9 Steps To Buying A House

Buying a house can be challenging, even if it’s not your first property purchase.

Most home buyers don’t know where or how to start the process, and it is usually a bad idea to approach a bank without knowing how much one should spend on a home.

Without being prepared, you could easily make one of many common, costly mistakes, such as:

• Not acting fast to make an offer – Your dream home might also be other people’s dream home.
• Not getting pre-approval in place – You can’t act fast if you don’t have pre-approval.
• Letting the building report scare you – Every property has some problems and it’s better to get into the inspection process to uncover the problem.
• Buying off the plan – Your situation may change and that’s why it’s risky, especially if you have a small deposit.
• Listening too much to the media – You don’t want to freak out over housing market risks from listening to the media too much. Those risks are inevitable.
• Putting off buying unnecessarily – Houses have gone up in value over the long term. If you bought a house 10 years ago, you’re probably much better off than someone who just bought a house today.

Avoiding the pitfalls is all about doing your own research, understanding the market and finding the property that is within your budget.

I’ve compiled some tips you can follow to navigate the home buying process. These will give you a headstart and help you dodge common mistakes.

What to prepare before buying a house

What to look for when buying a house

Here are 9 basic steps to follow when buying a house in Australia

Step 1: Decide how much you should spend on a home

When planning and budgeting for your property purchase, you need to consider three main things:

• How much you can afford – The size of your deposit and your borrowing power determine the amount you can afford to spend on a home.
• Long-term planning – You need to think about how your needs will change when you get older. For instance, you might need a larger home later in life, when you start a family.
• Your attitudes towards money – Your financial attitudes will have a significant impact on your decision about how much to spend. I’ve seen customers who are financially conservative, while others feel comfortable taking on debt.

In the end, it really is a personal choice. Mortgage brokers can give you some advice and case studies, but you need to ask yourself:

• How much do I feel comfortable paying?
• What’s more important to me, financial future or current lifestyle?
• What are my long-term needs?
• How is my attitude towards money affecting my decision?

Go to How Much Should You Spend On A Home, where I give essential tips to plan your budget.

Step 2: Determine the best home loan deal for you

Which deal is best depends on your objectives and requirements. Sometimes, it’s not even about the best deal, just getting approval.

Most home buyers focus on interest rates, but there are other factors that affect the price of a loan.

You also want to take into account:

• The lenders that will approve your loan
• Your needs and how the lender meets those needs
• The total cost of the loan, including interest, Lenders Mortgage Insurance (LMI) and other fees

I talk about these factors in detail on the 3 Secrets To Getting The Best Home Loan Deal page.

Step 3: Determine how much deposit you need

The bigger the deposit, the better you’re positioned. Most lenders want a deposit of at least 8%, but if you have a 10% deposit, you’re ready to jump into the market and buy your home with LMI.

With a 20% deposit, you’ll be able to skip the LMI cost entirely – or at least minimise it.

If you are hoping to buy without a deposit, there are ways to do that, too. You can find out if your parents are willing to act as a guarantor. A guarantor home loan will allow you to borrow without a deposit and avoid paying LMI.

Use our property purchase costs calculator to work out how much of a deposit you need.

Step 4: Check your borrowing power

If you’ve used a few online borrowing power calculators, you might have varied results.

Our How Much Can I Borrow Calculator uses the same methods the lenders’ credit departments use and compares your borrowing power with several lenders in one go. You can use it as a rough guide to estimate your potential repayments and the amount you can borrow.

But the real question is how much are you willing to spend on your house.

Our mortgage brokers usually suggest you work out your repayments using an interest rate that’s two points higher than the actual rate.

This is to find out if you’re comfortable with the possibility of interest rates rising in the future. Having a buffer helps make sure you’ll be able to afford the mortgage in a few years.

Check out 3 Essential Tips To Improve Your Borrowing Power, where I talk about tips that’ll help you borrow more from lenders.

Step 5: Get your home loan pre-approved

Good properties don’t stay on the market too long. That’s why it’s essential to get pre-approval before you begin looking for a property.

Securing formal pre-approval shows that a bank has pre-assessed your loan and you know your maximum purchase price.

