12 Step Home Buying Process

Buying a home is an involved process. Check out this 12 step summary to see what is involved!

Determine what you can afford
Shop around for a house
Get a Real Estate Broker* to represent you
Make an offer
Get a lawyer – go through attorney review
Get an Inspection
Get your mortgage locked in
Getting the house appraised
Getting Clear Title
Getting the Clear to Close
Final Walk-Thru
Closing

*NOTE – In Illinois, Real Estate Agents are officially called Real Estate Brokers

Here are more details about each step…. bearing in mind that these 12 steps assume the buyer is getting a loan. Although similar in many ways, a cash transaction involves slightly different steps.

Determine what you can afford

You might think that the first step to buying a house is to imagine your dream home. It’s a nice thought but not very realistic

Before you can really buy anything you need to have the money.

So the best first step is to figure out what you can afford. Unless you are quite wealthy, you will likely need to get a loan. So that means you must find out how much of a loan you can get.

You can start by simply getting Pre-qualified for a loan; however getting Pre-approved for a loan is even better.

You do both of these things by connecting with a loan officer or two. They can help you figure out what you should be able to afford. You should not get charged, so you can connect with a few of them and see what they can do for you.

You may find that you need to work on your credit score, or that you need to save more money for a down payment before you even qualify for a loan. You will want to learn these things as soon as possible so you can work on improving your finances as needed.

When ready, pick the loan officer you like best and ask for a pre-approval letter.

Of course, you may be wondering how pre-qualification differs from pre-approval, and why a pre-approval is better.

A pre-qualification is similar to pre-approval, but less rigorous. A pre-approval requires you to share more financial information with a creditor than a pre-qualification might. As a result, an eventual offer based on a pre-qualification may be less certain than an offer based on a pre-approval.

A pre-approval letter not only confirms you can afford to buy a house, it ensures you are in a strong position to make an offer if you see one you love. By the end of this step you should have a good idea of what your maximum property purchase price can be.

However, it is best to shoot for buying a house that is less than the absolute maximum you can afford, so that you do not feel “house poor” once you move in. You will want to have sufficient funds left to live comfortably.

In addition, you’ll want to allow for funds needed to make desired changes/improvements/updates to your new home.

Shop around for a house

If you like to shop, this next step is pretty fun.

By the end of Step 1, you have a good idea of the price range that you can nicely afford.

Keeping your price constraints in mind, it is now time to figure out what you want in a house: the style (e.g. ranch vs. townhouse, etc.), the features (3 BR? fenced yard? garage?), and of course location (near work? in great school district? other?).

Consider making a list that includes what you desire, but more importantly what you need in a home.

You typically start your search on the internet. You can find what types of houses are selling in the locations you favor and how much they cost. You might also start driving around in different neighborhoods you are considering, to see which ones appeal most to you. These activities can help you to narrow your search if you are not too sure of what you want and what options might be out there for you.

You might also find some public open houses that you want to go check out. These are fun and it gives you a good chance to see and compare houses that are currently for sale.

**Get a Real Estate Broker* to represent you**

(* often called an “agent” outside of Illinois)

You may be wondering why you might want this representation at all, right?

At some point in the process of “shopping around” you will start to get more serious. At this point, if you did not already do so, you will want to engage with a real estate broker who will not only help you find houses, but will also represent you in the process of buying one.

Sometimes people think that you will get a better deal when you buy a house, if no real estate broker representing you as the buyer gets involved.

However, typically as a buyer, there is no advantage to having no broker, because it is the seller who pays commission – not you as the buyer. Whether you have an broker or not has little bearing on what the seller will agree to in price.

So find a good real estate broker. You have much to gain by doing this, and nothing to lose. But most importantly find a good broker you can trust. You want one who is looking out for you and not just their next paycheck.

Ask your real estate broker to set up an MLS search with your criteria that will help narrow down the field of potential houses that might meet your criteria for what you want and need in a home.

Whenever you see a house of particular interest, do a drive by to see if it’s in an area and neighborhood that you would like to live in. If you still like what you see after that, have your real estate broker arrange a personal appointment to see the house.

Make an offer

Wow! You found something you would love to buy! Now your real estate broker can evaluate the housing market directly around your desired house. Together, you and your real estate broker develop a plan for how much you will offer and how negotiation of the price might proceed.

Your real estate broker will present the offer and it will be accepted or not. If not accepted, your broker will negotiate price and terms on your behalf.

Ultimately, either an agreement between buyer (you) and seller (the house owner) will be reached, or else you will walk away from that house and find another.

Not always, but often you submit something called “earnest money” as part of your offer. You can discuss this with your real estate broker to determine how to handle this. The point of it is to make your offer strong and to indicate to the seller that you are serious about this deal.

Assuming an agreement is reached, and both parties have signed off on the final agreement, you move to the next step.

Get a lawyer – go through attorney review

You might engage a lawyer soon after Step 1, but if you haven’t already, you need to get a lawyer now.

