How-To Guide: Buying a House for Beginners

by Bruce Ueno

It’s easy to dream about home ownership, but it’s much more complicated to actually buy that dream home. Once you’ve determined that becoming a homeowner is right for you – meaning you plan to stay put for at least five to seven years, have the cash for a down payment and are willing to tackle home projects that would otherwise be farmed out to a landlord – take the purchasing process step by step. Staying organized, open-minded and proactive can simplify the home-buying venture.

Step 1: What Can You Afford?

Crunch the numbers to determine what you can afford – and be realistic about it. Just because the bank approves you for a loan of a certain number doesn’t mean it’s optimal for your budget. A general rule, according to CNN Money, is to purchase a home that costs no more than 2.5 times your annual gross salary. Your total debt, including your mortgage, should not exceed 36 percent of your income. Be frugal when buying a house, recommends financial website Smart Money, and avoid overextending yourself. Consider how you would pay your mortgage in the case of a layoff or disability.

Step 2: Organize Your Finances

Before seeking preapproval, shore up your credit. Pay down debts and attempt to remove any blemishes on your credit report. Strong credit will make the home-buying process easier. Although you can casually search for homes, the eventual process of putting in an offer and applying for a mortgage goes more smoothly when your finances are in order and you’ve gotten preapproval. Check your credit report to ensure it contains correct information and then seek preapproval from a bank or credit union. Obtaining preapproval shows a seller that you’re ready to buy the house.

Step 3: Start Searching

Search for homes with the help of a professional real estate agent. Potential homeowners can find more listings than ever on the Internet, but using an exclusive buyer agent can help you make more informed decisions, particularly when it comes to putting in an offer. When searching for a house, look for one in an area with a good school district; even if you don’t have children, it plays a large role in a home retaining or gaining value, according to CNN Money.

Step 4: Determine Your Down Payment

Determine the source and amount of your down payment. Ideally, lenders would like a down payment of 20 percent. However, a number of specialty loans, including ones from the Federal Housing Administration and the Department of Veteran Affairs, offer opportunities to put down as little as 3 percent. Loans with a down payment less than 20 percent typically require the homeowner to pay private mortgage insurance, which protects the bank in case you don’t make your monthly payments. PMI equals approximately 0.5 percent of the total loan amount per year, according to Kiplinger.

Step 5: Put in an Offer

This is where an experienced real estate agent really helps. An offer on a house should be educated, based on the sales of similar homes in the same neighborhood. Go in with a slightly lower offer – such as 8 to 10 percent below asking price – as a catalyst for negotiation. If the seller accepts, he will sign the contract. In some cases, the buyer includes contingencies in the contract, which are conditions that must be fulfilled before the deal can be completed. This could include a contingency that the buyer's previous home sells before the deal can go through, or that the buyer obtains financing.

Step 6: Earnest Money

Make an earnest money deposit into an escrow account to show the seller that you're serious about purchasing the property. Small or token deposits of under 1% tend to send mixed signals to the seller, so deposit more if you're able. Your agent or lawyer will then review the contract, which is contingent upon your mortgage approval, an approved home inspection and a final walk-through 24 hours before closing.

Step 7: Figure Out Your Mortgage

Choose your mortgage with a loan officer. There are a number of variables when obtaining a mortgage – 15 year versus 30 year, fixed versus adjustable rate, paying points versus lowering your interest rate – The choices can be quite intimidating, but an experienced loan officer will walk you through each option and help you determine the best for your needs.

Step 8: Have an Home Inspection

Hire an experienced home inspector to go through the house with a fine-tooth comb. This professional, often an engineer with experience in home surveys, will ensure there’s nothing major wrong with the house before you purchase it. This can save you unexpected costly repairs that the seller might not be up front about.

Step 9: Finalize the Deal

Walk through the house one last time.  Once your loan documents have been prepared and the terms of the contract have been fulfilled, escrow will prepare a HUD-1 settlement statement which itemizes all monies coming in and being paid out on your closing date.  You and the seller will have a chance to review the documents before the meeting where you will sign the paperwork.  In California, this usually takes place in the escrow office, and it is not necessary for the seller to be present at the meeting. Read each document carefully so you understand, and don’t be afraid to ask questions. You will hand over your cashier’s check for your down payment and any portion of closing costs for which you might be responsible. The property deed will be transferred from seller to buyer, and the home becomes legally yours.

First time buyer in the Inland Empire?  I can help.  Call me at (951) 310-0397