10 Steps to Home Ownership
Step 1: Are You Ready?
One of the keys to making the home-buying process easier and more
understandable is planning. In doing so, you'll be able to
anticipate requests from lenders, lawyers and a host of other
professionals. Furthermore, planning will help you discover valuable
shortcuts in the home-buying process.
Do You Know What
Whether you are a first-time homebuyer or entering the marketplace
as a repeat buyer, you need to ask why you want to buy. Are you
planning to move to a new community due to a lifestyle change or is
buying an option and not a requirement? What would you like in terms
of real estate that you do not now have? Do you have a purchasing
Whatever your answers, the more you know about the real estate
marketplace, the more likely you are to effectively define your
goals. As an interesting exercise, it can be worthwhile to look at
the questions above and to then discuss them in detail when meeting
with local REALTORSŪ.
Do You Have The
Homes and financing are closely intertwined. (Financing is the
difference between the purchase price and the down payment, commonly
referred to as debt or the mortgage.) The good news is that over the
years new and innovative loan programs have evolved which require a
5 percent down payment or less. In fact, a number of programs now
allow purchasers to buy real estate with nothing down. However, this
changes from time to time. If you were looking for financing last
year, plan on starting all over again.
addition to a down payment, purchasers also need cash for closing
costs (the final costs associated with closing the loan).
Not everyone, however, elects to purchase with little or no money
down. Less money down means higher monthly mortgage payments, so
most homebuyers choose to buy with some cash up front.
to closing costs, in markets where buyers have leverage, it may be
possible to negotiate an offer for a home that requires the owner to
pay some or all of your settlement expenses. Speak with local
REALTORSŪ for details.
Is Your Financial House in Order?
Those great loans with little or nothing down are not available to
everyone: You need good credit. For at least one year prior to
purchasing a home, you should assure that every credit card bill,
rent check, car payment and other debt is paid in full and on time.
Step 2: Get a RealtorŪ
than 2 million people in the United States have earned real estate
licenses. However, real estate is a tough business with a steep
dropout rate, and the result is that only a small percentage of
those with licenses actively help buyers and sellers.
National Association of REALTORSŪ (NAR) includes 1 million brokers
and salespeople, individuals bound together with a strong Code of
Ethics, extensive training opportunities and a wealth of community
information. NAR members are routinely active in PTAs, local
government committees and a variety of neighborhood organizations.
Being actively involved in community affairs provides REALTORSŪ with
a better understanding of the area in which they are selling.
Buying and selling real estate is a complex matter. At first it
might seem that by checking local picture books or online sites you
could quickly find the right home at the right price. But a basic
rule in real estate is that all properties are unique. No two
properties -- even two identical models on the same street -- are
precisely and exactly alike. Homes differ and so do contract terms,
financing options, inspection requirements and closing costs. Also,
no two transactions are alike.
this maze of forms, financing, inspections, marketing, pricing and
negotiating, it makes sense to work with professionals who know the
community and much more. Those professionals are the local REALTORSŪ
who serve your area.
How do you choose?
every community you're likely to find a number of realty brokerages.
Because there is heated competition, local REALTORSŪ must fight hard
to succeed in your community.
Places to find RealtorsŪ are open houses, local advertising, Web
sites, referrals from other REALTORSŪ, recommendations from
neighbors and suggestions from lenders, attorneys, financial
planners and CPAs. The experiences and recommendations of past
clients can be invaluable.
many cases buyers will interview several REALTORSŪ before selecting
one professional with whom to work. These interviews represent a
good opportunity to consider such issues as training, experience,
representation and professional certifications.
