#1 What's The Right Home For You?
The search for a new home will go more smoothly if you do some advance assessment and decision making. Examine your desires, needs, hopes and dreams. Think about what you want, what you need and what concessions you are willing to make. Determine what type of home will work for your lifestyle and what your parameters are. Define what features are nonnegotiable and what is open to compromise.
Creating a prioritized list will help guide your search and balance what is available on the market with what you want. A good place to begin is weighing how the following factors impact you and will influence your decision.
Location. The location of your new home is the foremost contributing factor in its pricing. A small house in a desirable, high-demand area may list for more than a larger home with more features in a less sought after area. Convenience to schools, town centers, retail areas and recreation, for example, may affect the listing price.
Suburbs, urban or rural. What are the walking and driving distances to schools, restaurants, parks, shopping and the town center? Determine what type of work commute you will have and how much time is involved. Assess traffic patterns and congestion and how it fits into your desired lifestyle.
Schools. Perhaps you are looking to live within a specific school district or close to your childcare provider. Though you may not have children that will use the area schools, the district's reputation could impact the resale value of your home down the road.
Type of home. Does a single family, condo, townhome or cooperative best suit your needs?
Style. Perhaps you have a specific style in mind. Is it a single story, multistory or split level? Do you imagine yourself in a Victorian, Tudor or contemporary style home? How about an older home with character as compared to something brand new and sparkling? What type of exterior do you prefer—brick, stone, wood or something completely different?
Rooms. The number of bedrooms and bathrooms, square footage and bonus rooms is important to consider.
Garage. Do you want an attached, detached, one- or two-car or larger garage? Perhaps you want space for a workshop.
Special amenities. A home that has features that are sought after in your area will dictate a higher selling price as well as the resale price down the road. Determine what upgrades are important to you: fireplace, pool, spa, expanded master suite, library, lower level finished basement or gourmet kitchen to name a few.
Condition. Do you want a fixer upper, turnkey, an older or brand new home?
Neighborhood. Perhaps you want to live out in the country with homes that are far apart or you prefer a neighborhood with young children or older families.
Yard. Do you prefer landscaping, decks, patios and perennial flower gardens, something small requiring little work or no yard at all?
Think about your future and how long you plan to live in the home. If having children is years away or yours are grown up, a good school district may not be a priority. Perhaps an older parent with growing health concerns will need a room in your home as well as your care someday. Driving around your desired neighborhood in advance will alert you to potential deal breakers such as barking dogs, traffic patterns and neighbors.
Now that you have set your priorities and you have a good idea of what type of home fits your lifestyle, it is time to contact your real estate agent for advice and to set a plan to start your search for the perfect home. An experienced, educated agent with extensive market knowledge will successfully guide you through the maze of available options and the specific paperwork needed that will lead to your home purchase. Possessing a wealth of knowledge, your agent is well prepared to assist you from beginning to end, helping you feel at ease throughout the sometimes complicated buying process. Your agent can provide you with specific, detailed information about schools, shopping centers and recreation.
#2 How Much Home Can You Afford?
Now that you have figured out the type of home that best suits your needs, next you will need to determine what you can afford to buy. Knowing your price range allows you to avoid wasting time looking at homes that do not fit your criteria. If there are more homes available in your area than there are buyers, then you are in a buyers’ market. You may look at homes that are priced slightly higher than your upper limit because there is more room for negotiation with the seller.
Contacting lenders for pre-approval and receiving a written letter verifying your top loan amount will help to make your offer more attractive to the seller. You will save time by eliminating from your search homes either above or below your price range. Though you may not want to make an offer for at the high end of your approved borrowing amount, you may be able to afford more than you realized.
Do not confuse pre-approval with pre-qualification. Pre-qualification is a lender's opinion based on the financial information that you provide and is not verified. During the pre-approval process, your credit, bank references and employment are all verified. A lender's pre-approval letter will demonstrate to the seller that you are serious.
Several factors go into the determination of what price home you can afford. A lender will calculate your expense-to-income ratio and review your total projected monthly housing expenses in relationship to your income and existing debt. In advance, you can review your income, savings, monthly expenses and debt.
- Gross income
- Available funds for down payment, closings costs and other fees and any cash reserves that your lender mandates.
