credit, a solid work history, and a chunk of cash to use for a down payment, this process of preparing for ownership transfer for a property usually happens without too much incident unless there ends up being issues with the property itself. Along the way, you’ll be interacting and getting help from your agent (if you have one), the seller or his agent, the loan officer and others who might be involved with making the transaction happen.

The purchase contract typically outlines deadlines for:

  • seller disclosures – detailed information about the property provided by the seller to the buyer
  • due diligence – other items related to the property that need to be vetted by the buyer, including things that range from HOA details and other regulations that might affect the property to a check of the sex offender registry to see if there is a registered sex offender nearby
  • financing and appraising the property
  • final settlement or closing

Closing on Your New Home

The date for closing on the home and transferring ownership is normally scheduled to take place on or before the date listed as the settlement deadline in the purchase contract. If some aspects of the home inspection, due diligence, or financial arrangement process is delayed, the closing date can also be delayed with either a verbal or formal approval from the seller.

Closing on a home is normally done with a title company, which is identified well before the settlement deadline specified in the purchase contract. The title company needs time to, working with the seller and the buyer, prepare the closing documents, prepare title insurance, and perform other services related to transferring ownership from one person or entity to another.

At closing, be prepared to review and sign dozens of pages of documents related to purchasing the home. Many of these are related to financing and insuring the home. Others have to do with the other

Some of the forms you’ll be signing at closing include:

  • promissory note and other mortgage documents: The information on here should be similar to what was provided to you on the good faith estimate document provided by your lender when you applied for your loan.
  • documents related to closing costs and who’s responsible for paying them
  • local, state, or federal documents affected your ownership and inhabitance of your new home
  • a plethora of other forms and documents, many of which may make you think, “Wow, I would never thought of that!”

Getting through the closing process can take some work. Depending upon your loan type and other factors that govern the purchase of your home, it can often take over an hour to complete the settlement meeting. If your experience is like mine, your hand will be just about warn out from initialing and signing documents. But once it’s all over, you’re pretty much done, and the home is yours….

Except…depending upon the lender and the state in which the closing is held, it can take up to 3 days for the loan funds to source after a closing. Most lenders wire the funds the same day of the closing, however. The home sale is not officially completed until the funds have sourced, which means they have been transferred from the lender to the escrow account of the closing agent (which is usually the title company).

Moving In To Your New Home

Normally, new home owners have a right to occupy their newly purchased residence within 24 hours of closing. For each of the homes I’ve purchased, I was able to move in almost immediately after signing the closing documents.

The amount of time you have to move in to your new home may be affected by situations such as an existing lease agreement with tenants who may occupy the home. Delays such as that are not as common as the standard 24-hour occupancy turnaround.

Congratulations! You’re a Homeowner

There is usually a ton of excitement that accompanies the purchase of a new home. Each time I’ve purchased a new home for myself or my family, I’ve held a party for friends, family, and new neighbors to celebrate. You might want to do the same thing to mark the accomplishment. Just make sure you don’t spend the money you have set aside to make your next mortgage payment.