Buying a Home

Buying a home is a complex and often time-consuming process that involves much more than simply locating and paying for one’s dream house. The successful purchase of a home requires significant preparation as well as the assistance of various experienced professionals specializing in particular aspects of the process. A prospective buyer typically begins by determining how much he or she can afford to pay for a home and obtaining a prequalification statement from his or her preferred mortgage lender. The buyer then searches for and views homes in his or her price range, often with the assistance of a real estate agent, and places an offer on the home he or she wishes to purchase. After the offer is accepted, the buyer typically arranges for a home inspection and appraisal to bring to light any concerns about the property. Finally, the buyer must complete the closing process and pay the associated fees.

Background

To understand the process of buying a home, and its various financial restrictions and legal requirements, it is important to understand the history of home buying in the United States. The home-buying process has evolved significantly over the years, particularly in regard to mortgages. Prior to the 1930s, mortgages were typically short-term, and homeowners sometimes refinanced their loans on a yearly basis. In 1929, however, a devastating stock market crash ushered in a decade-long financial crisis that came to be known as the Great Depression. During that period, homeowners were often unable to make their mortgage payments, and lenders were unwilling to refinance the loans. Because of this, banks foreclosed on hundreds of thousands of homes, forcing many Americans to seek shelter and job opportunities elsewhere. In response to the Great Depression, the US government created a number of federal agencies to deal with the issues associated with buying a home, including the Federal Housing Administration (FHA). Some of those agencies offered long-term mortgages, which would soon become the norm.

Over the subsequent decades, the real-estate market in the United States experienced various highs and lows, and the government continued to introduce new regulations and to make changes to its agencies. By the beginning of the twenty-first century, a new crisis had begun to develop, one that would force further action from the federal government. For much of that decade, US housing markets experienced a boom period in which demand for homes increased, and with them, housing prices. In some particularly competitive housing markets, buyers sometimes chose to forgo common contingencies such as home inspection and at times even placed offers on homes before actually visiting them. As housing prices skyrocketed, some lenders offered large loans to buyers who could not afford to pay them back. This practice was known as subprime lending. Around 2007, the housing bubble burst, helping spur a major economic downturn. Many subprime borrowers were unable to make their mortgage payments, which in turn resulted in a wave of foreclosures. In 2010, in response to this crisis, the US government passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which, among other reforms, prohibited mortgage lenders from lending to home buyers without verifying their ability to pay.

The risks involved in buying a home, particularly in light of the predatory lending practices exposed in the early twenty-first century, demonstrate the importance of performing careful research and enlisting the aid of experienced professionals when attempting the process. The home-buying process is a complicated one, and a mortgage often represents the greatest amount of debt a person will take on over the course of his or her life. Because of this, the standard process contains a number of procedures and legal requirements designed to protect prospective buyers and prevent them from taking on debt or other obligations that are beyond their capabilities.

Overview

Most prospective home buyers begin their search for the perfect home by hiring a real estate agent—a licensed professional who schedules showings, serves as a go-between during negotiations, and helps coordinate other aspects of the process. Some real estate agents are paid directly by the buyer; many, however, split a small percentage of the sale price of the home with the seller’s agent and are thus paid only when a sale goes through. Experienced real estate agents can demystify the home-buying process for their clients and also provide valuable guidance regarding less common real estate situations such as short sales and foreclosure purchases.

After deciding to buy a home, a prospective buyer must first determine how much he or she can afford to pay, in terms of both monthly payments and the overall sale price. Some home buyers with large amounts of liquid funds may be able to purchase property without taking out a mortgage loan and thus may not need to consider the impact of monthly mortgage payments. However, for most buyers, a mortgage, paired with a down payment, is a necessity. As such, the prospective buyer must calculate how much he or she can afford to pay per month, taking into account factors such as his or her monthly and yearly income and existing debt and expenses. It is important to remember that a monthly mortgage payment typically covers mortgage principal, interest, property taxes, and homeowners insurance (PITI), rather than principal alone. A buyer who obtains a mortgage through a first-time or low-income home buyer program may also be required to make monthly private mortgage insurance (PMI) payments.

