Guest Author - Marti Winkler

So you've finally made the decision that it's time to purchase your own home. That's great, and more than a little scary. Buying a home, especially your first home, can be a fun, exciting experience, or a nauseating nightmare, depending on how well prepared you are to meet the challenges.

This article covers the 5 basic steps involved in purchasing a home, in order of execution. Following these steps will help make your home buying experience the former, and hopefully not the latter:

The 5 Strategic Steps

1) Financing the dream – finding a lender
2) Locating the perfect house
3) Making the offer
4) Navigating escrow
5) Closing the deal

Step 1 – Financing the dream – finding a lender

The first and most important step involves calculating your personal financial situation, and the easiest way to evaluate what you can afford is to speak with a lender.

You can start at your local bank or credit union and speak to one of their loan officers. There are also mortgage brokers and lenders that are not affiliated with a specific bank, and they typically have different types of loan programs available than what you would find at a bank. There are also online lenders such as lendingtree.com or ditech.com.

I would advise first time buyers to use a ‘real live person’ lender for their first purchase transaction. I believe that it's crucial to take the time to meet with and talk to a lender who can walk you through exactly what's needed to qualify for a loan, and provide you with personal service to answer your questions. It’s also a good idea to talk with more than one lender, as this will give you a good idea of the different types of loans available and any fees associated with the loans that can impact your closing costs or overall cost of home ownership. (There are several different types of loans which will be covered in a future article.)

The lender will start by running your credit report, which will give them your 'credit scores', sometimes referred to as FICO scores. There are three major credit reporting companies that calculate your scores based on criteria such as the number of your open credit accounts, terms of credit, amounts of outstanding payments and loans, type of credit (revolving or installment), on time payments, number of 30, 60 or 90 day late payments, bankruptcies, liens, and judgments.

The lender will also ask you about your current income, your savings, and any other payment liabilities you have, such as child support. You will probably be required to provide your last two payroll stubs, and/or your last 2 years tax returns. The lender will then determine your debt to income ratio, which is basically a calculation of how much money you bring in each month vs. how much you pay out each month. This will allow them to determine how much house (or house payment) you can afford.

Once the lender has calculated what price range you are qualified to purchase, they will provide you with a ‘pre-qualification’ or a ‘conditional approval’ letter (if they don’t, make sure to ask for one). This letter is very important when making an offer to purchase a home, as many sellers require one at the time the offer is submitted.

Step 2 – Locating the perfect house

So you’ve talked with a couple of lenders, and you’ve got your ‘pre-approval’ letter in hand. Now comes the fun part – finding the perfect house.

If you’re like most people, you already have an idea of the city, neighborhood or area you’d like to live in, and now you know what you can afford.

There a few different ways to find a house: you can drive around in a neighborhood you like and look for ‘for sale’ and ‘open house’ signs, check online sources for active listings, or contact a real estate agent.

In many parts of the country the real estate market is very hot, with some listings getting multiple offers within the first 24 hours. In my opinion, the best way to find a house is to work with a real estate agent or a Realtor. What’s the difference? A real estate agent is licensed by their particular state to transact real estate sales. A Realtor is a state licensed real estate agent who is also a member of the National Association of Realtors, and agrees to abide by their code of ethics. Most agents are Realtors, some are not, but they are all required to operate within the laws of their individual states, including agency and ethics laws.

That said, the important thing is to find an agent you’re comfortable working with, someone who knows the area you’re looking in, and someone who listens to you and is interested in providing you with good customer service.

You can ask friends or relatives if they have an agent they’ve enjoyed working with in past, or you can stop in at ‘open houses’ and talk with the agent who’s hosting it. Watch the signs in the neighborhood you’d like to live in, as there’s usually one or two agents that get the majority of the listings in the area. You can also call any real estate office, speak to the manager or broker, and ask who they would recommend to assist you in your particular situation.

Once you’ve found an agent, tell them what you want, and what you don’t want, and be as specific as you can. Tell them the neighborhoods you like, or the style of house you like, number of bedrooms and baths you must have, condition and age of the house you’re willing to work with, and anything else that’s relevant to your ‘wish list’.

