First-Time Home Buyer Process from Budgeting to the Closing Table
Buying Process Step-by-Step:
- Figuring out the Budget
- Lender Pre-Qualification
- Choosing a Real Estate Agent
- House Shopping
- Home Inspection
- Making an Offer
- Hire a Real Estate Lawyer
- Lender Pre-Approval
- Closing Table
When purchasing a new home, many go straight to the internet or bookstore to educate themselves about the process and what to expect. After going through it though, I can tell you, it’s almost impossible to prepare yourself completely for what’s to come when buying your first home. States, counties and even towns can have their own rules and regulations about purchasing a home so no one persons experience is ever really the same. I was also one of those excited new homebuyers who felt like I could anticipate all that was to come just from my frequent google searches but it’s hard to know until you actually go through it.
I can only hope that my individual story gives the next new homebuyer a little background on what to expect, who you will be dealing with through the whole process at different stages and how to prepare yourself for the waiting. From offer to closing can take anywhere from 60 days to 3 months or more, but on average it’s about 60 to 90 days. I’m not including foreclosures or short sales, which are a whole different ballgame. My story is for a regular purchase single-family residence on Long island, NY in the town of Brookhaven.
discretionary income should be somewhere between 30 to 50%
Figuring out the Budget
Let’s start at the beginning – how much you’re able to pay a month in mortgage, property taxes, PMI and home insurance. Those of you that may have thought the beginning was home searching, you are not alone. I think most people will try to do the fun part first like looking at homes online or going to open houses. However, it’s definitely not the first step! In fact, most mortgage reps, brokers and real estate agents will not only want to know your budget straight away but also want to know that a lender agrees with what you’re saying your budget is. The money aspect is not the most fun part but it’s the most responsible way to start your home search. Why find that home of your dreams if you can never afford it? A lot of the current attitude about finding out what you can afford stems from the housing crisis. Many were getting into homes they simply could not afford and lost them at some point to foreclosures because of it. All that hard earned cash paid into the home is now gone. We don’t want that to happen you!
Now, even though there are much stricter regulations in place for taking out a mortgage, some banks, I feel, still allow for more than what I think is within a reasonable budget. The difference, for me, between a regular budget from the perspective of a bank and a reasonable budget is that a reasonable one is a little more realistic to how people live or, more specifically, want to live. Everyone wants to live within his or her means but it’s important to make a list of where you want that discretionary income to actually go. Well, let’s be honest, it should go into a savings account but where do you enjoy spending that savings? Do you like the occasional splurge purchase like a new Gucci bag or do you enjoy going out to eat every night over cooking? Do you always want that hot new car or do you prefer to save every penny for that once of a lifetime vacation trip? You, and maybe even a significant other, need to sit down seriously and honestly discuss where you like to spend that extra income. There is much debate over the topic of a right amount of discretionary income among financial advisors and it greatly depends on many factors – such as residing in a high cost-of-living area or maybe knowing you have family to fall back on financially if there were an emergency. However, most would agree it should be somewhere between 30 to 50%. And just to clarify, discretionary income is that spending money after taxes that are not spent on the ‘must bills’ – food, shelter, credit card payments and transportation.
Two Types of Mortgage Loans
This brings me to the first person you will be meeting with in this whole process, your lender for a pre-qualification. This is important because your real estate agent needs this in order to get you into open houses to see a home. Your lender can be a broker, a bank lender representative or a mortgage bank representative. Depending on where you’re looking for a home, the benefits of each can vary. For us, a broker was the best option because he works directly for us and has associations with multiple bank lenders. He can then shop around for the best deal on interest rates. You should always get multiple quotes anyway. We felt uncomfortable at first with the idea of sitting down with a lender and using up their time when we may not end up going with them in the end. However, everyone in this regard was professional and understood we were exploring all avenues before making a decision. They also deal with it all the time so don’t feel bad. When making your decision, you should choose whomever you feel most comfortable with. For us, the most important thing was access. We wanted to be informed every step of the way and the broker we met with focused on that when we spoke with him and that’s ultimately how we made our final decision.
We knew we were most likely getting a fixed 30-year mortgage, or standard mortgage, with only 5% down. We know early on that we needed to pay PMI (“private mortgage insurance”) with our monthly mortgage costs since we couldn’t reach the 20% needed to not have to pay it. PMI is just a payment to cover the lender for those that don’t have enough to have 80% equity in their home up-front. Once you reach the 80% equity though, it’s no longer a payment you need to make. For most that could be 7 to 10 years depending on the loan amount. It’s not as bad as it seems though because many government loans require PMI for the life of the loan. This scenario is quite typical for middle-income first-time homebuyers. My fiancé and I made too much to qualify for any government loans or state or county programs but we didn’t make enough to save up for 20% down anytime soon, or ever.
