The learning curve that comes with becoming a first-time homeowner is steep. There are terms to learn, extensive financials to master, and options to juggle. The good news is that there’s time to process it all: buying is a marathon, not a sprint. Or, perhaps, a long hike, with ups and downs and (sometimes) long pauses.
To help navigate the journey, we spoke to Eileen Tu, Vice President of Product Development for Rocket Mortgage®. She gave us some info about the typical path, and some explanations of terms that often trip up buyers. Here’s how to break down the process, plus some helpful info on what you should know going in.
The basic steps of the home-buying process are pre-approval, house hunting, offers, escrow, inspection and appraisal, and closing. Although they may seem daunting, each one on its own isn’t too bad.
Pre-approval is the biggest hurdle: it’s time to get your finances in check, make sure your credit is solid, and calculate how much you’re able to pay as a down payment. While it’s tempting to scan real estate listings first, the financials will help you learn exactly what your budget will be. “The biggest topics that can create stress and confusion are figuring out down payment options and understanding their finances,” says Tu. Rocket Mortgage has a calculator to sort out what your range is, and can help you compile all the information needed to get an estimate on what your mortgage will look like.
After that, it’s the fun part: house hunting. Here, fun is a relative term: reading real estate listings, going to open houses, and talking to real estate agents may be some people’s hobby, but the process can go on for months. Don’t try to rush it, though, since it’s always better to find the right place you’ll stay in for years.
Your real estate agent will help you with the offer phase. It’s traditional to submit offers in writing, and you may receive a counteroffer. Here’s where you’ll need to be firm with your negotiations and not get too attached to any one location. Best-case scenario, you’ll end up getting a place under asking price, but it’s not uncommon to end up in a bidding war against another buyer. There can even be a fee to put in the offer in the first place, says Tu: “When an offer is made on a home, the seller may require the buyer to pay earnest money — which is held in an escrow account until the buyer and the seller negotiate a contract and close the deal. With the earnest money, the seller is more confident that the buyer is serious and will not back out of the deal — and it protects them if that happens or the sale falls through.”
After the offer is accepted, the loan process moves forward with your lender ordering an appraisal to determine the value of the property while an underwriter takes a closer look at the documentation you provided when you applied. As the buyer, you should also consider having an inspection done, so any major concerns with the property can be identified before you close. The findings could aid in helping you negotiate for a better price or for the seller to make necessary repairs.
Home insurance will be purchased, as well as title insurance that can protect against lawsuits from back taxes, conflicting wills, and other legal shenanigans. The closing will be scheduled, and you’ll receive a closing disclosure that explains all the costs 3 days before closing. On closing day, you’ll bring this document, a valid I.D., and a check for your down payment and closing costs.
If all goes well, you’ll file the paperwork, make the necessary payments, close on the property and become the legal owner.
Get the Right People on Your Team
No matter how much online research you do, you’ll also want a real person who you can text in an emergency. This starts with finding a real estate agent you like and a mortgage lender you trust. “Taking a hard look at finances and having a conversation with a lender are both great places to start,” says Tu. Remember that early conversations don’t require any commitment, so you’ll be able to take your time with each step.
If you’ve got friends who went through this process already with a great real estate agent, ask them to put you in touch. Resources like Rocket Homes℠ can also connect you with agents who know a particular area well. One thing to keep in mind: don’t be afraid to meet with multiple agents. Getting to know a few and seeing what their priorities are can help you decide the best match for you.
Not only will they help you find the home you’re looking for, but they are also well connected to the overall industry. You can ask your real estate agent to recommend insurance brokers, real estate lawyers, and even inspectors, since they likely have a set of people they already work with.
Learn the Terms
It’s a complex world, and there are a lot of terms to know. One of the biggest is how mortgages are calculated. During closing and mortgage settlement, you may have the option to pay a mortgage point. Tu explains: “A mortgage point — sometimes called a discount point — is a fee paid to lower the interest rate on a home purchase or refinance. One discount point costs 1 percent of the home loan amount. For example, if a homebuyer takes out a mortgage for $100,000, one point will cost $1,000. Purchasing a point means the interest is prepaid to result in a smaller monthly payment, and can greatly reduce the amount of money paid in interest over the life of the loan.”
Another thing that’s often confusing is private mortgage insurance. “One of the most common myths has been that homebuyers need to put down 20 percent to buy a home. I’m here to say that this isn’t true — there are many solutions that offer lower down payment options, especially for first-time homebuyers,” says Tu. When considering nontraditional plans, like putting down less, private mortgage insurance (known as PMI) may come into play. “Private mortgage insurance is a common type of insurance that is needed when someone chooses to put less than 20 percent down when purchasing a home. This is often wrapped into a monthly mortgage payment so it’s important to factor that into budgeting if a buyer is planning to opt for a lower down payment.” The good news, however, is that PMI is typically removed from the monthly payment once you’ve reached a certain threshold of the equity paid.
Luckily, you don’t need to know all of this before you start. Just focus on each step of the process and learn what you can along the way, and lean on trusted resources to help you. Here’s where Rocket Mortgage can help you again: dedicated articles on every topic in the Learning Center, trusted experts to help you through every step of the process, and programs like BUY+, which could help you save up to $10,000 toward closing when you buy with Rocket Homes and finance with Rocket Mortgage. Says Tu: “It’s incredibly important for homebuyers to trust their lender, and Rocket Mortgage is built on trust and helping our clients achieve their dream of homeownership.”
Illustrations: Clémence Gouy
Equal Housing Lender. NMLS #3030