The Home Buying Process Step by Step
Buying a home doesn't have to be difficult. There's a step by step process to it. And contrary to what you might expect, neither surfing the web for homes or choosing a REALTOR is the *real* first step. There's a "pre-step" we recommend for all wise buyers.
Before You Start: Have a Clear Financial Picture
- Roughly 90% homebuyers use a mortgage to finance their home purchase. You’re going to need to qualify. In order to do that, you need to know exactly where your money comes from and where it goes. You’ll need to be able to show:
- Your available cash reserves (savings)
- Income from all sources (wages; salary; tips and bonuses; pension; Social Security; child support/alimony; any other additional income)
- Amount and type of recurring monthly debt (including current rent/mortgage amount; student loan payments; minimum monthly credit card payments; car payments; child support/alimony payments; any other monthly debt that would show up on your credit report)
- Equity to be freed up from the sale of your current home, if applicable
- RESOURCE: See "10 Mistakes to Avoid When Buying a Home"
Step 1: Select me and the JM Denver Home Team as your REALTOR®
- As a Buyer’s Agent, I represent and protect your interests and act as your advocate. (Similarly, when you see an agent listed on a For Sale sign in front of a home, that agent is representing the seller and protecting their interests.) Having a Buyer’s Agent also saves you frustration and time you might otherwise have spent driving around looking at houses that may not be available or meet your needs. (See what my clients have to say about the experience of working with me.)
Step 2: Get Pre-Approved for a Mortgage
- Guidelines and paperwork can vary from one lender to another, but in general you should be prepared to meet the following requirements:
- Credit score of 640 or greater (you CAN get approved with a lower score, but you’ll likely pay a higher-than-market interest rate)
- Able to show the most recent two months of bank statements, paystubs, and tax returns (if you’re self-employed, different/additional documentation may be required)
- Debt-to-income ratio no higher than 43%
- RESOURCES: Check out "Getting Preapproved for a Mortgage: The Top 5 Documents You'll Need", then see how much you can afford with this Mortgage Calculator.
- Your next step is to apply for the loan. You may do this in person with a lender or online. If you qualify, you’ll be approved for an amount that takes into account both the proposed monthly mortgage payment (including taxes and insurance) plus any monthly debt payments.
Step 3: Compile Your Wish List for Your New Home
- This is the starting point for your home search. List what you’re looking for in terms of:
- Type (e.g., single family home; townhome; condo)
- Age of home (e.g., if you only want to look at new construction)
- Levels, if that’s important for you (e.g., mobility challenges)
- Square footage
- Yard size
- Floor plan
- Distance/commute time(s)
- School district
- Homeowners association (if it’s important for you either way)
- Architectural style
- Community amenities
- Anything else that’s important (e.g., RV storage space; pool; maintenance-free; age-restricted; etc.)
- RESOURCES: See "Home Buying Tips to Make Sure You Don't Overlook a Potentially Great Home" and "New Construction: Why You Need Your Own Agent"
Step 4: Choose Several Potential Homes and Tour Them
- I will run your list up against your budget (as determined by your lender) and the inventory of homes for sale. The result of this process is a custom report you’ll be able to access via an online portal. The report will list potential homes for you to consider and will include maps showing the locations of the homes. Of course, you will be able to conduct your own searches within our MLS system as well.
- I’ll get your feedback on which homes appeal to you the most. Then I’ll schedule time with you to visit and tour the selected homes. As we tour each property, I will be listening carefully to further discover what factors are critically important to you and which are less so. This data will help us further refine the home-search process.
- Be aware: good homes that are well priced and in good condition (we call these “cream puffs”) will sell quickly…sometimes in as little as a few days. We will get daily reports on homes matching your criteria as they become available. I will notify you immediately as particular homes meeting your needs come to our attention.
Step 5: Make an Offer, Negotiate, and Go Under Contract
- Once we’ve identified a property that you’re interested in, I will run a report that will include recently-sold homes and homes under contract. This lets us know what homes just like the target property have sold for.
