Whether you’re on the verge of buying your own home, or one of the 91% of millennial
renters who wants to buy a home someday, the process can seem daunting.
It would be lovely to skip right to that stock photo moment where the realtor hands you a
key next to a SOLD sign, but unfortunately, a lot of other stuff has to happen first and
the more you know about it, the smoother it will go.
So here is an illustrated guide to the Path to Home Ownership, from start to finish.
Many people jump right into finding a realtor or visiting open houses, but the most practical
first step is making sure you can get a loan--unless you’re paying cash, in which case you get
to skip ahead a few squares.
But for most of us, the first order of business is choosing a “loan officer”
This is the person who will secure a mortgage loan on your behalf.
Fun fact: I used to be a loan officer myself and I highly recommend sourcing this person
on personal referral.
The loan officer will have you fill out a pre-approval application that will include
your income, credit history and current assets.
You’ll also have to provide documentation like pay stubs, bank statements and tax returns.
Be prepared to share more financial information with this person than you do with practically
anyone else.
In return, he or she will help match you to a loan that’s right for you.
There are many different types of loans, but generally speaking, the better your credit
history and the more money you can put towards the down payment, the better your terms will be.
Having a score of 740 and being able to put down 20% of the purchase price is the ideal,
but as long as you have a credit score of around 680 and a down payment of at least
3 and half percent, your loan officer will be able to provide you with some decent options.
The loan officer will also help you decide how expensive a house you can qualify for,
and give you an idea what kind of closing costs to expect.
Closing costs are all the extra expenses that you’ll have to pay to finalize the deal
and you should anticipate them to total around 2% the purchase price.
Remember that your loan officer is not your financial planner.
It’s up to you to know how much you’re willing to shell out in total and how large
a monthly payment is comfortable for you.
And keep in mind that you don’t have to have all your ducks in a row in order to reach out
to a loan officer.
Even if you’re not quite ready to buy, they’ll be happy to talk with you and tell you what
you need to prepare.
If everything checks out, in a day or two you will be pre-approved for a home loan,
and now it’s time to add a new member to your team: the realtor.
Your realtor is your personal shopper and chief negotiator.
It’s their job to find you the home of your dreams, and help you make a competitive offer.
Realtors are not hard to come by, so it’s especially important to pick one with good
reviews, or has been personally recommended.
Like your loan officer, your realtor typically works on commission, which means they don’t
get paid until the deal is done, so they’ll be eager to get you into a home as fast as they can.
Now comes the part most people look forward to: finding a house!
After looking at countless pictures online and touring interiors,
at some point--hopefully--you'll zero in on a house that fits all the criteria you’re looking for.
So what comes next?
You and your realtor will submit a formal offer to the owner, accompanied by a letter
of pre-approval from the loan officer to prove that you can afford it.
If they accept, the clock starts ticking on the purchase process.
From here on out, it’s important that you don’t change anything about your financial situation.
Your loan approval is based on things staying just the way they are, so no changing jobs
or taking out new credit cards!
The first part of the purchase process is the option period.
You will typically give the owner a deposit of around 1% of the purchase price up front to
show that you are serious.
In exchange, the owner gives you a window of around 5-10 days to inspect the house and
decide whether you want to go through with it.
You’ll definitely want to hire a professional inspector to make sure the house is safe and
up to code and there are no issues with big ticket items like roof or AC.
If you do find major problems, you and your realtor can ask the owner to fix them, or
adjust your offer accordingly.
After option is over, you get to relax a bit while the loan officer works on turning your
file over to the underwriter.
They are the ones who hold the ultimate power to approve or deny your loan and it’s their
job to make sure you check out as a super trustworthy, squeaky clean potential borrower.
The loan officer will act as your go-between and just like you, will want to keep this
train moving, so be sure to promptly supply them with any supplemental documentation they
may need.
Once the underwriter gives you the all clear, you will be “clear to close”.
It’s almost closing day!
Time to get your checkbook out!
By this point your loan officer should be able to give you a definitive number of how
much you owe in down payment and closing costs.
This money is actually owed to a lot of different parties, but to make it simple, you’ll pay
it all to a title company, whose job is to make sure it gets to the right people.
You’ll also have to show up in person to sign a big stack of papers, which are then
sent back to the mortgage company and once they verify it…
Congratulations!
You own the home!
Even though the process is legally wrapped up, there’s a couple more things to keep
in mind: Your first mortgage payment is typically due the second month after closing.
So if you close on June 15th, expect to write that first mortgage check in August.
And don’t forget about moving costs!
Even if you don’t hire a professional moving service, there’s utility set-up costs, re-stocking
the pantry, replacing items that get broken in the move, or buying pizza and beer for
your dear friends that help you out.
No doubt about it: Buying a house is a big endeavor.
And like most big endeavors, the most important steps come early on:
...making sure you have enough money saved, and recruiting the right team members.
And that’s our two cents!