What should you expect when you work with a REALTORŪ?
you select a REALTORŪ you will want to establish a proper business
relationship. You likely know that some REALTORSŪ represent sellers
while others represent buyers. Each REALTORŪ will explain the
options available, describe how he or she typically works with
individuals and provide you with complete agency disclosures (the
ins and outs of your relationship with the agent) as required in
hired for the job, the REALTORŪ will provide you with information
detailing current market conditions, financing options and
negotiating issues that might apply to a given situation. Remember:
Because market conditions can change and the strategies that apply
in one negotiation may be inappropriate in another, this information
should not be set in stone. During your time in the marketplace
REALTORSŪ will keep you updated and alert you to each step in the
Step 3: Get a Loan Pre-Approval
people can buy a home for cash. According to the National
Association of REALTORSŪ (NAR), most buyers finance their purchase,
which means that virtually all buyers -- especially first-time
purchasers -- required a loan.
real issue with real estate financing is not getting a loan
(virtually anyone willing to pay lofty interest rates can find a
mortgage). Instead, the idea is to get the loan that's right for you
-- the mortgage with the lowest cost and best terms.
REALTORSŪ routinely suggest that consumers start the mortgage
process well before bidding on a home. Many lenders (the sources of
money) and programs. By meeting with lenders -- either online or
face to face -- and looking at loan options, you will find which
programs best meet your needs and how much you can afford.
REALTORSŪ also recommend pre approvals for another reason: Purchase
forms often require buyers to apply for financing within a given
time period, in many cases, seven to 10 days. By meeting with loan
officers in advance and identifying mortgage programs, it won't be
necessary to quickly find a lender, check credit, and rush into a
financing decision that may not be the best option
What is it?
"Pre-approval" means you have met with a loan officer, your credit
files have been reviewed and the loan officer believes you can
readily qualify for a given loan amount with one or more specific
mortgage programs. Based on this information, the lender will
provide a pre approval letter, which shows your borrowing power. You
can visit as many lenders as you like and get several pre-approvals,
but keep in mind that each one carries with it a new credit check,
which may show up on future credit reports.
Although not a final loan commitment, the pre approval letter can be
shown to listing brokers when bidding on a home. It demonstrates
your financial strength and shows that you have the ability to go
through with a purchase. This information is important to owners
since they do not want to accept an offer that is likely to fail
because financing cannot be obtained.
How do you get pre-approval?
estate financing is available from numerous sources, including
lenders here in the finance section of Realtor.com, mortgage
companies that have worked with local REALTORSŪ and in some cases,
individual REALTORSŪ themselves. Based on his or her experience, the
REALTORŪ may suggest one or more lenders with a history of offering
competitive programs and delivering promised rates and terms.
loan officer will carefully review your financial situation,
including your credit report and other information. The lender will
then suggest programs which most-closely meet your needs. For
instance, a first-time buyer may qualify for state-backed mortgage
programs with little money down and low interest rates, while a
repeat purchaser (someone who has bought a home before) with more
equity (money invested in the home) might want to get a 15-year loan
and the lower overall interest costs it represents. Typically,
first-time buyers opt for the traditional 30-year loan, with either
a floating interest rate or a fixed rate of interest over the life
of the loan.
Step 4: Look At Homes
Millions of new and existing homes are sold each year. There's no
shortage of housing options, but with so many choices the challenge
becomes finding the property which best meets your needs.
The housing market is complicated because the stock of homes for
sale is always in flux. If it were possible to have a complete list
of every home for sale at this very moment in a given community,
such a list would become obsolete within seconds as new homes become
available and properties now for sale are put under contract.
effect, buyers are looking at a moving target in a marketplace that
is never static. Because of this, it is important to know as much as
possible about the choices in preferred markets, and the way to do
that is by working closely with a local REALTORŪ who has a good lay
of the land.
What are you looking for?
A home is more than just a collection of bedrooms and bathrooms.
Several properties -- each with four bedrooms, three baths, and the
same price -- may well represent radically different designs,
commuting distances, lot sizes, tax costs, interior dimensions, and
Each of us is different and so it's important to list the features
and benefits you want in a home. Consider such things as pricing,
location, size, amenities (extras such as a pool or extra-large
kitchen) and design (one floor or two, colonial or modern, etc.).
