Buying A New Home
Understanding the Home Buying Process
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6 Steps to Buying Your Next Home
1. Get Pre-Approved
2. Find Dream Home
3. Make Offer & Negotiate Contract
4. Collect Earnest Money & Start Escrow
5. Be Actively Patient
Getting Ready To Buy
Many first-time home buyers don’t take the time to get pre-qualified. They also often don’t take the time to shop around to find the best mortgage for their particular situation. As your realtor, feel free to ask me any questions. If I don’t have the answer, I will at least direct you to the right person.
Every lender requires documents as part of the process of approving a mortgage loan. Here are documents you’re generally required to provide:
W-2 Tax returns — or business tax returns if you’re self-employed — for the last two or three years for every person signing the loan.
At least one pay stub for each person signing the loan.
Account numbers of all your credit cards and the amounts for any outstanding balances.
Two to four months of bank or credit union statements for both checking and savings accounts.
Lender, loan number, and amount owed on installment loans, such as student loans and car loans.
Addresses where you’ve lived for the last five to seven years, with names of landlords if appropriate.
Brokerage account statements for two to four months, as well as a list of any other major assets of value, such as a boat, RV, or stocks or bonds not held in a brokerage account.
Your most recent 401(k) or other retirement account statement.
Documentation to verify additional income, such as child support or a pension.
Your lender is required to provide you with a Loan Estimate within three business days of receiving your loan application. It is a three-page document that will show estimates for your interest rate, monthly payment, closing costs, taxes, and insurance. You’ll also learn how your interest rate and payments could change in the future, and whether you’ll incur penalties for paying off the loan early (called “prepayment penalty”) or increases to the mortgage loan balance even if payments are made on time (known as “negative amortization”).
Make Offer & Negotiate Contract
In 2021’s annual migration study, Idaho ranked #1 most sought-after place to move in the U.S. This ongoing influx of buyers has created a low inventory of homes for sale. When making your offer, be knowledgeable and ready to move because acting quickly with your offer will be to your advantage in this competitive market. Go to my Search Listings to see what other comparable homes are going for so that you can be prepared to make a competitive offer. It is unlikely that your offer is the only one on the table; do what you can to ensure it’s appealing to a seller.
Be Actively Patient
While your offer is being processed, your mortgage company will be working on underwriting your loan. This is the process of verifying your income, assets, debt and property details to issue a final approval for your home loan. Additional documents may be requested by your mortgage company and it’s important to stay on top of your lender’s requests to make sure you don’t slow down the loan process.
The biggest thing you can do to make sure you don’t run into problems is to avoid any major financial changes or spending. Don’t apply for new credit lines or loans, and don’t make purchases that will deplete your assets. Do these things after your loan closes. Taking on new debt changes your debt-to-income ratio (DTI), a key factor in determining the loan amount you can get approved for. If your DTI increases, you may be able to qualify for less–which could be a problem depending on your home price. If you push your DTI past about 45%, it’s possible you won’t qualify for a mortgage at all.
Once you’ve had an offer accepted and your loan is in underwriting, it’s time to schedule your home inspection. While this step is usually not a requirement for getting a mortgage, it’s a way to protect yourself from buying a home that will cost you more money than it’s worth. It’s your job to find an inspector and pay for the inspection; however, I can certainly help by recommending an inspector.
A typical home inspection will cover surface-level elements of the home such as structural components, outlets, heating and cooling systems, appliances and more; however, the inspector can’t checkout aspects of the house that aren’t easily accessible or visible. For instance, you’ll need a specialized inspector to identify lead, mold, asbestos, radon and pest problems.
Be sure to attend your inspection and ask all the questions you can think of. This is your chance to walk through your new home with an expert. They can tell you about the red flags and make recommendations for what to fix first and how to go about it.
Appraisals are a required part of the home buying process and typically occurs after the home inspection. In most cases, your final loan approval is contingent on the home inspection report and the appraisal. Once the appraisal is done, it’s time to move forward with insurance and warranties.
The appraisal protects both you and your lender from paying more for a home than it’s worth. Your mortgage company will order the appraisal for you, although it’s important to note that the appraiser is always an independent third party. By law, appraisers can’t be affiliated with you or your mortgage company. This ensures the appraisal process is fair.
