Buying a home is a big financial step. But understanding key parts of process—from preparing your finances to partnering with lenders and real estate agents who can help you secure the home you want—can make the experience go more smoothly. Here are seven steps to help you successfully navigate the homebuying process:
1. Get your finances in order
Before shopping for a home, examine your own finances, including your credit reports and scores. Banks will use your credit status to determine how much you can borrow, and what interest rates you’ll pay. The better your credit, the more likely you are to receive a favorable loan. Check on your credit at one or all of the three federally recognized credit reporting agencies—Experian, Equifax and TransUnion—and clear up any errors before you apply for a loan.
Also start saving for a down payment, which can be multi-year process. Depending on the type of mortgage you apply for, a down payment could be from 3.5 percent to 20 percent of the home’s purchase price
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2. Get prequalified or preapproved for a mortgage
Prequalification or preapproval helps you know how much house you can afford, and streamlines the home buying process. During prequalification, lenders examine your finances to determine which types of mortgages are available to you and how much they would be willing to lend you. The preapproval process requires more in-depth information about your finances, including how much you have saved for a down payment, but represents a commitment from a lender for a loan amount. A preapproved mortgage can give you an advantage over prequalified buyers and those who have not yet contacted potential lenders.
3. Look for a home
Once you know much you can borrow, you can begin looking for houses in your price range. Advice: Work with a real estate agent who is knowledgeable about your local market. Real estate agents also can help you negotiate the price of the home and manage the closing process.
4. Make an offer
Once you’ve found the house you want to buy, you’re ready to make a written offer to the seller. The legal requirements for a formal offer vary from state to state, and a real estate agent can help you make sure you include everything you need. In addition to price, the offer will typically outline how you will pay for the property, the down payment, and desired closing date. You also might include contingency clauses that allow you to cancel the deal without penalty, such as the discovery of structural damage during inspection. When the seller agrees to your offer, it becomes a contract.
5. Get an inspection
Once you offer is accepted, your real estate agent can help you set up a home inspection to identify any problems with the property that need to be fixed before completing the transaction. In lieu of fixing a problem, the seller may be willing to reduce the price of the property to cover your costs for repairs
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6. Get final approval from your mortgage lender
If you’ve been preapproved or prequalified, you can now work with your mortgage lender to finalize the details of your mortgage. Based on the contracted purchase price, your lender can determine monthly payments based on your interest rate and other expenses, such as escrow payments to cover property taxes. Your bank also will hire an appraiser to make sure the home is worth what they are preparing to lend to you.
7. Close the deal
The closing is when you sign all the paperwork needed to complete the purchase of the home, including final loan documents. Your lender will release the funds from your mortgage to the closing agent in return for the property’s title document. At this point, the title of the property is transferred to you and the seller will turn over the keys—making you a homeowner.