Table of Contents
- Considering the Decision
- Getting Finances in Order
- Finding a House
- Finding an Agent
- Make an Offer
- Closing the Deal
- Apply for a Mortgage
- Get a Home Inspection
- Get an Appraisal
- Find Appropriate Insurance
- Last Check
- Closing Costs
- Celebrate! You’re a Homeowner!
Buying a house is a big milestone for most people—and rightly so, because not everybody can afford to do that in their lifetime. The process is long, exhausting and can sometimes be quite overwhelming. If you are looking to be a homeowner, this is the road map you may want to follow.
Considering the Decision
Before getting started down this path, the first thing to do is to make a measured decision. Buying a house is a very big step and will have repercussions on your life for years to come. Therefore, this is a decision you will have to make with due consideration. The following are some of the things you may want to think about before deciding to buy a house.
Renting vs Buying
The first thing to figure out is whether or not you will just be better off renting a property than buying one. If you have the funds, buying may seem like a better idea since you can stop worrying about paying rent every month. More importantly, you will not have to deal with escalating rent every year and buying a property will also help you to build equity. However, owning your property also means paying taxes and keeping up with repairs. Whatever money you may save on rent, you will start spending on property taxes and home maintenance.
To decide whether you should rent or buy, you may want to ask yourself a few questions. How long do you plan to stay in that property? Do you have a job that requires you to move around often? How large is your family and can you afford to buy a home large enough for everyone? Most importantly, if the dream home you do find is outside your budget, it is best not to spread yourself too thin to be able to afford it. It is likely that it will not bring you the satisfaction you desired but it will certainly push you towards more debt. The answer to some of these questions will help you decide whether you are ready to buy a property or whether you should rent.
How Much Can You Afford?
The second step is to take a look at your finances. You will likely have to take a mortgage out, as most people do—however, you need to be able to show solid finances of your own even to take out a mortgage. Assessing your finances will also help you to arrive at the appropriate budget for yourself.
While assessing your finances, you also need to account for your spending habits. The amount of money in your account is not enough to decide on a budget, you also need to consider how much you are spending. After that, you will also need to decide how much you are willing to spend on monthly home payments for your mortgage. Your monthly mortgage sum can be calculated with a simple equation: principal + interest + tax and insurance payment.
Ideally, you should not be spending more than 31% of your monthly income on your house payment. If you have no other debt, you may be able to stretch the amount allocated to monthly house payments to about 40%. In total, your debt-to-income ratio should ideally be well below 50%. You should also keep in mind that buying a home leads to expenses other than your mortgage. These may be one-time payments, but they can certainly overwhelm your budget—these include closing costs, legal fees and other such logistical expenses.
Getting Finances in Order
Once you have settled on a budget, it is important to get your finances in order and make sure you have all the required paperwork to deal with the bank. A large part of getting your finances in order is to clean up your credit.
Check Your Credit Score
Your credit score will be the basis on which banks and lenders will decide whether you are a good candidate for a loan. Your credit score, or your FICO scores, are evaluated between 300 to 850. The higher your score is, the better your chances of securing a good mortgage. To get the best mortgage rate, you should have a credit score somewhere in the mid-to-high 700s. You can calculate your credit score by visiting annualcreditreport.com which will provide you with a free annual report.
If you are afraid that your score is too low, there are certain things you can do to improve your score. The first thing you should do is clear high credit card debts at the earliest. After that, you should set down to cleaning up any other irregularities such as errors from potential identity theft, among other things. Cleaning up your credit score is not an easy task, by any means. It can take a long time for these changes to reflect in your credit score. If your scores reflect bankruptcy, it can take a few years for you to climb up the ladder and arrive at a score that will get you a good rate. But no matter how monumental the task, you should certainly start finding ways to improve your score as soon as you decide on purchasing a property. This will only help you in the long run.
Get a Mortgage Pre-Approval
A pre-approval letter is an important part of the home buying process. This is a letter that the lender will provide you with. This letter will contain an estimate of how much you can borrow from the lender, based on your credit score and the mortgage rate the lender is giving you. This is not the same as being pre-qualified for a loan, which is just a rough calculation of how much of a loan you may qualify for. This calculation, however, is not yet based on verifications and assessments.
