Buying a House: A Practical Approach
Learning how to buy a house – particularly for first-time buyers – is difficult. There is a complex sequence to successfully coordinate: house shopping, financing, and closing. The process involves relationships with sellers, real estate agents, lawyers, and lenders. And along the way there can be infuriating setbacks.
Separating the major tasks into manageable stages can help buyers find the house with the right features and an affordable mortgage. Some steps in the process can be done concurrently. For example, prequalifying for a loan can speed up the home search, financing, and closing. The first essential step, understanding your financial fitness, will influence everything else on the path to moving day.
Step One: Financial Fitness
How much home can you afford?
When you shop for a house, consider the total price, including property taxes, maintenance, homeowners insurance, and utilities. There will also be a 20 percent down payment or the buyer may have to get personal mortgage insurance. Fannie Mae recommends that consumers spend no more than 28 percent of their net income on a house. LendingTree’s Home Affordability Calculator can crunch numbers such as gross annual income, the projected down payment, existing monthly debt, credit score and zip code.
How good is your credit?
Credit worthiness plays a significant role in finding an affordable mortgage. Check your credit score for free at LendingTree. It may be prudent to improve or repair credit to get better interest rates before leaping into the home-buying process.
Will a mortgage fit into your budget?
Tally your current income and outstanding debts. Use LendingTree’s mortgage calculator to compare different kinds of loans. The calculator estimates monthly payments based on variables such as mortgage types, interest, and the loan term (length of amortization).
Budgeting for borrowing and closing
The closing costs assessed in wrapping up the sale can render the home price unaffordable. Roadblocks in closing can entice the seller to choose another buyer. In assessing the total budget, include estimates for:
· Loan origination fees: Charged in points, these fees average one percent of the cost of the house.
· Application fees: Approximately $500
· Credit report check: $75-$150
· Lender Inspections: $450-$600
· Document preparation: $200
· Attorney fees: $600+
· Title search: $400 to $600
· Appraisal fees: $650
· Survey fees: $300 to $500
· Notary fees: Set by each state
The following two steps may be done simultaneously to save time:
Step Two: Mortgage Pre-approval
Those new to the home-buying process should know that delays in securing an affordable loan can kill a potential sale. Sellers often prefer shoppers who have a mortgage pre-approval, knowing that they can get a loan and are serious about buying. A pre-approval will cap the amount you can spend on a home based on your credit, income, debts, and other financials. Knowing how much you can afford will focus the house-search process on realistically-priced properties.
Rounding up documentation
Since a pre-approval costs money, it’s crucial for buyers to gather the necessary documents to facilitate the procedure, including:
· Tax returns for the two immediate years and supporting W2s
· Pay stubs and bank statements
· Contact information for previous landlords
· Statements from current creditors (lines of credit and loans) that show balances and monthly payments
· List of assets (bank and brokerage statements, auto or real estate titles)
· Profit and loss statements (for self-employed applicants)
Step Three: Determine Home Amenities and Features
To search for a home in your price range, separate the features into two lists: Must-haves and like-to-haves. No home is ideal or perfect, but separating what you need from what you can live without can narrow the search. Items to consider include:
· Location. Is the home close to necessary schools, shopping, employers, public transportation, parks, churches, and highways? Do you favor the inner city, suburbs, or gated communities?
· Type of dwelling. Single-family, duplex, condo or townhome, new home, older home, fixer-upper? How many bedrooms and baths, closets, and storage space is essential? How many stories do you need?
· Neighborhood. Evaluate high/low density, yard size, children or none, crime rates, traffic and noise levels.
· Components. Brick, adobe, log, stone, metal, concrete, siding, shingle, or veneer.
· Amenities. Consider appliances and counters, energy systems, gardens, swimming pools, patio/decks, garage size, fireplace, hot tubs and saunas. Which belong on the must-have list?
Step Four: Find the Right Real Estate Agent
After completing the pre-approval and home-feature assessment, it’s time to go shopping. According to the National Association of Realtors, over 85 percent of 2015 home buyers found their properties through an agent or broker. If a buyer’s agent asks for a broker’s commission agreement, make sure it is charged to the seller. Plan on interviewing three to five prospects in choosing an agent. Ask friends or family members if they can recommend someone.
Time Magazine suggests choosing a realtor with at least five years of experience. In the first interview, mention your price range and amenities, and ask for a list of current listings to determine their knowledge of homes in your bracket. If the prospect tries to show homes outside of your parameters, it’s time to interview another. Friendliness and enthusiasm matter.
The internet is also a good way to look over potential neighborhoods and homes listed in the area based in price range, zip codes, or school districts. Once you’ve narrowed down the location, choose an agent or broker that specializes in your target community. Those agents should have direct knowledge of schools, crime rates, commute times, weather extremes, industrial noises, odors, and future plans for construction or highway work in the neighborhood. Attend local open houses to gauge the amenities and features of homes in the area. Ask the broker for a frank report on price trends, taxes, and whether the neighborhood is rising in popularity or in decline.
When you find the right homes to consider, it’s time for the next step.
Step Five: Get Inspections and Look into Insurance
Even with a pre-approval, a buyer may be required by their chosen lender to conduct an inspection. The realtor can set up inspections on the best prospects (typical cost, $500). An inspector looks for defects in the home from roof to cellar, investigating plumbing and electrical systems as well as the exterior and interior of the home. It’s vital to know how much it will cost to repair or upgrade features, and whether it’s worthwhile to stick with the property. Inspection findings can impact the bottom line if you can charge the seller for projected repairs in the form of a reduced price.