Next, it's important to consider your priorities. If you can't get a
home at your price with all the features you want, then what
features are most important? For instance, would you trade fewer
bedrooms for a larger kitchen? A longer commute for a bigger lot and
Lastly, consider your needs in several years. If you'll need a
larger home, maybe now is the time to buy a bigger house rather than
moving or expanding in the future. If you expect your income to
increase, perhaps you should consider a more expensive home financed
with a loan program where monthly payments increase in the future.
Where should you look?
All neighborhoods and communities have a special nature that gives
them identity and value. One community may be well known for
historic homes while another offers both suburban living as well as
easy access to downtown office areas.
How do you find a house?
Some buyers like to search REALTOR.comŪ or the local Multiple
Listing Services by looking at listings on the basis of location or
price; others prefer to have local REALTORSŪ suggest properties; and
many buyers prefer both approaches.
Step 5: Choose a Home
There's no doubt that choosing a home is a big decision and you want
to do it right.
a buyer, here's what actually happens. A home has been placed on the
market for which the seller has established an asking price as well
as other terms. In effect, this is an offer. At this point, you have
three choices: accept the seller's offer and create a contract;
reject it and not make an offer; or suggest different terms and make
a counter-offer. If you choose this last option, the seller may
accept, reject or make a counter-offer.
aspect of the home buying process is more complex, personal or
variable than bargaining between buyers and sellers. This is the
point where the value of an experienced REALTORŪ is clearly evident
because he or she knows the community, has seen numerous homes for
sale, knows local values and has spent years negotiating realty
Is it THE house?
A house is shelter, but a home is far more. It's where you live,
relax, entertain friends, raise families, and work. A home is where
you spend much of your life, and so choosing a house is an enormous
How do you know if a house is THE one? Probably the best approach is
to look at as many homes as possible, something made easy by your
REALTORŪ, where you can quickly and easily view huge numbers of
homes, check prices, take video tours and view extensive
Can you really afford it?
Remember Step 2 - the pre-approval process? Getting pre-approved
means you have a very good idea of how much you can borrow, what
loan programs will most likely work best in your situation and how
much home you can afford.
How reliable is a pre-approval? While pre-approval is not a loan
commitment, it's still necessary for lenders to check such items as
appraisals and the latest credit reports. Despite fluctuating
interest rates, pre-approval nonetheless provides a reasoned,
careful analysis of what you can afford. After all, loan officers
are routinely paid only when loans are originated. It doesn't make
much sense for loan officers to suggest high loan limits that later
can't be delivered.
Step 6: Get Funding
Often the cost of real estate financing is routinely greater than
the original purchase price of a home (after including interest and
closing costs). Because financing is so important, buyers should
have as much information as possible regarding mortgage options and
Realtor.comŪ provides consumers with extensive mortgage information
as well as a variety of loan calculators. Local REALTORSŪ can
provide mortgage information, discuss financing options and
recommend loan sources. In addition, some REALTORSŪ also originate
What kind of loan?
There are thousands of loans available out there from a variety of
lenders, but in general, the mortgage you choose will likely be
determined by at least several key factors:
How much down? Loans with 5 percent down or less are available -- in
fact, loans from major lenders with no money down have appeared in
recent years (2010).
you place less than 20 percent down, lenders may want the mortgage
guaranteed by an outside third party such as the Veterans
Administration (VA), the Federal Housing Administration (FHA) or a
private mortgage insurer (PMI, or private mortgage insurance, is
required by lender to protect against any mortgage
defaults). Millions of VA, FHA and PMI loans are generated each
How's your credit? The best rates and terms are only available to
those with solid credit. To get the best loans, make a point of
paying credit cards, installment payments, rent and mortgage bills
in full and on time.
How do you get
To obtain a loan you must complete a written loan application and
provide supporting documentation. Specific documents include recent
pay stubs, rental checks and tax returns for the past two or three
years if you are self-employed. During the prequalification
procedure, the loan officer will describe the type of paperwork
Where do you get a loan?