Pre-approval for a mortgage involves bank statements, tax returns, submission of pay stubs and other official documents. This is a step before right before you can officially take a mortgage out. In other words, most of the paperwork has already been taken care of and you are ready to take out a mortgage as soon as you find a house that you want to make an offer for.
The more cash you can pay upfront for your home, the less you will have to borrow from the lenders. This also means that you may need to dip into your savings, but if you can get the out-of-pocket expense out of the way you will have to contribute less from your monthly income towards alleviating your debt. Your savings will then essentially go towards your down payment.
If you can put down about 20% of the total price of your home, you may not have to pay for mortgage insurance. However, just because you have the savings does not mean that you should put all of it towards your down payment. Your mortgage rate will also be determined based on how much reserve you will have left in your bank after making your down payment. You should also keep in mind that you will require cash in hand when you do make the big move. There are several logistical things that will require taking care of via cash payments and transactions. So even after you have set money aside for down payment, make sure you have enough cash to keep you comfortable through the duration of the move.
Finding a House
Once the paperwork and the preliminary money end of the business have been sorted out, you can set about finding a house that you want to spend money on. The following are steps you can follow to finally settle on a house that you like and that fits your needs perfectly.
Pick a Neighborhood
The first thing is to do is zero in on a neighborhood in which you would like to live. There are a few things you may want to consider here. Do you have a family or are you living alone? Do you have young kids? Is the neighborhood in a good school district? Are there parks with wide areas for you to get some fresh air and exercise? Most importantly, how long will the commute to work be? You can ask around and speak to colleagues and friends about neighborhoods that may be a good fit for you.
In asking around, you should also find out if you can afford to buy a house in these neighborhoods. Once you have a few neighborhoods as options, you may want to go there physically and check out the restaurants and shops in the area to get a sense of what it might be like to live there. You may also want to make a few visits on different days of the week and at different times so you can get a sense of the traffic in the area. Making frequent visits will also give you a sense of the community you may be living among.
You can also get in touch with real estate agents who may organize seminars and walks around the neighborhood for potential buyers. You can also take a virtual tour of the neighborhood using Google Maps and other online tools.
Once you have figured out a few neighborhoods that you would like to live in, you can start looking at possible options out of the available homes. The first thing you can do is check 0ut websites like Zillow, Realtor.com, nytimes.com, etc. which will show you listings for homes available in the area of your choice. By looking at these listings, you can automatically start eliminating the areas that do not have the types of homes you picture yourself living in.
To make your search easier, you can also set alerts based on the criteria that you have narrowed down for the type of home you want. Some websites will also helpfully show you how long a listing has been on the market for and how the price may have fluctuated in the past. These additional details will help you ascertain whether a listing is priced appropriately or whether you are being asked for more than the market rate.
Visit Open Houses
You should definitely visit plenty of open houses before you decide on a house. Only from actually visiting the house will you be able to get a true sense of what it might be like to live there. If a certain open house has more potential buyers, you may even get more insight from the questions they may be asking. If there is a house that you like or if you have a better sense of what you are looking for from these open houses, you can also set up private showings so you can look around with more leisure. It would also be advisable to line up a private showing before the open house, so the latter can be treated as a second visit.
When you are at an open house, you should not shy away from asking a lot of questions. Be confident and look through every aspect of the house. Open the cabinets in the kitchen to see how much space there is, ask about how much light the living room and the bedrooms get. If there is a backyard, you should certainly give it a thorough look to see how much maintenance it may require. You may also want to find out when was the last time sellers got work done in the house and why they want to move away. Whatever questions you can think of, even if they sound banal, you should simply ask to get the query out of the way. Visiting an open house is also a good way to find a real estate agent who understands your vibe and will be a good fit for you.
