Buying a Home
I'm buying a home - How should I proceed?
While buying a home may seem like a long and complicated process, first-time homebuyers can help ease some of the uncertainties that come with purchasing a home by getting educated about the purchase process. Proper research might include becoming familiar with current market conditions, gathering personal financial information, and weighing the potential benefits and challenges of homeownership.
Considerations of Buying a Home
The motivations behind purchasing a first home are always unique to the buyer, however, you may want to consider the current market, including home prices, mortgage rates, and overall residential inventory. You also may consider the value of your long-term investment, and compare the benefits of rent versus those of purchasing. What are the current rental prices and mortgage interest rates in the region? If rent is low and mortgage is high, it might be beneficial to wait a few years to avoid large monthly payments on a house.
If you have a particular home in mind, you may want to look at the investment potential of that property. Could you see a potentially profitable return on investment after renovating? This will be reflected by the current housing market in the region. Take a look at housing trends over the past few years - are home values rising or falling? If they are generally rising, you may see a good return if you decide to sell in the future.
Finally, you must weigh the potential benefits against the personal liability that comes with homeownership. While buying a home may grant you many tax breaks, it also brings many other liabilities – taxes, HOA fees, maintenance and repair fees, etc. Do you have the finances necessary to survive the purchasing process, and the ongoing resources to properly care for the home? Or should you wait a few years to save additional resources?
Gathering the Right Personal Information
When you do find that perfect home, you may need to act quickly. Because of this, it’s a good idea to make sure you have all your financial arrangements ready to go. The first step will be to determine your budget. A mortgage broker can help you with this. He/she can also help educate you on current interest rates and any financing requirements involved in securing a mortgage. Prior to meeting with a broker, you may want to determine your own monthly mortgage cap, since your lifestyle budget may be different than what your income and credit state on paper. You'll also need to determine what you can afford for the down payment, which is usually between 10 and 20 percent of the asking price.
By getting your financing in order prior to looking at actual properties, you’ll have a more realistic view of what you can expect in a new home. That said, real estate professionals and bank employees can help you create a customized budget and plan. Then you can target a market with appropriate home values rather than those that may not be the right financial fit.
Finding the right lender
When trying to find a lender, you may want to first determine which type of mortgage is right for you. There are many different kinds of mortgages, and they all differ in payment plans and principal rates.
The most common form of loan is a fixed-rate mortgage. These are designated into increments of time - most commonly 15 or 30 years, but these may be adjusted to as little as five years or as many as 50, depending on your financial situation. These loans are popular because the interest rate on the promissory note remains the same through the duration of the loan despite fluctuating market conditions.
Be sure to consult each potential lender on other options, which might include interest-only loans, option ARM mortgages, and reverse/piggyback payment plans. No one plan is always right for everyone. Carefully evaluate your finances to determine the best mortgage for you.
Next, you’ll need to determine what information and documentation you’ll need to provide to the loan company. The lender will require a current credit approval, so it’s a good idea to get a current copy of your credit report beforehand so you know what to expect.
It can also be beneficial to get prequalified for a mortgage. Note that this is different than getting the green light for the actual loan. A preapproval letter contains specific language from the mortgage broker that officially declares you financially able to buy a home. The letter will show that you have completed the loan application and verify that you have the credit score and employment status to qualify for the mortgage. The lender will likely ask for current bank statements, pay stubs, and tax returns to issue this document.
After receiving this letter, you will be one step closer to getting the keys to your first home.
Government assistance programs
The federal government offers financial assistance on some types of home loans. If you qualify for this aid, it can be a great way to help facilitate your home purchase. The Federal Housing Administration (FHA) and the Department of Veteran Affairs (VA) are two branches that offer assistance.
With an FHA mortgage, the government does not provide the loan, but insures the amount you borrow. Depending on your credit score and other requirements, you may be eligible for an FHA loan. The FHA mortgage limit varies by geographic region, so make sure you know what the maximum borrowing amount is in your particular area. There is no income limit when applying, but this is typically a preferred loan option for low-income and first-time homebuyers.
If you are a current or former member of the United States military, you may qualify for a VA loan. These mortgages are specifically designed to limit the risk veterans face when purchasing a home. Generally, the Department of VA commits to a repayment of 25 percent of the loan, even if a borrower/lender defaults on payment. The low interest rates, lack of premium payments and debt forgiveness policies of a VA loan make it a great choice for veterans, so consider this as an option if you qualify.
Working with a real estate agent, REALTOR® or broker
Purchasing a home may be the largest financial expenditure you make in your lifetime. For this reason, you may want assistance in navigating the real estate market and homebuying process. For this reason, it can be beneficial to hire a real estate agent, REALTOR®, or broker.
Before hiring such a service, it is important to understand the concepts behind these business relationships as well as their pay structure. REALTORs and real estate agents work for brokerage firms, which in turn are licensed by their state to sell property within a certain region. The agents of these companies work on commission, which varies greatly depending on the agency. So, imagine if you successfully bid $200,000 on a house and a brokerage charges 6 percent commission - you would owe them a payment of $12,000. In most situations, half of this is given to the closing agent, while the other half is distributed amongst the firm.
