Buying Real Estate - A Beginner's Guide
By Brandon Cornett | © 2014, all rights reserved | Duplication prohibited
This lesson explains the steps to buying residential real estate, and what you can expect during each of those steps. It is written with first-time home buyers in mind.
For the average home buyer, a house is the most significant investment they will ever make in their lives. So it's not the kind of thing you would rush into without doing the proper research.
In this tutorial, we will talk about all aspects of buying real estate for the first time. In particular, this article is designed for people who are buying residential real estate, as opposed to commercial property. So if you plan to buy a home in the near future, and you're wondering how the process works, you've come to the right place.
The Steps to Buying Real Estate
This article is broken up into key sections that correspond to steps in the buying process. Granted, the process varies from one home buyer to the next. But the basic steps for buying residential real estate are usually the same across the board. And those are the steps we have compiled for you below.
Here are some shortcuts to the main parts of this tutorial:
You'll also notice there are many hyperlinks within this lesson to related information. If you're not familiar with a certain topic discussed below, use the hyperlinks provided to learn more about it. With all of that being said, let's dive into this tutorial on buying residential real estate successfully.
One of the worst things a first-time home buyer can do is rush into the process without having done any financial preparation. Long before you start talking to mortgage lenders and getting quotes for loans, you should take care of a few preliminary steps. These include such things as setting your budget, checking your credit score, and saving extra money for various purposes.
Here are some articles to help you learn more about this critical stage in the residential real estate buying process:
When buying real estate for the first time, you will have a much smoother experience if you go through the preliminary steps recommended above. Make sure you set your budget before you start talking to lenders. Review your credit reports and scores early on, so you can improve your score if necessary. And be sure you are putting extra money aside, the more of it the better. Taking these steps early on in the process will make your real estate experience more successful in the end.
This stage of the real estate process actually overlaps with the previous stage. It's hard to separate the two, but I wanted to do so in order to make this tutorial easier to use. For example, in the previous section we talked about checking your credit score. This is a form of research as well. But I started with the financial-preparation topics mainly for money-saving purposes — because you need to start saving money as early as possible.
So the initial stages might really go like this: (1) start saving money toward a down payment and other costs, (2) start reviewing your credit information to see where you stand, (3) start educating yourself on the residential real estate buying process, and so on.
When it comes to buying real estate for the first time, there are three key areas you should research. You should study the overall process that takes place. You should learn about the different types of mortgage loans available to home buyers. And third, you should learn about the terminology used within the residential real estate industry.
Here are some resources to help you learn about these three topics:
In addition to the articles listed above, you can find hundreds of tips on buying real estate for the first time. In fact, I would argue that this website offers more information for first-time home buyers than any other website online today. But I've handpicked the three links above to get you off to a great start in your real estate research.
I recommend skimming through the 101 steps to buying a home, which is the first link above. Then I recommend spending some time learning about the different types of mortgages, particularly the difference between fixed-rate mortgages and ARM loans.
Some people who purchase residential real estate for the first time skip this process altogether. Technically, it's possible to do so. But I always recommend getting pre-approved for a mortgage loan when buying a home.
For one thing, everyone involved with the process will take you more seriously if you've already been pre-approved by a lender. This includes real estate agents and sellers alike. On top of that, you will be able to limit your house hunting efforts to a certain price range, based on (A) the budget you have set for yourself and (B) the amount you have been pre-approved for.
During the pre-approval process, a mortgage lender will review your financial background and tell you how much they're willing to lend you toward the purchase of a home. It doesn't mean you're guaranteed to receive that amount when it comes time to apply for a mortgage, but it does tell you what you're likely to receive from that particular lender. As you can imagine, this is a very helpful piece of information when you are searching for homes.
Here are some resources to help you learn more about the pre-approval process:
Just remember, it's possible to be approved for a mortgage loan that is too big for you. That is why you must determine your budget earlier in this process. When buying residential real estate for the first time, many people make the mistake of allowing a lender to tell them what they can afford. But this is a mistake. The only thing a lender can tell you is what they are willing to lend you. You'll have to determine your monthly affordability range for yourself. Keep this in mind when buying real estate and you will be more successful in the long run.
"Do I really need a real estate agent when buying a home for the first time?" This is a common question we receive from readers, and our response is always the same. There is no law that requires you to use an agent when buying residential real estate, but it can certainly be helpful to have an agent guide you through the process.
If you have never purchased a home before, or if you are buying real estate in a new and unfamiliar city, I recommend using an agent. When you consider the size of the investment you are making, it makes a lot of sense to have professional guidance.
