Can I afford my dream home? What should I look for when touring houses? What is escrow? What does closing on a house mean? These are just a few common questions that first-time home buyers have. The home buying process can be long and challenging, so it’s natural to feel intimidated at first. We’re here to break everything down step-by-step to help guide you through the process, from viewing model houses to finally closing the deal on your new home. First things first—an overview of the home buying process.
How Long Does It Take to Buy a Home?
The timeline for buying a home varies per home buyer, but the overall process can take most home buyers about three months. The average home buyer will spend 30-60 days searching for a home and 14-60 days from contract until close. For some home buyers, the entire process can take as little as 30 days while others will shop for several months before providing an offer. Your home buying timeline may vary, but here’s a guideline to follow:
- Preparing to Buy a Home: 3-4 weeks
- Building a team: 1 week to two weeks (this will overlap with the initial search)
- Pre-approval of mortgage: 12-48 hours
- The home search: 4-8 weeks (depending on criteria)
- Contract to close: 14-60 days
Considerations When Buying a Home
The home buying journey is long and can be difficult or intimidating, especially if you’re a first-time buyer. However, for many people homeownership is a fulfilling experience that can lead to lifelong memories. However, it’s essential to evaluate several factors before starting your journey to homeownership:
Owning a home is a large responsibility. There are both time and financial costs associated with the buying process, homeownership, and the upkeep of a house. Many people view homeownership as a universal steppingstone in adulthood. It is true that owning a home is one way to generate wealth, but make sure homeownership actually fits in line with your lifestyle and life goals. For example, if you travel each month and don’t want to handle maintenance issues on your own, homeownership probably isn’t for you at the moment. If you’re ready to dedicate a significant amount of time, money, and resources to buying and maintaining a house, then you might be ready to own a home.
When buying a house, consider how long you will remain in that location. If you picture yourself relocating within two years, you may want to reconsider buying. Commissions, closing costs, and other fees will cost you around 5-7 percent when you sell. If you owned the home for less than two years, you would have to pay capital gains tax as well.
Job security and stability
Similar to asking yourself how long you plan to stay in one location, consider your career journey. If you are planning to shift jobs or careers, you may want to put off home buying. If your debt is low, work life is stable, and you plan on staying in the same location for the next five years, you’re probably ready for owning a home.
Maybe you’re looking to go back to school, expecting a child, or you need to pay down some credit card debt; all of these can be valid financial reasons to postpone purchasing a home. Before you start searching for your new house, you need to have an excellent understanding of your finances.
You’ll want to do plenty of research and calculate an estimate of the true costs of homeownership. This may include knowing your credit score and your debt-to-income ratio. Your debt-to-income ratio should be less than 45 percent. To find your debt-to-income (DTI), divide your amount of debt, including a proposed mortgage payment, by your monthly income.
You’ll also need to figure out how much square footage you can afford. You will need to budget for a monthly mortgage payment and a down payment. Keep in mind that being a homeowner comes with more costs than just the mortgage payment. Budget for home maintenance, or, if applicable, Homeowners Association fees. It is recommended the homeowners set aside around $3,300 per year for maintenance.
You’ll need to determine the type of down payment and type of loan you will use to finance your home. A 20% down payment is a good goal but isn’t necessary. However, avoiding a 20% down payment also has its own costs such as an additional Private Mortgage Insurance (PMI) fee. If you don’t have a down payment equal to 20% of the home’s purchase price, a lender will likely require you to get private mortgage insurance since the loan is a riskier investment. PMI protects the lender in the event of default on the primary mortgage and/or foreclosure. There are different types of PMI, but it typically costs between 0.5% and 1% of the monthly mortgage annually. This payment is usually included in the monthly mortgage payment, but a PMI fee can be removed once you pay down enough of the mortgage’s principal.
Lastly, consider closing costs. During the home purchase process, the sale price of the home itself is only part of the cost of buying. Besides the down payment, there are always closing costs in any home sale. The term “closing cost” refers to a wide range of fees and payments paid out to a wide variety of people involved in the sale, upon which the sale depends to go through. The different fees involved to close a home sale can vary widely from state to state.
Setting Your Priorities
Although we want everyone to live in their dream home in the ultimate location, compromising is somewhat inevitable for many homebuyers. Understand that the perfect house in the perfect location at the perfect price and in perfect condition may not exist — and that’s okay. Every home buyer faces the same tug-of-war. Determining your priorities and deal-breakers will help you find an ideal place to call home. Home price, size, location, commute, amenities, and many other factors all grapple for attention. Be prepared to be flexible.
For example, if location is your first priority and you discover a home in a prime location, but it prices you out of your other preferences, you will have to compromise in several ways:
- Look for a different home type within the neighborhood, such as a smaller single-family house, a townhouse, or condo. Decide if you can live with one less bedroom or less square footage.
- Consult with a lender or a financial planner to discuss your options for increasing your budget. While no one should overspend on a home, going above your price range when you’re financing your purchase with a 30-year fixed-rate loan may only add a small amount to your monthly payment (e.g., $10,000 might only cost an additional $30/month).
- While everyone prefers a move-in ready home, you can often get a better deal on a home that needs some cosmetic repairs. Do your research though, as renovations might cost more than you think once you dig a little deeper.
Assembling Your Team
After conducting a good deal of research, figuring out finances, and determining your wants and deal-breakers, it’s time to assemble your team and finally begin the home search.
There are a several professionals involved in the home buying process. Similar to your home buying timeline, who you need on your team will vary. Some common key team members include:
- Real estate agent or Realtor (we’ll explain more about the difference between the two later)
- Home appraiser
- Title company
- Home inspector
- Insurance agent
- Mortgage lender
Just like recruiting top players for a sports team, be selective when choosing the professionals for your home buying team. When you’re buying your first home, trust in your real estate agent and lender is essential. Reach out to people you trust for referrals for agents and lenders. Meet with each one before agreeing to use their services.
Aside from the mortgage lender, the real estate agent is the most important member of your home buying team. Think of the real estate agent as the team captain. Real estate agents will help you find a home appraiser, inspector, and title company since they usually have a network of professionals they work with and trust.
Keep in mind that these are the people who will be involved throughout the buying process, so trust, communication, and professionalism are key considerations when creating your team.
Sorting Out Your Finances
After selecting a mortgage lender, you will apply for mortgage pre-approval. This application requires gathering the necessary financial documents for submission, such as pay stubs and tax forms. Once approval is obtained, the clock begins ticking. Many pre-approval offers have a limited life span before expiring.
The Home Search
Now searching for your new home finally begins. Research, save, view, and repeat until you discover a new abode that’s just right for you. Remember, Homes.com has all the tools you need to find and keep track of your favorite properties, so your wish list of homes stays organized.
Closing the Deal: The Offer, Assessments, Conditions, and Negotiations
At last, you have a mortgage pre-approval ready to go and have discovered an affordable property you can envision yourself living in! Now’s the time to give a purchase offer to the listing agent or seller.
Once your offer has been accepted, the due-diligence period begins. This process involves completing any tasks stated in the terms of the contract, including final mortgage approvals, appraisals, inspections, and other requirements such as creating an escrow account. Many professionals and home buyers consider this part of the process the longest and most difficult since it includes, but isn’t limited to, final inspection, obtaining the final loan, purchasing insurance, and negotiations.
Every professional on your home buying team will be involved, so remember that building a reliable team will make the experience much smoother. Unfortunately, without proper vetting, the purchase could potentially fall apart at this point in the process. A successful closing requires every team player to be in unison on the same date with numbers and figures that match.