An inspection should include or be accompanied by a survey to determine property lines to avoid potential disputes with neighbors and to support a property map used by local government to assess taxes.
Your lender will ask for the name of the insurance agency you’ll use to cover the home. The inspection can assess risks posed by weather and natural hazards that will increase the cost of insuring the home beyond the basic theft, fire, storm and liability coverage. Call local insurers for quotes to determine if there are necessary riders for floods, tornadoes or other acts of nature in your area.
All good? Congratulations, you’re ready to buy your chosen home! The following steps are intertwined and should be pursued simultaneously to coordinate the sale with finding the best financing.
Step Six: Make an Offer on the House
If the house suits your needs and wants, it’s time to make a written offer to the seller. The realtor or broker should provide a list of recently sold homes in the area that contain similar features as a way to compare prices. The sellers list the asking price, and it’s typically at the top of their range. Now come the negotiations.
Put it in writing
Consult your agent about submitting a written offer on the house. Base it on a lower amount than you’ll definitely pay for the house. The offer is not set in stone: expect a round of counter offers. Consider the inspector’s list of required improvements and repairs as a basis to drop the initial price. Do not get into a long exchange of offers; your chances will diminish. Add as few contingencies on buying the home as possible to keep the seller interested. The most common contingency is a purchase agreement based on the completion of a satisfactory appraisal that satisfies the lender. If your final offer is ultimately rejected, ask the broker if they know why and set about looking for another prospect.
Step Seven: Search for the Best Mortgage
Mortgages are typically offered by commercial banks, credit unions, and mortgage companies. When it comes to mortgages, the Federal Trade Commission reports that, “shopping, comparing, and negotiating may save you thousands of dollars.” Home buyers can receive free, competitive loan offers and learn current financing rates at LendingTree.
Understanding and comparing loan offers
The loan offer or good faith estimate will disclose the total loan amount, the interest rate, the estimated monthly payment, the total cost and the required cash down payment. The offers itemize the:
· Total cost, expressed in the annual percentage rate (APR)
· Interest rate charged on the borrowed amount
· The origination charges
· Loan term (length of the loan)
· Discount points – borrowers may qualify to pay percentage points to lower their interest rate
· Mortgage monthly payments (interest, taxes, and insurance)
Types of loans
There are three major categories for mortgages:
· Government-backed home loans (FHA, VA and USDA)
· Conventional conforming mortgages (Sallie Mae or Freddie Mac)
· Non-conforming conventional mortgages
Understanding interest rates
The two major types of interest structures include:
Adjustable-rate mortgages (ARMs). These begin with a low introductory rate period and then are adjusted according to terms set out by the mortgage offer. ARMs are capped at a top-end rate.
Fixed-rate mortgages. These loans retain their initial rate over the term of the mortgage.
Get an appraisal
In the process of evaluating a loan application, the lender will require a professional appraisal on the property. An appraisal is not the same as a home inspection that benefits the buyer. An impartial, third-party appraisal assesses the property value and annual tax rate on the home, assisting the mortgage underwriter in determining whether the amount of the loan is reasonable in comparison with values in the neighborhood. The appraisal takes into account the condition of the home interior and exterior, the location, the condition of home electrical, heating and plumbing systems, and all improvements that have been made to the home.
Step Eight: Closing the Sale
The first step toward completing the sale following the seller’s acceptance of the offer is to complete the contract between the buyer and seller. Hopefully all has gone well with the process without undue delays. But now you begin what can be an excruciating journey getting all the details settled and legal work completed. The process can take three or four weeks when all proceeds smoothly. Here are ways to avoid the major pitfalls and potential deal breakers:
Hire an attorney
You can’t establish a closing date until you go through the purchase and sale agreement documents. It may be beneficial to hire an experienced real estate attorney to thoroughly examine the agreement in detail. That done to satisfaction, the buyer can schedule a date for closing and…
Schedule and complete a thorough walk-thru of the house with your agent within 24 hours of the signing date. This is to ensure that any new damage or overlooked drawbacks to the property will be remedied by the seller.
Line up the closing day roster
Schedule a closing day that’s well before the end of the month so that the legal documents can be processed by all parties. On closing time, invite:
· You and the seller
· Your real estate agent
· The seller’s agent
· Buyer and seller attorneys
· The title company representative
· A notary public
At the meeting, if all is satisfactory, the buyer’s role at the meeting is to:
· Provide the good faith estimate, appraisal report, and proof of homeowners insurance
· Pay all closing costs
· Sign the home price settlement statement
· Sign the lender’s mortgage note that promises to pay off the loan on schedule
· Sign the deed of trust or mortgage
Now the waiting starts
The closing process can take from 4-6 weeks from the time all the documents are signed and notarized. This portion of closing is called escrow. During this interval, the lender will fund the mortgage and title professionals will process all required documents (property deed, seller’s reconveyance and deed of trust) to officially record your purchase.
During this hand-wringing interval, the buyer can prepare for relocating, closing/opening/transferring utility accounts, rounding up packing boxes or getting estimates from movers. Having patience during escrow is not only helpful; it’s indispensable. It’s a golden time for imagining life in your new home and shopping for a good bottle of champagne.