- Key steps to take and when during the homebuying process
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Despite a global pandemic, the U.S. housing market had one of its strongest years in over a decade in 2021.
The outlook for 2022 is just as bright, with an estimated 5.9 million existing home sales in the forecast, according to the National Association of Realtors.
But where do you start? Having a homebuying checklist to follow can make the process easier to navigate.
Here are the key steps to include on your homebuying checklist.
1. Before you start shopping
Review your credit
Unless you have the cash to buy a home, you'll likely need to get a mortgage. A mortgage is a loan that's secured by the home you're buying.
One of the most important things lenders consider for loan approval decisions is credit history. Specifically, lenders look at your credit reports and credit scores to get a sense of how likely you are to repay what you borrow. They also use credit scores to determine what kind of interest rate to charge on a home loan.
Checking your credit reports and credit scores can give you an idea of what your approval odds might be and what kind of loan terms you'll likely qualify for. This can also give you an opportunity to dispute any credit report mistakes which may be dragging your score down.
Set your homebuying budget
How much house can I afford? It's one of the most important questions to ask if you're ready to buy a home. You need to have an idea of what you can realistically afford to pay toward a mortgage each month. Doing the math using a home affordability calculator can help you determine what dollar amount range you should be looking for when you're ready to buy.
And don't forget about the other costs of homebuying. For example, you'll have upfront costs such as:
- Down payment
- Appraisal and inspection fees
- Closing costs
A 20% down payment is typically required to avoid private mortgage insurance (PMI) with conventional loans. And closing costs can run from 2% to 5% of the home's purchase price.
You'll also have ongoing costs, such as repairs and maintenance, as well as property taxes, HOA fees and insurance if those aren't escrowed into your mortgage payment. Factoring in all of these expenses can help you create an accurate homebuying budget.
2. Working with professionals
Shop for a lender
Finding the right lender matters. Your lender can help you narrow down which type of mortgage is right for you and guide you through the process from start to finish.
Working with a mortgage loan advisor at your current bank is another smart step if you're interested in getting preapproved for a home loan.
That's when the lender checks your credit and financials, then conditionally approves you for a mortgage. Having a preapproval sends a signal to sellers that you're serious about buying, and it gives you a financial framework for making an offer on a home.
Find a trusted agent
An experienced real estate agent can simplify homebuying. Your agent can take an inventory of what you need and want from a home – as well as your homebuying budget – and then help you find properties that are as close a fit for both as possible.
Asking friends or family members for referrals can help you find the right agent. Remember, you won't pay your agent anything out of pocket to help you find a home. The agent does earn a commission on the purchase, but this is typically paid by the seller at closing.
3. Making an offer
When you've found a home you think is “the one,” the next steps to buying a house for the first time are making an offer and applying for a mortgage. Your agent can make the offer on your behalf and help with negotiating a final purchase price.
Once you and the seller agree on a price, you'll sign a purchase and sale agreement, which stipulates the price and the target closing date, among many other details. At this time, you'll likely be required to pay an earnest money deposit into an escrow account as a good-faith gesture.
The earnest money deposit is typically 1% to 3% of the purchase price. This money may or may not be refundable if you decide not to buy the home, depending on the terms of the purchase agreement.
4. The mortgage process
Choose a mortgage
After the offer is accepted, you'll need to apply for a home loan with your lender. Before you do that, however, you'll need to choose what kind of loan you want. The most common mortgage options include:
- Conventional loans
- FHA loans
- USDA loans
- VA loans
Each one has different requirements when it comes to approval qualifications and your down payment. With an FHA loan, for example, your down payment could be as low as 3.5%.
Mortgages can have fixed rates or adjustable rates. The interest rate on a fixed-rate mortgage stays the same throughout the life of the loan, while the rate on an ARM will change to reflect current market rates after a set period of time, which usually ranges anywhere from one to 10 years. If you're working with a mortgage advisor, they can help you to find the appropriate loan option.
Apply for a home loan
Applying for a home loan involves completing the lender's application and providing the required supporting documentation. Many lenders allow you to fill out the initial mortgage application online. Some even make it easier by accepting uploads of digital documents rather than requiring paper copies.
Some of the documents you'll need to provide include:
- Tax returns for the previous year (or two years if you're self-employed)
- Bank account statements
- Investment account statements
- Pay stubs
- W-2s
Your lender will ask for consent to pull your credit reports and scores. Keep in mind that you may be asked for other documentation during the underwriting period if the lender needs to verify your income, assets or debts.
Perform due diligence
Once you've submitted your mortgage application, you enter the due diligence phase of homebuying. This is where most of the behind-the-scenes action of getting a mortgage happens. Here are a few of the most important things you'll take care of during this time:
- Continue working with your lender. If you haven't provided all the necessary documentation, you'll need to do that. Your lender will also ask you to pay for an appraisal to determine the home's value.
- Get homeowner's insurance. Coverage needs to begin on the day you take possession of the keys. Talk to your insurance agent about coverage: you may be able to get a discount by using the same company through which you have car, life and other insurance. Your agent also can help you determine what additional protection you may need, such as for contents or added liability coverage.
- Schedule a home inspection. While not required, most experts recommend that buyers hire their own independent inspector to professionally inspect the home before closing. This will help uncover any potential problems or repairs that aren't obvious to your unprofessional and untrained eye.
- Prepare to move. In the midst of the hustle and bustle of buying a home, you also need to start packing up all your belongings and preparing for the big move. Start early, get rid of things you won't need, and try to accomplish a little bit each day so that you're not overwhelmed the last few days before moving day.
5. Getting closed
Get ready to close
Sitting down at the closing table is the final step on your homebuying checklist. Once you sign off on the paperwork, the home is officially yours.
Before the closing, your lender will provide you with a good-faith estimate (or GFE) that details all of the various charges and fees that will appear on the settlement statement (also known as a HUD-1 form) you'll receive at closing. Review the GFE carefully and ask your lender or settlement agent if you have any questions about it.
Your lender also should tell you how much money you'll need to bring to the closing to cover your closing costs and down payment.
Close on the home
The closing process can be tedious as you'll be signing lots of paperwork. But this is the final hurdle you'll need to overcome.
On closing day, you'll meet at the designated closing agent's office. You can ask your agent to accompany you in case you have any last-minute questions. You'll need to bring a photo ID and your closing cost funds. This may be paid by cashier's check or your lender may allow you to schedule a wire transfer instead.
You'll then sit down and sign off on all of the loan paperwork. The signing process can take 30 minutes to an hour, depending on how involved the loan and purchase agreement are.
Once everything is signed, the documents have to be recorded with your local register of deeds. This should happen the same day. Once the recording is complete, you can collect your keys from the listing agent or your agent and start enjoying your new home.
Buying a Home Shouldn't Be a Headache
There's a certain amount of excitement that goes along with buying a home, and the more you know about what to expect about the process, the better. By using a homebuying checklist like this one, you can be better positioned to complete the purchase of your dream home.
And if you have questions about how homebuying works, working with a First Horizon loan officer can demystify the process. Get in touch today to learn how we can help.
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