- Total debt and monthly installment payments
- Credit history
- Type of mortgage
- Interest rates
Your CENTURY 21 Action Plus Realty real estate professional can provide you with the guidance you need and answer your questions about preparing yourself financially to purchase a home.
#3 What If You Already Have A Home?
Buying a new home while selling an existing home, presents additional challenges. Your real estate professional can assist you and ensure that the road is as smooth as possible. Being a buyer and a seller at the same time is a balancing act.
Timing the sale of one home while purchasing another can be tricky. What if you're unable to perfectly time the sale of one house with the purchase of another? You may be in between homes for a period of time and need to find temporary living quarters. Or, you may own two houses at one time. Talk to your agent about developing a back-up plan to avoid last-minute hassles.
If you are between homes, you will want to look at various options for storage. Storage facilities, containers or the use of the basements or garages of families and friends may be options during this transitional time.
While waiting for your home to sell, you may need to finance using a bridge loan, no-ratio loan or a home-equity loan (or a home-equity line of credit).
A bridge loan is a temporary loan that is secured by the equity in the buyer's existing home. It finances a down payment on the new home until the existing home sells. There are drawbacks to this type of loan. They are more expensive than a standard home-equity loan, and the buyer must be qualified by the lender to own two homes at one time, which is not always possible.
A no-ratio loan is used when the buyer does not want to use income to qualify for the mortgage. Based on your down payment, credit score and assets, this type of loan may enable you to own two homes at once, while a bridge loan does not.
A home equity loan or drawing on your existing home's equity line of credit may help you to finance the down payment on your new home as well as closing costs and other expenses. Look closely at the terms. A penalty fee may be assessed if you sell your existing home within a year of taking out the loan.
A Second Home Purchase
If you are already an experienced homeowner, you are familiar with what buying a home entails. The primary reasons to consider purchasing a second home are:
- Financially feasibility
- Vacation home for family and friends
- Retirement home during part of the year or down the road
- Potential tax breaks
- Mortgage payments made by renters
The ability to afford a second home depends on your financial portfolio or qualification for a second-home mortgage. Your down payment and closings costs will be out-of-pocket expenses. Your monthly expenses for housing will rise, so you will need to take a close look at your budget. The mortgage interest rate of a rental property may be higher than that of a primary residence. Work closely with your lender to come up with the best mortgage program to suit your needs.
#4 Choosing a Real Estate Agent
To start, you will want to find an experienced real estate professional that is able to smoothly guide you through the home-buying process.
Buying a home is a major life decision so choosing a knowledgeable agent with whom you can build trust, is a good listener and works in the area in which you would like to live is essential.
Choose a professional that understands your needs and concerns and will provide you with personalized service.
When talking with your agent for the first time, expect a discussion about the type of home that you would like, and share the prioritized list that you have put together. Discuss your needs and wants for desired features and location, price range, education systems, public transportation and highways, among others.
If you are looking at a number of homes over a period of time, then you might want to develop a rating system. Make a list of what you liked and disliked about each home. Your agent can help you with this process.
#5 Making an Offer to Purchase
You have found the home that you can't live without and are ready to make an offer. Your real estate agent is ready to guide you through the next step of this somewhat complex process. You can count on your agent's expertise again—this time in the art of negotiation.
Your agent will direct you toward at a price that both you and the home's sellers can agree upon. A formal purchase contract, written by you and your agent and signed by you, will be submitted to the seller for review and consideration. During this step, compromise is vital; you want to arrive at a fair price where everybody is satisfied.
Rely on your agent to communicate and negotiate with all parties and help you to achieve the desired outcome. Avoid providing any information directly to the seller or the seller's agent, either positive or negative, or the negotiation process could suffer.
What Should You Offer?
To start, your agent will show you how your potential home compares to others in the area in terms of today's market. Your agent will compare condition, features, size and potential renovation and repairs for you. When several homes have sold in your area, a review of historical sales activity may help you to arrive at a price that reflects area trends. Ask your real estate agent to show you what homes have sold in the last six months to a year. Compare original list prices to final list prices. Are the list prices lower or higher than the actual sold price? What is the average?
Determine the cost of needed repairs and cosmetic improvements as well as desired upgrades and renovations. A home that is in mint, turn-key condition will sell for more than a fixer upper that requires additional expense and labor.