Having carefully considered those factors and determined the price of a house he or she can afford, the buyer must next determine how much money a mortgage provider will be willing to lend. The buyer may contact the prospective lender and obtain one of two documents: a preapproval statement or a prequalification statement. The former provides an informal idea of the mortgage amount the lender is willing to offer based on the buyer’s ability to pay, but it is not a binding statement. A prequalification statement, on the other hand, guarantees that the lender is willing to lend a particular amount of money at a particular interest rate, provided that the buyer meets all the necessary conditions. A buyer may begin to view homes and visit open houses prior to obtaining a prequalification statement, but having such a statement in hand is beneficial when he or she wishes to place an offer quickly.

When choosing a property to purchase, most home buyers opt to visit and evaluate multiple potential homes in person, taking into account factors such as each home’s appearance, state of repair, size, amenities, and location. This is often accomplished through individual viewings scheduled by the buyer’s real estate agent. At times, buyers may also choose to visit open-house viewings, at which numerous prospective buyers may view a home at one time, often while the seller’s agent is present to answer any questions.

When the buyer has found a home that meets his or her needs, the next stage of the home-buying process begins. The buyer offers to pay a certain amount for the house, which may be below, above, or equal to the seller’s asking price, and the real estate agent conveys this offer to the seller’s agent. Offers are usually contingent on a number of factors, including the buyer’s ability to obtain a mortgage and the completion of a satisfactory home inspection. The buyer must usually submit a refundable deposit at this time. Once the offer has been made, the seller will respond to it by either rejecting the offer, accepting it, or making a counteroffer. In the last case, the seller and prospective buyer may negotiate until an agreement has been reached or either party declines to continue.

If the seller accepts the buyer’s offer, the buyer should next perform due diligence on the property, hiring a real estate lawyer to ensure that the home and the land on which it is built do not present any unexpected legal challenges. The buyer should also hire a licensed home inspector to conduct a thorough inspection of the property, which may include inspection of the home’s electrical system, plumbing and fixtures, included appliances, windows and doors, basement, and roof. The inspector will likely also search for signs of mold, rot, water damage, and other hazards. If the inspector determines that the home is in need of significant repairs, the prospective buyer typically has the right to withdraw his or her offer, assuming that the original offer was contingent on the inspection results. If the issues pointed out by the inspector are minor, the buyer may request that the seller make certain repairs or ask for the seller to give him or her a monetary credit at closing with which to pay for the necessary work. In addition to the inspection, the lender may require an appraisal of the property to ensure that its value is commensurate with or greater than the mortgage offered.

After a successful inspection and appraisal, the buyer and seller move forward into the closing process. Closing procedures may vary somewhat based on the location of the home and any unusual requirements on the part of the lender or local governing body, but most closings feature a number of the same procedures. Typically, the buyer, seller or seller’s representative, and real estate agents meet with a representative of the mortgage lender to finalize the necessary paperwork. The buyer must sign a number of documents, including the mortgage itself and a document known as the HUD-1 settlement statement, which outlines all the fees for which the buyer is responsible. Most mortgage agreements require the buyer to pay certain fees, known as closing costs, when he or she closes on a home; such fees are not part of the mortgage or down payment. However, some programs geared toward first-time home buyers require low or no closing costs. In addition to signing documents and paying fees, the buyer must typically demonstrate that he or she has obtained a homeowners insurance policy for the property.

Bibliography

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Green, Richard K., and Susan M. Wachter. "The American Mortgage in Historical and International Context." Journal of Economic Perspectives 19.4 (2005): 93–114. Print.

"H.R. 4173: Dodd-Frank Wall Street Reform and Consumer Protection Act." Congress.gov. Lib. of Congress, 21 July 2010. Web. 30 June 2015.

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