Southtrust Law & Title Company: Family moving a long box into newly purchased home.

Home buying 101: Buying a home in 10 steps

Buying a house requires a lot of time and effort, but these 10 steps can help make the home buying process manageable and help you make the best decisions possible.

1. Start with your credit

The main factors involved in calculating a credit score are:
  • The number of accounts you have
  • The types of accounts
  • Your used credit vs. your available credit
  • The length of your credit history
  • Your payment history
Here is a general breakdown of the factors the CRA’s use to determine your credit score:

Your credit history describes how you use money. It includes information about how you have repaid the credit you have already been extended on credit accounts such as credit cards, retail department store accounts, car loan, finance company accounts, home equity loans and mortgage loans for primary, secondary, vacation and investment properties. Credit scoring models look to see if you have had any late payments and how late your payments were, how much was owed, and how recently and how often you missed a payment.

Your payment history also includes details on public record and collection items, including bankruptcies, foreclosures, wage attachments, liens, and any delinquencies that have been reported to collection agencies.

The scoring model will take all of this information into account, which is why the payment history section account may have the biggest impact in determining your credit score.

2. Set your budget

Next, you need to determine how much house you can afford. For the most accurate figure, ask to be pre-approved by a lender, who will look at your income, debt and credit to determine a loan you can afford.

The golden rule in determining how much home you can afford is that your monthly mortgage payment should not exceed 28 percent of your gross monthly income (your income before taxes are taken out). For example, if you and your spouse have a combined annual income of $80,000, your mortgage payment should not exceed $1,866.

If you have significant credit card debt or other financial obligations like alimony or even an expensive hobby, then you may need to set your sights lower.

3. Line up cash

Lenders like to see 20% of the home’s price as a down payment. If you’re like most home buyers, this down payment is the biggest obstacle between you and homeownership. Finding a lender with zero or low down payment loans could be the difference between buying a home now or having to wait months or years to become a homeowner.

Various private and public agencies — including Fannie Mae, Freddie Mac, the Federal Housing Administration, and the Department of Veterans Affairs — provide low down payment mortgages through banks and mortgage companies. If you qualify, it’s possible to pay as little as 3% up front.

A warning: With a down payment under 20%, you will probably wind up having to pay for private mortgage insurance (PMI), a safety net protecting the bank in case you fail to make payments. PMI adds about 0.5% of the total loan amount to your mortgage payments for the year.

Now that you have secured the down payment, make sure you’ve got enough money to cover fees and closing costs. These may include the inspection fees, appraisal fee, loan fees, cost of a title search, and if needed, attorney’s fees. These fees can quickly add up to more than $10,000 and will often be 5% of the mortgage amount.

If your available cash doesn’t cover your needs, you have several options. First-time homebuyers can withdraw up to $10,000 without penalty from an Individual Retirement Account, if you have one, though you must pay taxes on the amount. You can also receive a cash gift of up to $15,000 a year from each of your parents without triggering a gift tax.

4. Find an agent

Most sellers list their homes through an agent, but those agents work for the seller, not you. They’re paid based on a percentage, usually 5 to 7% of the purchase price, so their interest will be in getting you to pay more.

You need an “exclusive buyer agent”. Sometimes buyer agents are paid directly by you, on an hourly or contracted fee. Other times they split the commission that the seller’s agent gets upon sale. A buyer’s representative has the same access to homes for sale that a seller’s agent does, but his or her allegiance is supposed to be only to you.

5. Search for a home

When searching for a neighborhood in which to live. Look for signs of economic vitality: a mixture of young families and older couples, low unemployment and good incomes.

Pay special attention to districts with good schools, even if you don’t have school-age children. When it comes time to sell, you’ll find that a strong school system is a major advantage in helping your home retain or gain value.

Try also to get an idea about the real estate market in the area. For example, if homes are selling close to or even above the asking price, that shows the area is desirable. If you have the flexibility, consider doing your house hunt in the off-season. The off season is generally during the holiday season when buying or selling a house isn’t at the top of most people’s to do list. You’ll have less competition and sellers may be more willing to negotiate.

6. Make an offer

Once you find the house you want, move quickly to make your bid. If you’re working with a buyer’s broker, then get advice from him or her on an initial offer. If you’re working with a seller’s agent, devise the strategy yourself.

Try to line up data on at least three houses that have sold recently in the neighborhood. If you really want the house, don’t lowball. This may insult the seller. Remember, that your leverage depends on the pace of the market. In a slow market, you’ve got muscle; in a hot market, you may have none at all.

You can get creative when finding ways to satisfy the seller. For instance, ask if the seller would throw in kitchen and laundry appliances if you meet his price.

Once you reach a mutually acceptable price, the seller’s agent will draw up an offer to purchase that includes an estimated closing date (usually 45 to 60 days from acceptance of the offer).

7. Enter contract

Have your lawyer or buyers agent review this document to make sure the deal is contingent upon:

  1. You obtaining a mortgage
  2. A home inspection that shows no significant defects
  3. A good-faith deposit. This is usually 1% to 10% of the purchase price and should be deposited into an escrow account.

The seller will receive this money after the deal has closed. If the deal falls through, you will get the money back only if you or the home failed any of the contingency clauses.

8. Secure a loan

If you have not already done so, call your mortgage broker or lender and move quickly to agree on terms. This is when you decide whether to go with a fixed rate or adjustable rate mortgage and whether to pay points. You will get a credit check for a fee of around $50 to $75 for a credit check at this point, and another $150, on average to $300 for an appraisal of the home. Most other fees will be due at the closing.

If you don’t already have one, look into taking out a homeowner’s insurance policy, too. Most lenders require that you have homeowner’s insurance in place before they’ll approve your loan.

9. Get an inspection

In addition to the appraisal that the mortgage lender will make of your home, you should hire your own home inspector. The average home inspection with 4 point wind mitigation and termite inspection costs around $499, with condos and small homes under 1,000 sq ft. costing as little as $249. Larger homes over 2,000 sq ft. will run $599 or more. Radon or mold testing will cost extra, but will typically cost less if you purchase them with a home inspection.

Ask to be present during the inspection, because you will learn a lot about your house, including its overall condition, construction materials, wiring, and heating. If the inspector turns up major problems, like a roof that needs to be replaced, then ask your lawyer or agent to discuss it with the seller. You will either want the seller to fix the problem before you move in, or deduct the cost of the repair from the final price. If the seller won’t agree to either remedy you may decide to walk away from the deal, which you can do without penalty if you have that contingency written into the contract.

10. Close the deal

A few days before the actual closing, you will receive a final HUD Settlement Statement from your lender that lists all the charges you can expect to pay at closing.

Review it carefully. It will include things like the cost of title insurance that protects you and the lender from any claims someone may make regarding ownership of your property. The cost of title insurance varies greatly from state to state but usually comes in at less than 1% of the home’s price.

The lender might also require you to establish an escrow account, which it can tap if you fall behind on your mortgage or property tax payments. Lenders can require deposits of up to two months’ worth of payments.

The actual closing is often somewhat anticlimactic. It’s a ritual affair, with customs that differ by region. Your lawyer or real estate agent can brief you on the particulars.