If the appraised value of the house comes back higher than your purchase price, good news! You just snagged a deal and some additional equity in your home. On the other hand, a lower-than-expected appraisal value can cause problems for your mortgage process since your lender will never lend more than the appraised value of the property. If your appraisal comes back low, you have a few options:
- Bring more money to the table to make up for the difference in price
- Negotiate with the seller to lower the home price
- Contest the appraisal if you think there’s an error in the report
- Walk away from the deal
Determining Your Down Payment
How much you need for a down payment depends on the type of loan and how much the house costs, but the more you can put towards a down payment, the lower your monthly payment can be and the more you’ll save on interest. Conventional loans typically require a down payment of at least 5% of a home’s price. FHA loans require as little as 3.5%.
Along with your down payment, you’ll have to pay closing costs, or fees associated with processing and securing your loan. These can vary depending on the price of the house and the type of mortgage, but estimate between 2% and 5% of the home’s value.
CLOSING ON YOUR Home
Your offer is accepted. Your loan is approved. Now, you’re finally ready to sign on the dotted line. Closing is where you’ll sign all of the mortgage paperwork and, in most cases, take possession of the property. A pre-closing walk through may be scheduled before final closing documents are signed. Here’s what you need to know about closing:
Acknowledge Your Closing Disclosure
Before your closing, you’ll get a document called a Closing Disclosure, which will include a summary of the final costs of your loan.
It’s important to acknowledge that you received the document as soon as possible. Your lender is legally required to give you the Closing Disclosure three business days before closing, so if you don’t acknowledge receipt of
your Closing Disclosure quickly enough, your closing could be delayed.
What You Should Bring
- Your driver’s license or other valid, government-issued photo ID
- A cashier’s check or proof of wire transfer to pay your down payment and closing costs
- Your Closing Disclosure to compare to the final paperwork
- A list of key contacts, such as your agent or lawyer, in case you have questions
Who Should Attend
In general, all buyers who are going to be on the loan should plan to be at closing. It’s possible to close if you can’t be present, but you’ll need to give someone power of attorney.
In some states, the buyer and seller will both be at closing, whereas in other states each party attends a separate closing. In other words, you might see the seller at closing, but it’s not a guarantee.
You can expect a closing agent to facilitate the closing. They’re a neutral third party who will help both buyer and seller along the way. And of course, your real estate agent can attend, although this is not required.
WHAT YOU’LL PAY FOR AT CLOSING
At closing, you’ll get the keys to your home, and you’ll also need to pay any closing costs. Here’s a breakdown of the most common upfront costs:
Your down payment will become the equity you have in the home.
Your lender will collect these funds at closing to ensure there’s enough money in your account to pay tax and insurance bills as they come due.
This covers costs from third parties your lender uses to process your loan. These fees typically include appraisal fees, title insurance costs and credit report fees.
Per Diem Interest
You’ll pay daily interest upfront to cover the period between closing and the date your first mortgage payment is due.
Homeowners Association Dues
If you’re moving somewhere that has HOA dues, you may be required to pay a year’s worth of dues at closing.
A point (or discount point) is a fee paid to lower your interest rate. If you’ve chosen to pay points, you’ll pay for them at closing.
To show you’re serious about buying, earnest money is given to the seller before closing on the house as a good faith deposit. Earnest money protects the seller if the buyer backs out. It’s typically around 1-3% of the sale price and is held in an escrow account until closing. If the deal falls through due to a failed home inspection or any other contingencies, the buyer gets their earnest money back.
An escrow account serves as a savings account managed by your mortgage lender. The lender will deposit a portion of each mortgage payment into your escrow account to cover your estimated property taxes and insurance premiums.
This document officially transfers ownership of the property. In a cash deal, it goes to you; otherwise, you won’t get the deed until you pay off the mortgage.
These are binding statements by either party. For example, the sellers will often sign an affidavit stating that they haven’t incurred any liens on the property.
This word describes any amendments to the sales contract that affect your rights. For example, the sellers may arrange to retain occupancy for a specified period after closing but agree to pay rent to the buyers during that period.
Documents that provide a record and proof of your coverage insuring the title or the property itself. Homeowners insurance documents will generally be your responsibility, while proof of title insurance will be given to you at the closing table.