Knowing the common upgrades and features of homes in your new neighborhood, may help you determine the asking price. For example, if your home is in a neighborhood where a walk-out finished basement is popular, and your basement is unfinished, the offered price might be lower. The resale value of a 3-bedroom home in an area of 4-bedroom homes could be lower. In effect, all features and upgrades combined with needed repairs should be weighed and balanced to come up with an optimum offer.
Whether or not the current market is more favorable for a buyer or a seller will help determine the price of your offer. When more homes are for sale than there are buyers, then you are in a buyer's market. When there are fewer homes for sale than there are buyers, then you are in a seller's market. Higher prices exist in a sellers’ market and lower prices exist in a buyer's market. Make your offer accordingly.
Making Your Offer
The next step is figuring out what you want to pay for the home. Your offer is just the first step in negotiation. Counteroffers are common, and sometimes there are several. Your initial offer may be lower than the final agreed upon price. Depending on the market, a home may have multiple offers at the same time resulting in a sales price that is higher than the list price. The most financially attractive buyer with the highest offer and fewest number of contingencies will typically prevail in this type of situation. Because prices are more flexible in a buyer's market, sellers are more often open to negotiation.
#6 How Will You Pay For Your New Home?
Paying Cash for Your Home
Paying cash for a home has advantages and disadvantages. You will need to weigh all of these factors to determine if and how paying cash will impact your home purchase in the short and long run. A qualified financial adviser may assist you in determining if a cash purchase is the right choice for you.
- Expedience. A cash buyer is able to close on a home quickly by avoiding the loan qualification process, which, depending on the type of loan program, can be time consuming.
- Interest and Fees. Though the foremost advantage to paying cash for a home is to avoid mortgage interest, a loan has several other costs associated with it. A lender will charge closing costs, interest points and loan origination fees and will require an appraisal that is paid for by the buyer.
- Tax Advantages. Several tax advantages exist for buyers who use mortgage loans to purchase their home. A cash buyer will miss out on these savings.
- Investment Portfolio. Analyze investments in your portfolio combined with other potential investments to determine the best gain in the long run. The money invested in a real estate cash purchase may or may not, depending on the market, result in the highest profit when compared to other investments.
Obtaining a Mortgage Loan
Few individuals have enough savings or liquid funds to enable them to purchase a home with cash. Unless you are one of those people, you will need to apply for a mortgage loan, or a loan secured by your home, through a lender. The mortgage note shows existence of the loan and is a legal contract stating that a monthly payment will be made until the loan is paid in full.
Several types of loans exist with varying features, but most are simply variations of a fixed-rate or adjustable-rate mortgage. The size, maturity, interest rate and method of payment may all differ. Familiarize yourself with how these mortgage programs work so that you are able to understand your options. Your agent and lender will help you decide on the best loan program based on your individual factors and needs. Putting potential interest rates, prices and terms into our Mortgage Calculator may help you to decide what best suits you.
If you are a veteran, you may qualify for a VA loan. In addition, several types of non-traditional loans exist for buyers who are unable to qualify for a typical loan due to higher debt-to-income ratios or credit problems. Talk to your lender about your options if your credit report has negative information or if your credit suffers from other issues. Your real estate agent may refer you to a creative, non-traditional, more flexible lender with less strict criteria.
#7 Getting Your Mortgage
Researching and talking with mortgage companies prior to submitting an application is important. Find out what their loan programs are, requirements for down payment and any fees or incentives available. You are in essence paying the lender for the use of their services—ask questions and make sure you get the answers that you need.
Mortgages may be obtained through a mortgage company, bank or credit union. Your real estate agent can provide you with a list of reputable lenders or refer you to a specific lender that will suit your individual needs.
Many home buyers seek out a lender for pre-approval or pre-qualification prior to beginning their home search. This preliminary process will help you save time by focusing on homes that are in the price range that you can afford and for which you can qualify. Pre-qualification is a lender's opinion based on the financial information that you provide and is not verified. A pre-approval carries more weight. During the pre-approval process, your credit, bank references and employment have all been verified and a letter is written, which reports that you are qualified for a loan and the amount.
The Mortgage Loan Application
The credit report is the primary resource for obtaining a mortgage. Prior to applying for a mortgage, obtain a copy of yours. Review it carefully for any errors or inaccuracies. The higher your credit score, the lower your interest rate. Make sure to immediately correct any mistakes.