Keep in mind that you will probably NOT find exactly what you’re looking for, but you can likely get pretty close and stay within your price range. If you’re a first time buyer, you may be disappointed when you see what you can actually afford, but remember, this is just a first step, and once you’re in, you can move up as you build equity. Be willing to compromise on things that are not that important to get into a good neighborhood that may be close to schools, employment, shopping or recreation that you enjoy. Location is still the most important thing.

If you’re in a hot market, you have to move fast on new listings, so you can expect urgent calls from your agent telling you that you need to see the house TODAY, as in now, if you want a shot at it.

Under normal market conditions, you’ll probably be given a list of houses to drive by and see if you’re interested in taking a look inside. (I’m describing conditions in parts of Northern California, and your area may be different. When I was first in the business I would drive people around, only to have them cringe and say ‘There’s no way we’re looking at that house’, and I’d have to tell them ‘Yes, we are looking at that house, since I already scheduled an appointment with the seller.’ Big waste of time.) So, after you’ve found a house or two you’d like to see, your agent will set up the appointments to show them to you.

A word of caution: if you’re walking through a house, and the seller’s there with you, try not to act too excited, and give off all the typical ‘buyer’ signals and say things like ‘this is exactly what we’re looking for’, or ‘I just LOVE this house’. This could compromise you’re bargaining power, as the seller knows how you feel about the house, and how bad you want it.

Don’t get discouraged. It may take a few weeks or months to find the right house, and things change every day, so keep looking.

Now that you’ve found the right house, it’s time to write an offer.

Step 3 – Making the offer

If you're working with an agent, you'll most likely be writing the offer in the agent's office. Most states or the local Association of Realtors have standardized forms that simplify the process of writing an offer by having much of the typical legal jargon shown under numbered sections, which involves checking a box or initialling an area. In California the common contract in use is called the CAR form RPA-CA, which translates to the California Association of Realtors, Residential Purchase Agreement and Joint Escrow Instructions, and includes 8 pages of fine print for your reading enjoyment.

The typical contract starts with the basics: date and location of offer, buyer's names, address of the property, amount of the offer, amount of the 'earnest money' deposit, finance terms and requested close of escrow date.

Following that you get to decide, with the assistance of your agent, the finer details of the offer, such as any inspections you would like to have done on the property and who you would like to pay for them (buyer or seller), any personal property you would like included, title and vesting information, time periods for completing the inspections and removing any contingencies, dispute resolution by mediation or arbitration, and your rights and responsibilities as the prospective buyer.

Your agent should go through the entire contract for you and explain what all the terms and your selections mean. Your agent can tell you what's typically done in your area, in regards to who 'usually' pays for what, but the decision is ultimately yours.

Remember, everything is negotiable, and that includes the sales price. The agent is required to submit any offer to the seller, regardless of how low or ridiculous it may seem. Before you make the offer, you must decide how bad you want the house. Be aware that if you 'low-ball' the price, your offer may be rejected by the seller, which means you may not get a counter offer back, and you would have to start over with a new offer. The seller will usually accept a full price offer, if the other conditions of the contract are agreeable.

In extremely hot markets, many homes get multiple offers within a few hours or a day of hitting the MLS, so if you find yourself in a bidding war, be prepared to offer over list price. Again, how bad to you want the house?

Once you complete the offer, sign and initial where shown, it's time to break out your checkbook. You will give the agent a check for a small percentage of the purchase price. The check is a 'good faith' gesture for the seller to see that you are serious. Typically the deposit check is 3% or less of purchase price, and your agent can advise you on what amount would be appropriate.

The agent then contacts the seller's agent (or in some cases the seller directly) and lets them know that there's an offer on the property. Back in the day (OK, the late '80's) it was typical to set up a meeting with both agents and the seller to present the offer to them, and plead the case of the buyers.

Today, however, the most practical way seems to be by fax, and your agent will probably fax the offer to the listing agent, along with a copy of your earnest money check and your 'pre-qual' letter from your lender. The listing agent will meet with the seller and present your offer as you wait anxiously by the phone.

Every once in a while, the seller actually accepts the offer exactly as written. If this happens, CONGRATULATIONS! you're on the fast track to owning your own home.

