Before you go after the home of your dreams, be armed with the right finance tools.
Mortgage interest, closing costs, property taxes, escrow accounts: If you don't know how to navigate it, home-buying can seem like a wild, perilous pastime.
Sure, buying a home should be as easy as plunking down a boatload of cash. The actual process, though, is loaded with stressful paperwork. But the worry that one false move could cost you more than you bargained for might be easier to take if you think of buying a home as a five-step process.
Step One: Get Approved
Before you start shopping for your dream home, you need to know your budget. If you're a first-time buyer, start the process by shopping around for a lender and applying to get pre-approved for a home loan.
"Getting pre-approved lets the seller know that you have the money to pay for the house," says Nancy Clement, a mortgage broker with Mortgage Partners in San Diego. "If you're not pre-approved and the seller gets more than one offer, they're not going to look at yours, because they don't know if you can buy."
Step Two: Find the House
Now it's time to get into the hardcore shopping. You can research open houses on your own, but you'd be smart to enlist professional help.
"Real-estate agents used to be there to help you find open properties. Now they're there to point out the pros and cons of buying a certain place," says Michele Lerner, author of Homebuying: Tough Times, First Time, Any Time. "A real estate agent can point out things like, 'Gee, you're buying the most expensive house on the street,' which may not be good since it probably won't go up in value as much as the house around the corner."
For a first-time home-buyer, a good agent can be particularly helpful as a guide through the negotiation process. Once you've found your ideal home, you should make an offer as soon as possible, one that includes the total purchase price you're willing to pay, and how much you're willing to offer as a deposit to ensure that the contract goes through.
That deposit gets placed in a third-party escrow account, to prevent either party from pulling out until the deal has either gone through or officially been canceled.
Step Three: Get the Loan
Beware the pre-approval trap. Just because you've been pre-approved for a mortgage doesn't mean you automatically qualify for a loan. Beyond knowing everything you need to get a loan, you'll need to meet a few qualifications.
You need a good credit score (above 680), proof of at least two years of work experience, and debt levels less than 40 percent of your income (including your new monthly mortgage payments).
You also won't get a loan if you've declared bankruptcy less than two years ago, or filed for foreclosure less than four years ago. But if you satisfy all those measures, getting a loan after you're pre-approved should be easy.
Step Four: Let the Negotiations Begin!
If the seller accepts your purchase offer, get ready to nitpick. You, your agent and your seller's agent, and your lawyers will spend the next month or two negotiating everything: how solid the property's foundation is, whether a carpet needs to be replaced, and everything in between.
Luckily a team of third-party experts will help make sure the house is as good as the buyer says.
"Buyers can expect to have an appraisal, home inspection, and termite inspection done, at minimum," says Heidi Cassel, regional escrow administrator for the state of California. Once inspections are out of the way, the buyer and seller agree on which party will pay which costs, and sign off.
Step Five: Close Your Deal
The only thing left now is to get title insurance—the piece of paper that ensures that the property is free of liens that could prevent it from legal sale—and to officially transfer the funds.
"When you think about how much goes into the home-buying process, it's exhausting, which is why buyers need to be educated before starting," Clement says. "Otherwise, it's easy to get lost."