If the lender has not already done so as part of a pre-approval process, it will verify your employment and bank accounts as well as obtain and evaluate your credit report. Next, your lender will request several pieces of information from you so that they may determine your financial fitness and loan eligibility. They will ask for such historical information as:
- Pay stubs
- W-2 forms
- Bank, retirement accounts and investments statements along with account numbers, names and addresses
- Credit card account numbers, amounts due and monthly payments
- Auto loan account numbers, amounts due and monthly payments
- If you are self-employed or have commission-based income, they will require balance sheets and tax returns
Your lender will require you to sign an authorization that allows verification of the information that you have provided. They will request a copy of your credit report and ask for copies of the purchase contract and the earnest money deposit check that you have submitted. The timing of the loan verification process depends on the type of mortgage for which you are applying as well as several other factors. Ask your lender how much time your approval will take.
Lenders have several legal obligations to you, as the borrower. They must inform you of the mortgage's annual percentage rate (APR) within three business days of your loan application submission. Your lender must furnish you with consumer information on adjustable rate mortgages, if applicable. Additionally, the lender must provide you with an itemized good faith estimate of your costs and fees associated with every aspect of the loan.
The lender will order an appraisal to determine the market value of your home. The home must appraise at a certain value and percentage of the loan for you to gain loan approval. Your loan will require private mortgage insurance (PMI) if your down payment is less than twenty percent of the value of your home.
Negotiation may be key in obtaining the ideal interest rate for your mortgage. Many lenders set interest rates that are non-negotiable, however keep in mind that the mortgage lending industry is a business just like any other. The lender wants and needs your business and is working in a competitive marketplace. Comparison shopping for loan rates in combination with points and educating yourself about the market, will help you bargain from a position of strength.
Locking in Your Mortgage Interest Rate
A lock-in is a lender's promise to hold a certain interest rate and number of points over a specified period of time for a borrower. Locking in your mortgage rate might help ensure that what you shop for is what you get. The terms you are quoted when first contacting the lender, may not be the terms available to you at closing. You may be able to protect yourself against increasing rates during a time of rising interest rates. Lock-in rates are typically 30 to 60 days in length and should guarantee your rate, terms and points. You may be able to lock in at the time of your loan application, when the loan is approved or later, depending on the lender.
Points are additional charges imposed by the lender. They are also used to reduce or buy down your mortgage's interest rate. These charges are typically prepaid at the time of closing, but sometimes are added to the mortgage, depending on the loan. One point equals one percent of the loan amount.
Annual Percentage Rate
The annual percentage rate, or APR, is a standard calculation used by lenders. Designed with the intention of helping borrowers compare various loan options, it is the yearly interest rate paid by the borrower, taking into account points and other costs. The APR discloses the real cost of borrowing by incorporating all fees, points and rates into one single rate. You are then able to easily compare loans with different terms and fees.
Your Credit Report
The credit report is the primary resource for obtaining a mortgage. If you have not already done so prior to applying for a mortgage, obtain a copy of yours. Contact one of the three major credit reporting agencies for a copy of your report. Each of them will provide instructions on reading the report and disputing inaccuracies.
- Experian- 800.311.4769
- Equifax- 800.685.1111
- Trans Union- 312.408.1050
Review your report carefully for any errors or inaccuracies. The higher your credit score, the lower your interest rate. Make sure to immediately correct any mistakes that you find. Legally, negative information may appear on the report for seven to ten years.
Credit problems are the primary reason that potential buyers are not approved for a loan. The credit score measures the risk and likelihood that the borrower will repay the loan. Repairing credit issues is not easy. Lenders will examine your report for collection activity, bankruptcy, missed credit card payments, loan defaults, bankruptcy, nonpayment of taxes and judgments for non-payment of child support.
Private Mortgage Insurance (PMI)
Private mortgage insurance, or PMI, is a type of insurance that protects the lender and is required if the down payment on a home is less than 20 percent of the sales price or its appraised value. Generally, once the loan principle reaches less than 80 percent of the value, the requirement for PMI will terminate.
Typically, the first year's payment of PMI is paid at closing and placed into escrow. After closing, the premium is included in the monthly payment with the mortgage. For more information pertaining to PMI, talk to your lender.
#8 The Home Inspection
Once you and the seller have agreed upon price, you are ready for a formal inspection of your potential home to detect defects or problems. Typically, a clause in the sales contract states that the offer is contingent upon a home inspection.