- I will prepare the offer for your signature. You’ll sign the contract electronically and have your earnest money ready in the event the offer is accepted. You’ll also provide a copy of the pre-approval letter from your mortgage lender.
- The lender and our team will call the listing agent to establish your credentials. We may go back and forth on details such as price, dates, inclusions/exclusions, etc. We run all of these by you – we will advise, but the decision is always yours. When the seller accepts your offer, you are considered to be “under contract.”
Step 6: Obtain Inspection(s) and Appraisal; Negotiate Further if Needed
- The home inspection typically occurs within 7 days of going under contract. The purpose is to look for safety and/or structural concerns. (Items such as torn screens or cracked tiles are considered “cosmetic” since they don’t affect safety or structural integrity.)
- Expect to pay $350-$600 for a general home inspection, depending on the square footage/size of the home.
- Additional inspections as needed or desired might include ones for the sewer ($100-$130), radon ($100-$125), and/or structural integrity ($250-$600).
- The buyer pays for all inspections.
- Fees for inspections are due at the time the inspection is performed and are non-refundable.
- Depending on the inspection results, more negotiation may be necessary.
- RESOURCE: See "Home Inspections: What to Expect"
Step 7: Await Title Search and Insurance
- A title search detects any liens on the home that must be paid off prior to your purchase.
- Title insurance protects you from any errors that have occurred on the title prior to your ownership.
- In Colorado, it is standard for the seller to pay for the title search and insurance.
Step 8: Appraisal, Final Underwriting, and Loan Approval
- At this point, the lender will re-verify important elements such as your credit report, employment, and tax returns. I can’t stress this enough – it is CRUCIAL that you avoid changing your employment, making large purchases such as a car or furniture, or apply for new credit. A change in any of these elements sets off warning bells for the lender and will delay the approval process or put your funding at risk of non-approval.
- The lender will also order the appraisal. The buyer pays for the appraisal, which typically costs $450-$650. Typically this cost is included in the closing costs, but some companies charge the buyer up front.
- The purpose of the appraisal is for the lender to verify that the value of the home matches or exceeds the loan amount.
- Typically the appraisal will match the contract price. If it comes in higher, that’s great news and indicates you’re getting an even better deal! (Don’t worry; you don’t have to disclose that to the seller.) In a few cases, the appraisal can come in lower than contract price. If this happens, we may be able to renegotiate with the seller to reduce the price. Alternatively, you may have to increase the amount of your downpayment. (If we can’t reach an agreement, you can use the contract’s appraisal contingency, get your earnest money back, and walk away. At this point we would resume the home search.)
- Assuming everything goes well with the appraisal, the lender will review every detail one last time and provide final loan approval.
Step 9: Closing and Taking Possession
- Closing is the final step in the process of buying your home. It’s almost always held at the offices of the title company that performed the title search back in Step 7. The closing is where you pay the seller and officially take ownership of the home.
- “Paying the seller” and “taking ownership of the home” sound like simple things, but they involve a LOT of paperwork. It’s not unusual for buyers to have more than 20 separate forms to sign at a closing. You should expect the closing to take anywhere from 30 to 90 minutes.
- As your Realtor®, My role in the process is to review all settlement statements (closing documents) for accuracy and reasonableness before you sign. I’ll also answer any questions you may have about the purpose of each document. In most cases I will attend closing with you; if I cannot, I will send someone in my place.
- The buyers and their agent, the sellers and their agent, the lender, and a closer from the title company generally all attend the closing.
- Closing is when you make your downpayment and pay your loan closing costs. Closing costs average 2%-3% of the loan amount. (You’ll know the amount well in advance of the closing date.)
- Be sure to bring your identification as well as a cashier’s check, money order, or wire transfer.
Step 10: Being a Happy Homeowner
Congratulations! You did it! Now it’s time to celebrate. With the JM Denver Home Team on your side, you can relax knowing you made a great decision, got a great home for a great price, and had a great experience from start to finish.