Mortgage financing can be obtained from mortgage bankers, mortgage
brokers, savings and loan associations, mutual savings banks,
commercial banks, credit unions, and insurance companies. A growing
number of REALTORSŪ can also arrange financing.
Step 7: Make an Offer
REALTORŪ groups, working with legal counsel, have developed forms
that are appropriate for realty transactions in specific
communities. Such documents include numerous sale conditions and
their wording should be carefully reviewed to assure that they
reflect the terms you want to offer. REALTORSŪ can explain the
general contracting process in your community as well as his or her
While much attention is spent on offering prices, a proposal to buy
includes both the price and terms. In some cases, terms can
represent thousands of dollars in additional value for buyers -- or
additional costs. Terms are extremely important and should be
You sometimes hear that the amount of your offer should be x percent
below the seller's asking price or y percent less than you're really
willing to pay. In practice, the offer depends on the basic laws of
supply and demand: If many buyers are competing for homes, then
sellers will likely get full-price offers and sometimes even more.
If demand is weak, then offers below the asking price may be in
How do you make an offer?
The process of making offers varies around the country. In a typical
situation, you will complete an offer that the REALTORŪ will present
to the owner and the owner's representative. The owner, in turn, may
accept the offer, reject it or make a counter-offer.
Because counter-offers are common (any change in an offer can be
considered a "counter-offer"), it's important for buyers to remain
in close contact with REALTORSŪ during the negotiation process so
that any proposed changes can be quickly reviewed.
How many inspections?
A number of inspections are common in residential realty
transactions. They include checks for termites, surveys to determine
boundaries, appraisals to determine value for lenders, title reviews
and structural inspections. You can also have inspections for septic
systems, radon, well water, pool, oil tanks, and others. Some towns
will also have their own safety inspections.
Structural inspections are particularly important. During these
examinations, an inspector comes to the property to determine if
there are material physical defects and whether expensive repairs
and replacements are likely to be required in the next few years.
Such inspections for a single-family home often require two or three
hours, and buyers should attend. This is an opportunity to examine
the property's mechanics and structure, ask questions and learn far
more about the property than is possible with an informal
Step 8: Get Insurance
one would drive a car without insurance, so it figures that no
homeowner should be without insurance.
The essential idea behind various forms of real estate insurance is
to protect owners in the event of catastrophe. If something goes
wrong, insurance can be the bargain of a lifetime.
What kind and how
There are various forms of insurance associated with home ownership,
including these major types:
Title insurance: Purchased
with a one-time fee at closing, title insurance protects owners in
the event that title to the property is found to be invalid.
Coverage includes "lenders" policies, which protect buyers up to the
mortgage value of the property, and "owners" coverage, which
protects owners up to the purchase price. In other words, "owners"
coverage protects both the mortgage amount and the value of the down
Homeowners' insurance: Homeowner's
insurance provides fire, theft and liability coverage. Homeowners'
policies are required by lenders and often cover a surprising number
of items, including in some cases such property as wedding rings,
furniture and home office equipment.
Flood insurance: Generally
required in high-risk flood-prone areas, this insurance is issued by
the federal government and provides coverage for a single-family
home plus contents. Local REALTORSŪ can explain which locations
require such coverage.
Home warranties: With
new homes, buyers want assurance that if something goes wrong after
completion the builder will be there to make repairs. But what if
the builder refuses to do the work or goes out of business?
Home warranties bought from third parties by home builders are
generally designed to provide several forms of protection:
workmanship for the first year, mechanical problems such as plumbing
and wiring for the first two years, and structural defects for a
certant length of time.
Home warranties for existing homes are typically one-year service
agreements purchased by sellers. In the event of a covered defect or
breakdown, the warranty firm will step in and make the repair or
cover its cost.
Insurance policies and warranties have limitations and individual
programs have different levels of coverage, deductibles and costs.
