Home buying rules: 9 essential steps for buyers

Buying a home is one of the most significant financial decisions most people ever make, and it comes with a lot of complex rules. Untangling the process and understanding your rights and homeownership laws can help you avoid or resolve any problems that might pop up.

Here are 9 essential steps you need to know when considering how to buy a house.

1. Review your finances and set a budget

It’s essential to set a budget for buying a home. You need to know how much you can reasonably afford to spend each month, and how much you’ll need up front to get a mortgage.

If you anticipate getting financial help from family or friends, you’ll want to factor that in, too.

The primary figures to pay attention to are your credit score and your debt-to-income ratio. You’ll need to meet a minimum credit score and a maximum DTI ratio, depending on the type of mortgage you apply for and your lender.

You can order a free credit report from each of the three major credit bureaus at AnnualCreditReport.com. Make sure it’s accurate and correct any errors you find.

2. Research homeownership laws and rights

You should research the laws and homeowners’ specific rights in the areas you are looking to buy in. This can help you better navigate the home buying process.

You can consult with real estate agents and attorneys to better understand your legal rights, such as:

• The right to choose which real estate agents, brokers, inspectors, and lenders you use to buy a home.
• How to receive copies of legal documents and have them reviewed by a professional.
• The right to do a final walk-through of the home before closing.
• How to get prior property tax information.
• The right to review the house title and to know about any liens and encumbrances on the property.
• Protection from discrimination under the Fair Housing Act and equal opportunity housing laws.
• Your property rights and any deed restrictions or other limitations on the property, such as homeowners association dues and rules.

3. Get mortgage preapproval

When you’re ready to start shopping for a home, you’re ready to apply for mortgage preapproval. This is a letter from a lender that has reviewed your basic financial information stating how much it expects you can qualify to borrow.

While a preapproval is no guarantee of mortgage approval, it shows agents and sellers that you are ready to secure financing to buy a home.

You’ll need to provide documents such as government-issued ID, proof of income and assets, as well as proof of your debt and expenses.

When shopping for lenders, be on the lookout for mortgage scams. Beware of offers for mortgages with "too good to be true" interest rates, overvalued homes, or marketing claims that your credit score doesn’t matter.

4. Make an offer on a home

Once you’ve found a home you want to buy, it’s time to make an offer. You’ll want to carefully consider the purchase offer amount because you may be competing with other bidders. Also, be ready for the seller to make a counteroffer or to flat-out reject your bid.

This is where having an experienced agent helps. You can make an offer without a real estate agent, but working with one gives you access to their in-depth market knowledge and professional negotiation skills. Plus, they can handle the paperwork needed to buy a home.

Consider hiring a real estate attorney, as well. An attorney can draft and finalize purchase contracts, review purchase agreements, and assist with the closing process.

5. Negotiate and sign a purchase agreement

Once your offer’s been accepted, you and the seller will need to negotiate and sign a real estate purchase agreement to finalize the terms of the sale. This document needs to include all the details of the sale, including the purchase price, the amount of any earnest money deposit, the contingencies that must be met to close the sale, and the closing date.

Earnest money deposit

Also known as a good-faith deposit, an earnest money deposit is paid to the seller to show that you are serious about buying the home.

Earnest money can be either a set amount, a percentage of the home value, or a set price. The amount ranges from 1% to 10% of the home purchase price, but most often is 1% – 2%

If you can afford it, it’s a good idea to put down more. This makes you more competitive and attractive in the eyes of the seller.

When the sale closes, the earnest money typically is applied to your down payment or closing costs.

Contingencies

A contingency is a condition that must be met for the deal to close. If a contingency is not met, the sale can be canceled.

Common contingencies include:

• Mortgage contingency. Also known as a loan contingency or financing contingency, this allows the buyer to cancel the sale if they are unable to secure financing.
• Appraisal contingency: Lenders won’t allow you to borrow more than a home is worth. This is why they require an appraisal when underwriting a mortgage. If the home appraises for less than expected, it can jeopardize the buyer's ability to borrow enough to buy the home. The appraisal contingency allows the buyer to cancel the sale if the home appraises for less than expected.
• Home inspection contingency. This contingency requires a satisfactory home inspection. If a professional home inspector finds serious flaws in the home that make it unsafe to live in or require expensive repairs, the buyer can cancel the sale.

Closing date

Also known as the settlement date, the closing date is the deadline for completing the sale. You’ll want to leave enough time to clear all the contingencies and get mortgage approval before this date.

6. Proceed with mortgage approval

With a signed purchase agreement, it’s time to officially apply for a mortgage. You’ll need to submit a completed application as well as all your financial documents for underwriting.

The lender will provide you within 3 days of receiving your application with a standardized Loan Estimate document that will estimate all your loan costs, including your interest rate and all closing costs.

Three days before the scheduled closing, you’ll receive a Closing Disclosure with all the final terms of your loan and your final closing costs, which will need to be paid at closing.

7. Get a home inspection

A home inspection is a visual examination of a property’s physical structure and systems. If the inspector finds flaws with the home that require repairs, it will be listed in their report. If you have an inspection contingency and the report shows the home needs extensive repairs, you can ask the seller to make repairs or renegotiate the price to compensate. If the seller disagrees, you can walk away from the sale.

8. Pay closing costs

You’ll need to pay closing costs, which typically total 3% - 6% of the loan amount and include expenses such as the home inspection, appraisal, credit report, land survey, and notary fees.

Optional closing costs include title insurance, which can protect you from any claims against the property that don’t turn up in the title search. This includes outstanding liens, back taxes, judgments, HOA dues, conflicting wills, mortgages, leases, and easements.

Watch out for mortgage wire fraud. This is when an imposter poses as your real estate agent and persuades you to wire your closing costs to a bogus account. Always make sure you’re paying your closing costs to the correct account.

9. Close the sale

Closing on the house is the final step in buying a home. This is when you finalize the sale and resolve all obligations between the seller and buyer.

On closing day, you’ll sign a lot of documents. Besides you and any co-borrowers, on closing day, you can expect to see the seller, both your and the seller’s real estate agents, the escrow officer, and the closing agent.

Once you’ve received the deed to the home, you’re the legal owner.

The bottom line: Understand your rights and the rules of buying a home

When buying a home, it’s important to be aware of the various rules of each step of the buying process. You’ll also want to be mindful of the specific rights and laws in your location. You’ll feel more surefooted and at ease at every stage.

If you’re ready to explore your borrowing options, apply for a mortgage with Rocket Mortgage^® today.