A home inspection typically takes between 2-4 hours depending on the size of the home and the number of rooms, features and amenities. Many potential problems can be uncovered during the inspection.
The home will be evaluated from the foundation to the rooftop and will include, where appropriate, the functionality of the heating and air conditioning systems, electrical, plumbing and all appliances. The inspector will look at the home's structure including the foundation, basement, roof, chimney, walls, doors and windows.
If you do not know of a qualified inspection company, ask your real estate professional for a referral. The inspector should be able to provide you with a sample report to show that they follow industry standards. Note that the job of the inspector is to simply inspect, not to repair or to refer clients to repair companies, which could result in a conflict of interest.
When you schedule your appointment with the home inspection company, inform them that you will be present throughout the inspection process. Legitimate inspection companies will welcome your presence. This is the time to ask and share any issues that are of concern to you. In-person explanations will help you to understand the report, which can be fairly complex and lengthy—a thorough home inspection may cover as many as 1000-plus items. Your real estate agent will facilitate discussions and lead you through negotiations depending on what is found during this process.
#9 Closing On Your New Home
The day has arrived for the final step in buying your home—the closing. The closing, also known as the settlement or escrow, in simplest terms is when money is taken in from the buyer and paid out to the seller. Ownership is transferred to you. The closing can take place in person or by mail and is handled by the real estate company or a title company.
You may be entitled to perform a walk-though of your home prior to the closing, depending in what state you reside. You should not close unless all of the items that have been agreed upon are completed and you are entirely satisfied.
The paperwork, which by this time has been formally reviewed by all involved parties—the buyers and sellers, agents, lenders, attorneys and title companies—details specifics of the sales agreement. In addition the paperwork enables all parties to verify their interests in the transaction.
The closing agent will review the settlement sheet with you after which both you and the seller will sign it. The settlement details the payments and credits that are due to the seller and the payments and dollar amounts due from the buyer. Particulars include transaction costs such as title and tax searches, and adjustments, if applicable, such as prepaid taxes.
After you sign the loan documents, you will need to show evidence of insurance and inspections, if you have not already submitted these to the lender.
You will then submit your payment. If you have a mortgage, and your lender is paying your property taxes and homeowner's insurance on your behalf, an escrow account, or reserve, will be opened for you.
After the closing, the buyer's title and mortgage liens are legally recorded in your local municipalities by the closing agent. Once the transaction is recorded, which can sometimes take a few days, funds are disbursed to the seller, real estate agents and the lender, if applicable. Once the deed is recorded, you are the legal owner of your new home.
#10 Moving To Your New Home
You will begin to prepare for moving day prior to the closing. The date of possession will be in your sales contract. Make sure to coordinate the date and time of your move with the seller if the move falls on the same day.
No matter how many times you have moved, it is never easy. However, you can take certain organizational measures to ensure that your move is as smooth as possible.
Prior to moving, create a simple record-keeping system with a checklist and a schedule. Keep detailed records of your expenses—they may be tax deductible. The more prepared you are, the fewer surprises await you on moving day, so stay on schedule.
A short to-do list prior to the move might include:
- Hire movers or rent a moving truck or van
- Find storage
- Get moving supplies
- Make a home inventory of your possessions
- Have a garage or yard sale, or donate unwanted items
- Pack ahead of time
- Safeguard valuables
- Transfer utilities, cable and phone
- Contact lawn service, cleaning and security companies as to date of service termination
- Notify post office
- Take care of change of address notifications for publications and correspondents
- Obtain coverage for new homeowners insurance
- Contact health care professionals, ask for referrals and obtain health records.
- Register children at their new school and request transfer of records
- Clean both homes
- Dispose of trash and flammable items
- Re-key doors
The Moving Day
Some simple steps will help to minimize your stress on moving day.
- Develop a checklist and use it.
- Have tools available to disassemble or detach furniture or appliances.
- Set aside any boxes or items that you do not want moved.
- If possible, move your valuables and breakables on your own.
- Clear walkways, and if you live in a congested area, reserve a parking area for the moving truck.
- Walk through each room as well as the yard prior to leaving to make sure that you have everything packed.
- Review the moving company's paperwork prior to signing off on it.
- Prepare an envelope with the mover's payment and tip, if applicable.