Finding an Agent
As mentioned above, by visiting open houses you can find a broker or a real estate agent who will understand you and will help you find the home of your dreams. Of course, you can also find a home on your own and you do not necessarily need to go through a broker. But a broker will also make the whole process a lot easier. You do not have to constantly keep an eye on the market and follow up on listings—you can outsource all that leg work to a broker. You will also be able to see homes as soon as they become available on the market—a broker will have that kind of information. In fact, you may be able to see the house even before it is listed on websites.
However, finding the right broker can be a long and arduous process. There may be several market recommendations and advertisements, but the best thing to do is to keep your ear to the ground and trust friends or family who have recently purchased properties in the area. You should work with a broker who has experience working with someone in your income bracket. Of course, you will also have to pay the broker so you need to find someone whose commission you can afford in addition to all the expenses of the house. Your broker’s commission will typically be 5-6% and will be split with the seller’s broker. The commission may not be a direct out-of-pocket purchase, but it will be incorporated in the list price.
Make an Offer
Once you have found a home that you have your heart set on, the sooner you move the better. Sure, making that final decision can be a difficult one and you want to ensure that you are making the right choice. But if you are feeling confident about a house, you should not hesitate to make an offer and make it fast.
Know the Market
To make an offer, you need to know the market well. You may want to consider other comparable homes in the area and determine how much those were sold for. Accordingly, you can settle on a price that you (and your real estate agent) think is appropriate for the property. If you are working with a good real estate agent, they will do all this homework for you and determine the perfect offer for you that has the appropriate room for negotiation.
In case the property that you like happens to be listed with your real estate agent, they will be representing both you and the seller. While this means that they may be willing to compromise on their commission, there is also a conflict of interest here because they represent both sides. It is perfectly acceptable, then, to go with a different broker but still vying for the same property.
Play the Game
When you make an offer, you should be ready to negotiate. It is very unlikely that the sellers will simply agree to the first offer you make. You know how the game works—you want to spend the least amount possible, the seller wants to get the most out of their house. Typically, the recommendation when making an offer is to begin 5% below the asking price. If the listing has been in the market for a long time, you will have more leeway to negotiate. But if the market is hot and the seller has other potential buyers, the process of negotiation is likely to be harder. But always remember to keep your budget in mind when you are making an offer and you should also do a recce of your finances to see how high you are willing to go if the negotiation turns out to be trickier than usual.
Bidding wars can be quite competitive but usually being the first to make a solid offer in a competitive market gives you an edge over other potential buyers. Some things that may help you win brownie points with the seller are making personal contact with them and letting them know why the home is important to you, increasing your down payment so the seller has more confidence in your finances and also being more or less flexible about the closing date may give you better chances with the buyer.
Make a Formal Offer
Once you have agreed upon the price with the seller, the next step is to draw up an official agreement. If you have an agent, they will draw this agreement up and then send it to you for review. Once you have reviewed and given the agreement your approval, it will be sent to the seller’s agent for a similar process of review. If all looks good on both sides, you will be expected to make a token cash deposit to lock the deal. This payment, also known as “earnest money”, is only a token amount and will be in an escrow account until the deal is officially closed. After that, the money will be included in your down payment.
The formal offer will have a variety of information and details, including how you will make the rest of the payments. The agreement will also have details of contingency plans in case something does not work out and the deal has to fall through. Typically, the contingency will include a home inspection clause which gives you the right to have the property inspected during a certain time frame. In case something goes against your expectations during the inspection, you are allowed to back out from the deal or renegotiate the price.
The agreement will also include a mortgage contingency that gives buyers the option of withdrawing from the deal if they cannot find financing within a stipulated window. If your finances are dependent on selling your current home, the offer can be contingent on the sale of that house.
If the market is competitive and several potential buyers are vying for the same property, there is often a temptation to make the deal easier by waiving the contingencies. However, this is not financially advisable, especially if you do not have the cash to make up for the possible losses. For example, if you do not have a mortgage contingency, you will lose your deposit if the appraisal comes back unsatisfactory. In addition, if the bank inspects the house and finds it unsuitable for a mortgage, the pressure will fall on you to cover up for the deposit with hard cash.