Here are some articles and resources to help you find the right agent for you:
Many home buyers are afraid to use an agent because they think they'll have to pay a lot of money toward the agent's commission. But in most cases, the seller pays the buyer agent's commission out of the proceeds they make from the sale. It usually works this way, but not always. So you should ask an agent who pays their commission before signing on with them.
If you have followed the recommended steps to buying real estate discussed so far, then you will have accomplished the following things. You'll have a budget for yourself that clearly defines the maximum monthly amount you can spend. You'll have a good understanding of the residential real estate process and terminology. You will have been pre-approved by a mortgage lender for a certain amount. And you'll have a real estate agent to guide you through the rest of the process.
Now that you've done all of the preliminary homework, you're ready for the fun stuff. You are ready to begin the house hunting process. Just remember to focus your search on homes that you can afford, based on the budget you established earlier in this process. Here are some helpful resources to guide you through this step:
The best advice I can give you during the house hunting phase (and when buying real estate in general) is to balance your emotions with logic. First-time buyers often get so excited about a house that they lose their objective point of view altogether. There's certainly nothing wrong with being excited about buying real estate for the first time — in fact, there would probably be something wrong with you if you did not get excited about it. But you need to balance those emotions with an analytical frame of mind.
Once you have found a home that meets your needs and falls within your price range, the next step is to make an offer on the property. The key here is to understand difference between the listing price and the sale price. The first number is what the seller wants to get for the house. The second number is what they actually end up getting.
In some cases, these will be the same number. If the sellers are asking a reasonable amount for the home, based on recent and comparable sales in the area, then there's a good chance they'll get what they are asking for. On the other hand, if the asking price is overly inflated based on recent sales data, then the seller will probably end up getting less than their asking price.
Here is some additional reading to help you make a smart offer on a house:
This is one of the most important steps to buying residential real estate, and for several reasons. First, and most obvious, it could possibly determine what you end up paying for the house. But your offer also affects your chances of getting a mortgage loan. After you make an offer on the property and go back to your lender for the loan, they will send a professional home appraiser to assess the value of the property.
If the home is appraised for less than what you've agreed to pay, you will have trouble getting the loan. This happens all the time when overly eager buyers offer too much for a house. Trust your real estate agent's advice and use the resources provided above to make a successful offer.
Let's continue our guide to buying residential real estate by assuming your offer has been accepted. Let's further assume that the property has met appraisal, and that the mortgage lender has given you a green light for the loan. The next thing you should do is to have the home inspected by a professional home inspector.
People who are buying real estate for the first time often ask if this step is necessary. To which I respond with a resounding "Yes!" A home inspection will only cost you somewhere in the neighborhood of $300 - $400, which is a small price to pay for the peace of mind you get out of it. After all, buying real estate is one of the biggest financial investments you will ever make, so it only makes sense to have the property thoroughly inspected by a professional.
Here are some articles that will help you understand the home inspection process: 7 Questions to Ask a Home Inspector
After you get the home inspected, your inspector will sit down with you and go over the items he found. At that point, you can work with your real estate agent to decide what you're comfortable accepting and what you want the seller to fix. Like everything else with residential real estate, the inspection fix-it list is negotiable. The market will also determine how far you can push it. In a seller's market, you shouldn't ask for very much (aside from major discrepancies). In a buyer's market, you'll be able to ask for more repairs because the sellers will be more desperate to sell.
Closing, also referred to as settlement, is the final step in the residential real estate transaction. This is when all of the money changes hands, when all the paperwork is finalized, and when the keys are handed over from the seller to the buyer.
The best thing you can do to prepare for the closing process is to save up enough money and stay in touch with your escrow agent. You will need to have sufficient funds to cover your closing costs, which can add up to a few thousand dollars in most cases. It's also important to stay in touch with your escrow company or agent between the initial contract and the closing to make sure everything stays on track.
This is a key part of the residential real estate process, because there is a potential for things to go wrong. But you can avoid most of the common problems simply by understanding the process. Here are some articles to help you do just that.
- The Real Estate Closing Process Explained
- How to Prepare for Closing Costs
- Closing Costs on FHA Home Loans
Conclusion and Going Forward
I hope you have found this guide to buying real estate helpful, and I wish you all the best in your home buying process. Keep in mind there are hundreds of articles on this website that cover residential real estate and related topics. So if you have additional questions about buying a home, hiring an agent, or choosing a mortgage loan, use the menu at the top of this website.
In closing, I would like to offer a few tools to help you move forward in the process. The links below will help you accomplish some of the residential real estate goals we discussed in this article. You can use them to find a local agent, to review your credit information, and to shop for a mortgage loan.
About the author: Brandon Cornett is a consumer educator and creator of the homebuying Institute. He has written thousands of helpful articles about the real estate buying process, many of which you can find on this website.
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