For details, speak with REALTORSŪ, insurance brokers and home
How do you get insurance?
The time to obtain insurance and warranty coverage is at closing, so
speak with a REALTORŪ or insurance broker prior to closing. Be sure
to ask about limitations, costs, deductibles and "endorsements"
(additional forms of coverage that may be available).
9: The Closing
to any local courthouse and you can find property records detailing
real estate ownership in your community -- sometimes records that
date back hundreds of years.
These records are important because they provide today's owners with
proof that they have good, marketable and insurable title to the
property they are selling. Equally important, such records enable
buyers to provide proof of ownership when they sell.
closing process, which in different parts of the country is also
known as "settlement" or "escrow," is increasingly computerized and
automated. In many cases, buyers and sellers don't need to attend a
specific event; signed paperwork can be sent to the closing agent
via overnight delivery.
practice, closings bring together a variety of parties who are part
of the "transaction" process. For example, while the history of
property ownership has been checked, it's possible that the records
contain errors, unrecorded claims or flaws in the review itself,
thus title insurance is necessary. At closing, transfer taxes must
be paid and other claims must also be settled (including closing
costs, legal fees and adjustments). In most transactions, the
closing agent also completes the paperwork needed to record the
What to expect
Settlement is a brief process where all of the necessary paperwork
needed to complete the transaction is signed. Closing is typically
held in an office setting, sometimes with both buyer and seller at
the same table, sometimes with each party completing their papers
Whatever the case, the result is that title to the property is
transferred from seller to buyer. The buyer receives the keys and
the seller receives payment for the home. From the amount credited
to the seller, the closing agent subtracts money to pay off the
existing mortgage and other transaction costs. Deeds, loan papers,
and other documents are prepared, signed and filed with local
property record offices.
What you need to do
One of the best parts of settlement is that buyers and sellers need
to do very little.
Before closing, buyers typically have a final opportunity to walk
through the property to assure that its condition has not materially
changed since the sale agreement was signed. At closing itself, all
papers have been prepared by closing agents, title companies,
lenders and lawyers. This paperwork reflects the sale agreement and
allows all parties to the transaction to verify their interests. For
instance, buyers get the title to the property, lenders have their
loans recorded in the public records and state governments collect
their transfer taxes.
Step 10: You've
You've looked at properties, made an offer, obtained financing and
gone to closing. The home is yours. Is there any more to the home
Whether you're a first-time buyer or a repeat buyer, there are
several more steps you'll want to take.
Those papers you received at settlement are extremely valuable, so
hold on to them! In the short-term they can help establish tax
deductions for the year in which the property was purchased. In the
future, such papers will be important for tax purposes when the
property is sold, and in some cases, for calculating estate taxes.
Also at closing, determine the status of the utilities required by
the home, items such as water, sewage, gas, electric and oil
service. You want utility bills to be paid in full by owners as of
closing and you also want services transferred to your name for
billing. Usually such transfers can be done without turning off
utilities. REALTORSŪ can provide contact numbers and related
About two weeks after closing, contact your local property records
office and confirm that your deed has been officially recorded. Such
records are public notices that show your interest in the property.
It is generally understood that sellers will leave homes "broom
clean" when moving out. This expression does not mean "vacuumed" or
"spotless." Broom clean makes sense because it means the house is
ready to be painted and cleaned.
Your home, your
For most owners a home is the largest single asset they hold, so it
makes sense to protect that asset.
Many owners make a photo or video record of the home and their
possessions for insurance purposes and then keep the records in a
safety deposit box. Your insurance provider can recommend what to
photograph and how to secure it.
You want to maintain fire, theft and liability insurance. As the
value of your property increases such coverage should also rise.
Again, speak with your insurance professional for details.
Lastly, enjoy your home. Owning real estate involves contracts,
loans, and taxes, but ultimately what's most important is that home
ownership should be a wonderful experience. Enjoy!