NOTE: This is normal for real estate deals in Illinois; however in some states lawyers are not necessarily involved.

In Illinois we have a (typically 5 day) period called “attorney review.” Your attorney and the seller’s attorney make sure that terms of the contract are clear, correct and are good for their respective clients.

Your best bet is to use a good lawyer who specializes in real estate. If you do not know one, a good real estate broker will have excellent references for you.

There are important advantages to using a proven real estate lawyer.

First, it is usually cheaper as they work for a flat fee as opposed to charging by the hour.
Second, they KNOW the ins and outs and complexities of the home buying process and are best able to keep things running smoothly all the way to closing.

Surprisingly, a lawyer’s failure to adequately manage legal aspects of the transaction can result in the deal unnecessarily falling apart.

Communication between all parties involved in the transaction is critical so you want a lawyer who is responsive and willing to communicate readily.

Get an Inspection

It is common to make your purchase dependent upon having an independent inspection of the property completed during the attorney review period.

This means that you’ll want to order that inspection as soon as your offer goes into the attorney review period so that issues found can be addressed as part of your final contract.

Your real estate broker should know good inspectors who are used to setting up appointments and getting things done in tight timeframes. Inspectors know that their work must be completed within that short attorney review period.

Now, inspectors may point out many minor issues as well as some big obvious ones that you already noticed yourself. However, the real point of the inspection is to uncover things that you never realized were problems with the house.

If it turns out that the problem will be very costly to address, your lawyer might negotiate something (e.g. the seller fixes it before the sale, or the seller reduces the price to cover the expected cost, etc.)

Please keep in mind that only inspection issues affecting health & safety, or the home’s major systems are issues to be negotiated. Cosmetic problems are not included in such negotiations.

If the lawyers come to agreement on issues to resolve, the deal goes forward.

However, buyer and seller might not come to an agreement of what to do. In this case, the deal can fall apart, your offer/contract becomes null and void, and you go back to looking at houses again.

In any case – do NOT assume that each and every thing that an inspector might pick on is something that gives you good grounds for a price reduction. This is NOT true.

The ONLY things to worry about should be critical and expensive issues that you could not easily see for yourself and were surprised by.

Get your mortgage locked in

So now assume attorney review has completed and both buyer and seller have signed off on a final contract.

Now you need to secure your funding. If you have the cash, you just have to make sure it is readily available to you for the closing. But if you need a loan, even though you got pre-approved in Step 1, you now need to get an actual loan secured. Work with the loan officer you liked best.

You may even shop around a bit at this point (if you did not do so before), to see what packages different loan officers can work out for you.

But you will need to get your mortgage set up quickly now. You typically have 45 to 60 days to secure your loan but that time frame will be stipulated in the purchase contract as “days to closing.”

Having done much of the legwork earlier in getting the pre-approval really pays off here. That is because ultimately you need to provide financial documents (W-2 statements, paycheck stubs, bank account statements, etc.) to prove you have sufficient funds. Your actual loan will be based on the final purchase offer price minus what you put down for a down payment.

Getting the house appraised

This step happens as part of the process of securing your loan.

Your lender will typically hire an appraiser to assess the actual value of the property. Your loan officer can talk to you about what they do, and will get an appointment for this set up as part of the process of securing your loan.

In some cases a buyer may engage (and pay) their own appraiser. This is more typical with cash buyers. If you are a cash buyer, you are not required to get an appraisal, but some buyers will want to in any case.

Assuming you are getting a loan, the lender orders and pays for the appraisal. It does not happen often, but it is possible that after reviewing the appraisal, a lender will require an adjustment to the loan (or to your down payment amount) because the loan to value ratio is not suitable to them.

Getting Clear Title

This is another step that you should know about, but it is not something you do. Your lender will want to be sure that the seller of the house has the legal right to sell, and that the title can be transferred cleanly.

Your attorney will choose a title company; then the title investigation process is performed by the title company.

Getting the Clear to Close

Leading up to your closing, just days before, there are critical paperwork and funding details that must be all in order. Your lawyer, your loan officer and your helpful real estate broker are all part of your team working for you to make sure these details are addressed properly and in a timely manner so that the closing can take place according to schedule.

This team works best for you when there are open lines of communication between all of your team members.

Once everything comes together the lender will issue the Clear to Close. That means all the necessary paperwork is completed and funding for the loan is secured. Onward to the closing date!

Final Walk-Thru

This is a step you typically perform, along with your real estate broker, right before the closing. You inspect the house after the seller has moved out and make sure the movers have not damaged anything.

You also check that all items negotiated at the time of sale (i.e. appliances, blinds, etc.) are still in the house.

Closing

Finally, you get to your most exciting step! This is where you actually go and sign all necessary documents, get your keys to the house and take possession!

Congratulations! Now your next adventure can finally begin!

Questions?

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