If you’re thinking about homeownership, Trent Hamm with The Simple Dollar walks you through seven basic steps that will take you from apartment living to owning your own home.
1. Decide Whether to Rent Or Buy
It is critical to spend some time thinking seriously about whether homeownership is right for you. Some benefits of renting include a lower overall cost (in most situations), a landlord that can handle property problems, and less time invested in maintenance. On the other hand, some benefits of homeownership include more living space (in most situations), more flexibility and freedom to do what you want with your living space, and the ability to build equity in the home.
One extremely important factor in this equation is the money factor. In general, homeownership is more expensive, but how much more expensive? It’s a great idea to spend some time with a good rent or buy calculator, which will help you calculate the various costs of both options and help you figure out if renting or buying is the best option for you from a purely financial perspective. If you’re on the fence about whether you could actually afford the month-to-month cost of owning a home, you should probably wait. The personal and financial challenges that stem from being in a home you can’t afford are immense, and you’re better off not putting yourself in that situation if you’re less than sure about it.
If you conclude from all of this that renting is the right choice for you for now, then you’re done. If you think that homeownership might be a good idea, start saving for a down payment now and get your finances in order by keeping your bills paid and debts low.
2. Get pre-approved for a mortgage
The next step in the process, should you decide to buy a home and you don’t have enough to write a check for it outright, is to get pre-approved for a mortgage. A mortgage pre-approval simply means that a financial institution has indicated they are willing to lend you a certain amount of money to buy a home, as long as it happens within a certain timeframe. The process of getting pre-approved for a home mortgage may sound intimidating, but most of it boils down to simply answering questions about yourself, your employment history, and your income history.
3. Start shopping for a house
Once you’re preapproved, now is the time to start looking for your affordable dream home… one that fits within your preapproval amount.
4. Make an offer on the house
Once you’ve found the right home, you’ll want to make an offer on it. Your offer will come with contingencies. This means that your offer is dependent on a number of things. One is a successful home inspection. Another may be that the home’s value is independently appraised and is in line with the price. Another contingency is that your mortgage is fully approved (this usually depends on the home inspection and appraisal if you’ve been pre-approved).
You will also need to place a deposit. This is a small amount of money, usually 0.5% to 2% of the home’s value, that indicates that you are making a serious offer and that, if it’s accepted, the buyer will take the home off the market. You’ll lose some or all of the deposit if you back out of the agreement to buy the home for a reason other than the contingencies.
5. Get an inspection
The next step is to get the property inspected by a reputable inspector. You’ll want to do this quickly, as you’ll want to get into the house and the buyer will want to sell the house, plus your pre-approval for the mortgage won’t last forever.
6. Get a final mortgage approval
At this point, assuming that the home passes inspection with no major problems, you’ll want to go back to your lender and get final mortgage approval.
The lender will want proof of insurance at this point, which means that you should shop around for homeowners insurance.
7. Close on your home
This is the final step, and it can potentially be an intimidating one. You’ll be asked to sign a number of documents pertaining to the mortgage you’re taking out, usually including a promissory note, truth in lending statement, a mortgage or deed of trust and a monthly payment letter.
The big concern about this day is the closing costs. Many of the documents you’re signing will come with fees, and you’ll want to be prepared for them. Closing costs will typically add up to around 2% of the home’s cost and that money will be expected on the day you close. Your real estate agent can help you figure out how much closing cost money you’ll need.