More than likely, though, you'll probably get a counter offer back, with the terms modified by the seller. Usually it's the purchase price, if a below full price offer was made. Otherwise, it will be some other detail in the contract that the seller just can't seem to live with. If you agree to the terms of the counter offer, you sign your acceptance and you're on your way.

Once agreement is reached, the agent will open escrow, and the clock starts ticking.

Step 4 - Navigating escrow

So, now it's time to open escrow. You've heard about escrow, but maybe you're not quite sure what it means, and what you'll be required to do. Well, here's the scoop:

Once you have an accepted contract, one of the agents will open an escrow with a title company as specified in the contract.

An escrow company is basically a neutral third party that helps facilitate a transaction. It's like a holding company, in that the buyer and seller each put in what they want to exchange: the seller wants to exchange their house for money, and the buyer wants to exchange money for a house. The escrow company is there to ensure that both parties follow what the signed contract states, and make sure that the necessary title insurance and deeds are in place and correct.

In some states, there is a separate company that handles the title documents, and another that handles the escrow. In Northern California the same company handles both. Also in some states lawyers are required to facilitate the transaction. Your real estate agent will know what is required in your state.

Once escrow is opened, you'll be given an escrow number, which is used to identify your particular transaction, and you'll be assigned to an escrow officer, who is ultimately responsible for the transaction closing on time and with minimal chaos (OK, so that's the idea anyway).

According to your state laws, and what's spelled out in the contract, your deposit check will be taken to the escrow company within the next 24-72 hours, and will be credited to your side of the transaction. The escrow officer will be collecting copies of all documentation accumulated during the transaction including copies of any pest or other inspections, home inspection, transfer disclosure statements, agency disclosures, water or sewer tests, proof of homeowner's insurance and lending documents.

Towards the end of the escrow period, you'll be contacted by the escrow officer to come in to sign all the paperwork, especially the loan package, so it can be sent back to the lender for funding. At this time you will also be required to bring in any remaining down payment, usually in the form of a cashier's check or bank check that's good immediately.

Unfortunately, the final days prior to the close of escrow can be very stressful, as last minute paperwork and lending conditions have everyone jumping through small flaming hoops to get things closed on time. Hopefully you're working with a great agent and lender who help keep these little setbacks to a minimum.

Now it's finally time to close the deal.

Step 5 - Closing the deal

You've signed your closing paperwork, you've received confirmation that the loan funded yesterday, and your phone rings. It's the call you've been waiting anxiously for since this ordeal began. You answer the phone and your agent says:

CONGRATULATIONS! WE'RE ON RECORD! YOU'RE A HOMEOWNER!

Wow! How great does that feel? You did it! You survived one of the most stressful events of your life (so far, anyway), and now you're in the club.

After a few minutes of sheer joy and fright, you'll wipe the grin off your face and realize it's time to get busy moving into your new home. Your agent will arrange for you to get the keys so the fun can really begin.

A few days prior to close, you need to contact the local utility companies and have them transferred into your name, so service is not interrupted. This includes the electricity, gas, water, sewer, phone, trash, and most importantly (to guys), the cable or satellite TV.

The good news is you won't have your first house payment due for more than a month. Depending on what day of the month you close, you skip to that date in the next month, and your payment's due on the first of the following month. For example, if your escrow closed on September 12, you skip ahead to October 12, and your first payment is due on November 1. Why does it work this way? You've prepaid some of interest due on the loan as part of your closing costs.

You'll also be receiving a copy of the final closing statement, also known as the HUD-1 statement. Keep this with your other tax paperwork, as some of your closing costs may be tax deductible, along with any interest you've paid on your mortgage for the year. You may even receive a small check from the title company after close of escrow for any overpayment of final fees at settlement.

Also, a few months after close, your home will be re-assessed at the sales price for property taxes. You'll be receiving a Supplemental Tax bill, and yes, you need to pay it, or forward it to your mortgage company if you have an impound or escrow account. The escrow account collects a portion of the total property tax and homeowner's insurance with each payment, and pays your property taxes and insurance payment when they come due.

If you have a Home Warranty on your new home, keep the information in an envelope in an easily to locate place, so you won't have to search all over if something happens.

For decorating tips be sure to visit the BellaOnline Home & Garden section.

Take care and have fun in your new home!