The benefit of using a real estate agent or broker is that they act as connectors between buyers and sellers. They have access to listings and properties that are often not on the public market, and network with one another for increased efficiency. For the best chance to find a bargain, you may want to hire an agent or broker.
Attending Open Houses and Viewing Properties
Once you've found a good agent, it is time to start attending open houses and property viewings. While vacant homes may be easier to evaluate, there are certain rules and tips you should follow when visiting occupied homes.
Remember, home sellers entertaining offers have not moved out yet - it is still their property by law. In addition, many homeowners develop emotional bonds with the houses –where they or their children grew up. Therefore, it is always in your best interest to remain as respectful and neutral as possible. In the presence of the homeowner, refrain from speculating on new additions or remodeling - these suggestions might offend a homeowner. Even if the home is very messy, remain neutral and do not make any cryptic remarks.
When walking through a home, you'll want to check for common structural problems that may present themselves in the form or cracks, chipping or water damage. Sheetrock and drywall should be inspected for bulges that may be the result of internal moisture, and any flaking paint should be carefully examined. In bathrooms and kitchens with tile floors or backsplashes, the grout and spacing should be clean and even. If there are high tiles or uneven surfaces, this could create structural problems later on.
In addition, it is prudent to hire a home inspector who will be able to recognize smaller problems that may not be visible to the average homebuyer. Experts can provide documents that certify the structural integrity of a home –everything from the architecture to the plumbing. This is a necessary part of the process, because if any problems are identified, you may be able to negotiate with the current homeowner to fix them before you move in. Or, if the repair/refurbish expense outweighs the benefits of an investment, you may consider walking away from the deal.
Distressed Properties and New Construction
Sometimes, a home might hit the market at a bargain price due to previous financial problems. If a property is foreclosed, the ownership then transfers to the respective bank or lending company that financed the previous mortgage. This could be due to too many missed payments or defaulting on an initial loan.
Other times, a homeowner mired in debt will seek to sell their property in what is called a short sale. Basically, the buyer agrees to take on a portion of the acquired debt in return for a large discount on the asking price. This allows a seller to put the proceeds toward their current debt, and allows a lender to forgive much of the final number. In turn, the buyer stands to profit from a discounted property, and could possibly make money on the investment in the long term.
New construction is another option to consider when buying a home. This is a desirable option for many because the home they are purchasing is brand new - there is no need to deal with a previous homeowner, and the home condition is likely immaculate. In this situation, the agent or buyer negotiates directly with the contracting company who built the home. Since the home has already been inspected by construction professionals, there is no need to obtain additional certification. However, make sure to do your research on the construction company beforehand.
Making an Offer
When you are ready to make an offer, you and your real estate agent will need to draw up a contract with the applicable information, which might include:
- Sale price/offered price
- Street address and a description of the surrounding land
- Sale terms (cash purchase, mortgage financing, etc)
- Seller's written intent to transfer title (ownership)
- The date the property will change hands.
- Any agreements on the prorating of utility bills
- Payment of title insurance and home inspections
- Deed details
- State-specific required clauses (consult your broker for this)
- Scope of time before the offer will expire
- Contingency plans that will come into effect as the result of a cancelled/defaulted sale
You will also need to supply earnest money - this is a certain amount of cash that is provided with the offer as a sign of good will. This could be any percentage of the final asking price, but is normally a retainer in the amount of a few thousand dollars. The money will be returned in the event of a canceled sale, but can be kept by the owner if you break the contract.
When you are determining your offer price, you will want to consider the appraised value of the home. Of course, you’ll want a good deal on your new home, but that may be affected my current market conditions, the state of the property, competing offers, etc. There are even times when a home will sell for more than the initial asking price due to competing offers.
Your offer may be accepted, rejected, or the sellers may submit a counteroffer for your consideration. If your offer is rejected, then you'll have your earnest money returned and you can rethink your bidding strategy. This might involve making a higher bid or even scrapping the entire application. If your offer is accepted, follow the steps outlined below.
The next steps
You've looked at the market, secured a lender, found a reliable real estate agent and identified a target listing. Your offer has just been accepted - now what do you do?
After a deal is accepted, everything that has been contractually agreed upon gets set in motion. The time between the offer acceptance and the closing of the transaction is known as “escrow.” Depending on your geographic area, this process may differ, but will likely include third-party handling of transaction documents and funds.
Depending on negotiations, you might have to deposit money into an escrow account. The homeowner may then begin construction on any improvements/renovations required by inspections or the purchase contract, and you must begin to get your financial paperwork in order (including preapprovals, letters of intent and offer contract). All parties involved in the transaction will determine a tentative closing date, when the transaction should be finalized and you are scheduled to receive the keys to your new home.
After all the paperwork is signed, your new home will almost be ready to move into. If you think that a final inspection is necessary, be sure to include this in the language of the final contract - technically, you are entitled to as many walkthroughs as you want to determine if the current homeowners held up on their end of the bargain.