The 10 Steps to Buying a House

Introduction

Buying your first property can be a thrilling experience. But luckily, with today’s technology and some planning, it can be a simple process. While the experience of buying a property varies by the location, a bulk of residential purchases done with a conventional mortgage will follow the steps outlined here.

The process of buying a house

Before we jump into the steps of buying a property, there are a few things you should do beforehand:

• know what type of property you will be buying
• have your budget ready (property price you can afford)
• have a few target neighborhoods where you would like to purchase

Finally, you should have saved enough money for the down payment and the closing costs. The typical down payment is 20%, but some programs exist where you don’t need to provide a down payment (see VA loan). Similarly, there are types of loans that require as little as 3.5% as a down payment (see FHA loan). The closing costs will vary, but they are typically 3% to 6% of the loan amount.

Step 1: Get pre-approved

A pre approval letter is a document your lender can provide you stating how much you are potentially qualified for. In order to get a pre approval letter, the lender will verify your credit score and assess your borrowing capacity. Getting a pre approval letter early in the process will help you be ready to bid on the right property once you find it. Above all, the pre approval letter will show the seller of the house that you are a strong candidate. Finally, remember that you can and should shop around for the best lender for your needs. The right lender will provide you excellent customer service as well as a competitive interest rate and closing costs.

Step 2: Speak with a real estate agent

The real estate agent will be your main point of contact during the home purchase process. In addition, your agent will discuss your priorities, recommend areas based on your criteria, and take you to see the properties you are most interested in.

Step 3: See the properties

Once you’ve determined the properties you are most interested in seeing, the real estate agent will schedule times to visit them. Meanwhile, you should use the opportunity to visit the area ahead of time. Try to get a sense of the vibe of area. Can you see yourself living there? That will help you focus on a few properties and pick the right one for you. 

Step 4: Submit an offer 

After seeing a few properties in the neighborhoods you like, you found your ideal property. It’s time to submit an offer. Your real estate agent will help you analyze comparable properties in the area to find the fair market value and submit the right offer.

With the offer you can include contingencies. Contingencies are the conditions in the offer that need to be met or occur for the transaction to finalize. The following are common contingencies used: inspection, appraisal, and financing. We’ll talk more about those in the next few steps. 

Step 5: Get the offer accepted

After submitting your offer, the seller can do one of three things:

• accept your offer
• counter with a higher offer
• decline your offer

In short, multiple factors can help determine the attractiveness of your offer. Has the property been in the market for a long time, or did it just come? Sometimes the seller is not in a rush to sell and will only accept offers at his/her ask price. In other cases, the seller needs to sell fast and would be willing to accept lower offers. Another event that may happen is that the seller has multiple offers and asks all buyers to submit their best and final offer. That typically happens in a hot market or when the property is in high demand.     

Step 6: Send earnest money deposit

Once your offer is accepted, the next step is to send the earnest money deposit. This is generally done the same day or the day after the offer is accepted. Generally, the deposit is held in an escrow account managed by the title company. With the offer, you specify an amount of money you are willing to give as a good-faith deposit, in case you decided to back out of the contract. Typically the earnest money deposit is sent via a bank wire or by handing a check to the title company.   

Step 7: Property inspection

Your offer will typically have an inspection period. This is the number of days you have to inspect the property and determine if it is in the conditions. Hiring a home inspector is one of the best expenses you can do in your home purchase process. A professional home inspector will inspect the property’s foundation, roof, HVAC system, interior plumbing, electrical systems, appliances, floor, and many other things. After the inspection, the inspector will send you a written report with all the details on the house you have under contract.  In most cases, there will be nothing seriously wrong with the property. But, in some instances, there could be structural damages, leaks in the roof, damaged electrical systems, or others. In those cases you may want to renegotiate your offer with the seller or ask for credits at closing to fix those problems. 

Step 8: Property appraisal

Early in the mortgage loan process, your lender will order a property appraisal report. This is done by a licensed property appraiser who will visit the property, usually 2-3 weeks into the process. A home appraisal report will help your lender determine the fair market value of your property. If the property is appraised at a lower value, your lender will require you to cover the difference out of your pocket.  If your offer included an appraisal contingency, then you can re-negotiate your offer price. In the event the seller does not agree to re-negotiate or to lower the price, then you can walk out of the deal. On the other hand, if the appraisal comes higher, then you can use the opportunity to cover some of the closing costs (by re-negotiating the sale price higher and getting a credit for the difference), or have immediately more equity in the property. 

Step 9: Loan approval

If everything went well in the process, your lender will inform you that your loan has been officially approved. This usually happens 30 days after the process begins. 

Step 10: Close 

The final day has arrived. On closing day you will meet with the closing agent (usually at the title company’s office) to sign all the documents. The typical documents that are signed are:

• Promissory Note. This document is your binding commitment to repay your mortgage loan. It also contains all the details of your mortgage
• Mortgage/Deed of Trust. While the promissory note is basically an IOU, the Mortgage/Deed of Trust pledges the property to secure a loan. Remember, a mortgage is not actually a loan, but a contract between you and the lender that creates a lien on the property. Additional details can be found here.  
• Closing Disclosures. You will have received this three days prior to closing. The disclosures includes a breakdown of all the costs associated with your loan, amount to wire for closing, and estimated payments going forward. 

But before that, you will have the opportunity to conduct a final walk-through with the listing agent to confirm that nothing has changed in the house. If everything looks as promised, you will proceed to wire the closing monies (down payment + closing costs) and the property will be officially yours.

What’s next?

Congratulations on buying your property! If this will be your primary residence, the next step will probably be to setup utilities, buy furniture, and make your house feel like home. On the other hand, if this will be an investment property, the next step will be to get the property ready for your future tenants or guests.  Planning on using it as a long-term rental? A great book we recommend on managing long-term rental properties is The Book on Managing Rental Properties: A Proven System for Finding, Screening, and Managing Tenants with Fewer Headaches and Maximum Profits.