Get a Real Estate Lawyer
It is highly advisable to hire a real estate lawyer to guide you until the deal is closed. In case there is a need to renegotiate the terms or if something new comes up during the home inspection. Hiring a lawyer is also similar to finding a real estate agent. You want to work with somebody who has experience with clients like yourself, with similar needs and limitations.
Closing the Deal
Finally, once all the above formalities have been taken care of, you can start working towards closing the deal. The following are the things you need to do to close a real estate deal well.
Apply for a Mortgage
To apply for a mortgage, you can either approach a bank directly for the rates or you can go through a mortgage broker. A mortgage broker can do a lot of the legwork for you and are also not partisan since they will be independent of the lenders. However, you should also keep in mind that the broker is paid a percentage of the loan amount of the fee. No matter what you choose to do eventually, be sure that you arrive at a decision only after considering several different lenders and options.
Get a Home Inspection
Once you have figured out how much you will put down for the down payment and have applied for a home inspection, you will need to schedule a home inspection. This is a very important part of closing the deal because this is the chance for you to ascertain that what you are paying for is truly your money’s worth. With a standard home inspector’s report, you can have things like the roof, heating, air conditioning, plumbing, etc. covered. This report will give you a chance to renegotiate the deal or reconsider it altogether if the inspector finds structural damage or other problems.
It is advisable that you are also present at this inspection so you can, well, inspect the inspector! You want to ensure that the inspector is taking the pains to go up on the roof and turning the air conditioning or the heat on to check that things are in proper working condition. You can also strike up a conversation with the inspector and get more helpful information about the amount of maintenance the house might require. Typically, an inspection may take anywhere between 2-3 hours. The basic cost of a test may be approximately $200 for a home that is smaller than 1,000 square feet and the amount increases accordingly.
Get an Appraisal
The lender will need to assess the property to make sure that the amount you are borrowing is in keeping with the property. The lender will choose the appraiser, but the buyer does have the right to vet the appraiser and ensure that they are accredited and have experience in the particular area. You can ask to see the appraiser’s credentials and ask them questions. If something does not look right, you are within your rights to ask the lender to somebody else in their stead.
Keep in mind that the appraisal fee is also an expense that will be borne by you. The fee can vary depending on the size of the house.
Find Appropriate Insurance
It is extremely important to get a good homeowner’s policy and title insurance. This is not just for your protection, but also to protect the lender so they will also insist that these details are taken care of.
Websites like Insure.com and NetQuote.com will allow you to compare rates for various homeowner’s coverages.
Don’t lose patience, you are nearly at the last step! Before you finally close the deal, you should take one quick whip around and ensure all is in order. You will want to visit the home, preferably during the day, to ensure that everything in the house is the way it has been mentioned in the sales contract. For example, if the sellers have agreed to leave some fixtures behind or if they agreed to have some work done to go through with the sale, you need to ensure that all those things have indeed been done.
Make sure that you make the most out of this trip and do an extremely thorough check. This means checking all the appliances, turning the switches on and off, turning on the faucets to check water pressure, etc. Many people forget to check the attic and will often find that it has not been cleared out by the previous owners. So ensure that you are thorough about this last walk around the house and only close the deal when you find that everything is in order.
Finally, on the day that you are closing the deal, you, the seller and both your respective agents will need to be present to sign the official papers. You will need to write a cheque to cover closing costs, which will include the attorney’s fees, search fees, transfer taxes as well as homeowner’s insurance. Once all of this has been done, the official signatures have been done and the payments have been duly made, the deed of the ownership will finally be transferred to you.
Celebrate! You’re a Homeowner!
Congratulations, you have reached the final and the most exciting step! You can pop the champagne open because you are now a homeowner! This is the point where you can finally kick off your shoes and relax in your new home. Until the step of closing costs, you should maintain your composure and keep in mind the real possibility that something could go wrong in the deal. Ever so often, a deal comes very close to closing but some factor does not align and your dream home can slip away. So it is good to be excited but it is also important to make every move carefully so the disappointment does not feel crushing in case something goes awry.