Choosing a Real Estate Agent
After getting pre-qualified, which is not the same as pre-approved, you’re ready to speak with your real estate agent. Keep in mind that the lender you obtain your pre-qualification from doesn’t necessarily need to be your mortgage lender in the end. You’ll be able to shop around for mortgages and interest rates at another time down the process. You will still need to divulge your entire financial status and monetary past at the time of pre-qualification – this includes but is not limited to current paychecks, W2s, tax returns, current debt, current monthly payments and checking and savings account balances.
How to Choose an Agent
After figuring out our budget, we started the home search. We used the typical Zillow and Redfin websites to find some homes in the beginning and while most of these are quite accurate for what’s available, just know a real estate agent will have the most accurate listings. Your agent will in all likeness give you access to their agent-only search websites, which has benefits for each side - they can track what you’ve marked as your favorites and you can have the comfort of knowing it’s the most up-to-date listings.
Now, this is the most fun part of the process, so enjoy it! Really know what you want in a home whether it’s a fixer upper or ready-to-move-in and go to as many open houses as you can. The photos sometimes don’t do the home justice and at other times the photos can be from a time when the home was more up-to-date. Seeing it in person is the only way to know what you’re really getting. Also try to be as honest with your agent as possible – if going above a certain ceiling is a deal breaker, let him know, if there’s no chance you’d buy a home without a basement, might as well be upfront about it. Don’t waste their or your time; it’ll make for a more enjoyable house searching experience.
After you’ve found some homes you’re interested in do drive by it at different times of day and on different days of the week before making an offer. You may get impatient or think you don’t want this dream house to slip out of your grips but don’t jump the gun. Sometimes neighborhoods can seem wonderful on a Sunday afternoon but terrible by nightfall or maybe even a noisy neighbor that only comes out after 5.
Home Inspection List
Home Inspection & Making an Offer
After you’ve picked the home of your dreams hire an inspector for a home inspection before making an offer. These can either be inspection professionals or engineers – whichever one is your choice. Always ask for a copy of the report. This is what you’re paying for, which can range from $350 - $550. After this inspection you can make your offer. Note anything you may want to include in the contract as far as to be repaired, included with the home, etc.
Hire a Real Estate Lawyer
This brings us to the next step after making an offer - hiring a lawyer. Real estate law can range from very complex to quite simple. Lawyer fees will also vary based on this. Our contract was quite simple since we only included in our contract to keep the kitchen appliances, otherwise, we were taking the home as is. Your lawyer will deal with the seller’s lawyer and also set-up the title, which is part of your closing costs. He will need the contact name and number of your real estate agent and lender rep since he also sets up the closing time and date with the sellers.
Lender's Want to See
Debt or Debt Ratio
While all the contract paper work is being finalized, you will be writing your down payment check and shopping for a mortgage for pre-approval. Your mortgage lender will need the contact information for your real estate agent and your lawyer so each can keep in contact on the various steps being complete. You will then sit-down with your lender and sign all the necessary documents for the loan and provide anymore paperwork that may be needed that wasn’t already given – most likely it will only be more current paystubs.
After this point, it’s really just a waiting game and letting all these people you’ve hired do their job. The best updates will come from your broker and lawyer since they’re pulling the trigger on most of the last steps. This is the step where patience is important. You’re either waiting on the sellers to sign the contract or the title company or for the bank to finally approve the loan. It could be a whole plethora of things but hold out – the end is near.
And lastly, your closing day will be in a room with your lawyer, the seller’s lawyer, the title company representative, your real estate agent and the seller’s agent, your broker and a representative from the lender. The sellers will also be there, which can be awkward but try to make the best of a day of just signing lots and lots of paperwork. Your lawyer will walk you through the whole process and likely have already let you know the day before what final checks to write and to whom.
It’s long arduous process but one well worth the effort. You’ll be a homeowner by the time you’ve dotted your ‘I’s and crossed your ‘T’s. All you need is patience, a little bit of luck and enough knowledge to get your through each step.
See my other articles on Grieving Your Taxes and Homeowner Taxbreaks on my homepage.