There are three key qualifying criteria banks look at, namely:

• Deposit
• Income and living expenses assessment (borrowing power)
• Other credit issues

We covered the deposit you’ll need and your borrowing power in Steps 3 and 4, respectively.

Banks use the 5C’s of credit when assessing your application – Character, Capacity, Capital, Collateral and Conditions.

Understanding how banks see you will increase your chances of getting approved with the right one.

Step 6: Know what you want

Do you see yourself living in the property for the next 5 to 10 years?

If you’ve not considered this question, you are yet to understand the reasons for buying a house. Just because prices are affordable doesn’t necessarily mean you should buy the property.

Remember, the perfect property doesn’t exist and it’s better to be realistic about what’s in your must-haves. To get started, make a list of attributes that are:

• Essential
• Desirable
• To be avoided

These will help you finalise the type of property you’re looking for and what properties to avoid.

Step 7: Find your dream home

By this point, you should have your:

• Maximum purchase price
• Your must-have list of essentials and desirable attributes
• Pre-approval

The next step can be both exciting and tedious, as you’ll have to find a suitable property within budget.

Here’s what I recommend:

• Do your own independent research. Read newspapers, real-estate magazines, and local papers to find pricing information.
• Talk to real-estate agents working in the area of your interest about what’s available at the moment.
• Talk to a friend who might be living in the area.
• Consider using a buyer’s agent.
• Keep your Saturdays free for house hunting!

I discuss these points in detail on Our Guide To Finding A Perfect House.

Step 8: Inspect the property and do your due diligence

After you’ve found a house to buy, Inspecting a property for faults should be your next step.

• Inspect the property with people who think differently than you. This will give you a better insight into areas that your eyes might miss.
• Talk to the agent. I usually ask them what other buyers liked and didn’t like about the property.
• Sometimes, they’ll point out something that you’ve missed.
• Take a good look at the neighbourhood. For instance, there’ll be a lot of noise if the property is near a school, a park, or a major road.
• Have a checklist ready to consider different aspects of the property.
• Talk to neighbours and get their perspectives of the area.

Finally, a good conveyancer or solicitor can help you with due diligence. If you wish to move forward with the property, get a:

• Pest inspection report
• Building inspection report
• Strata report (if it’s an apartment or townhouse)

Learn more about How To Do A Property Inspection Before Buying.

Step 9: Value the property

It’s difficult to make an offer on a property if you can’t work out what it’s worth. Homeowners can put their property on sale at any price they like, which isn’t of any help.

There are websites like RP Data that can do an online valuation of a property but, personally, I don’t think these online valuations are accurate enough.

I suggest valuing a property using comparable sales combined with your own research.

What to do at auctions

You can expect competition from seasoned bidders at an auction and that’s why you need to be prepared before you walk into one.

While most people will offer you advice about what you should do, it’s important that you are aware of what not to do as well.

I recall attending two auctions with friends of mine who were buying in Sydney’s inner west. These are great case studies of real transactions so I thought I’d share what I learned:

• Sometimes you have to let the property go to stay within your budget.
• Get your own building report!
• Don’t rely on an online valuation. Use comparable sales to value a property.
• Get a strata report if you’re buying an apartment or townhouse.
• Talk to the neighbours!

Problems homebuyers face when buying

We asked our customers the biggest challenges they faced when buying a property. Here’s what they said:

• Saving a deposit
• Not knowing where or how to start the home buying process
• Finding a decent mortgage broker
• Understanding the market and whether they were overpaying
• Getting pre-approval
• Finding a home within their budget

Tips from homebuyers

Following up with the challenges our customers faced, we also asked what tips they would give a friend who wants to buy a home.

Here they are:

• Use a guarantor if you can
• Talk to a mortgage broker
• Save and raise as much deposit as possible
• Get pre-approval, even if you aren’t sure you’re going to buy
• Do proper research

Are you ready to buy a house?

Buying a house is a major milestone and it can be very confusing without a guide.

Our mortgage brokers can quickly assess your situation and work out the right home loan option for you.

To speak with one of our mortgage brokers, call 1300 889 743 or complete our free no-obligation assessment form.