Buying a home can be a complicated process. Fortunately we are here to assist you. Here are the basics.
- Start with your credit. Credit reports are kept by the three major credit agencies, Experian, Equifax, and TransUnion. They show whether you are habitually late with payments and whether you have run into serious credit problems in the past.
A credit score is a number calculated from a formula created by Fair Isaac based on the information in your credit report. You have three different credit scores, one for each of your credit reports.
A low credit score may hurt your chances for getting the best interest rate, or getting financing at all. So get a copy of your reports and know your credit scores. Try Fair Isaac’s MyFICO.com
Errors are common. If you find any, contact the agencies directly to correct them, which can take two or three months to resolve. If the report is accurate but shows past problems, be prepared to explain them to a loan officer.
- Set your budget. Next, you need to determine how much house you can afford. You can start with our online calculator. For a more accurate figure, ask to be pre-approved by a lender, who will look at your income, debt and credit to determine the kind of loan that’s in your league. We can give you names of local lenders that do a fantastic job if you need direction.
The rule of thumb is to aim for a home that costs about two-and-a-half times your gross annual salary. If you have significant credit card debt or other financial obligations like alimony or even an expensive hobby, then you may need to set your sights lower.
Another rule of thumb: All your monthly home payments should not exceed 36% of your gross monthly income.
The size of your down payment will also determine how much you can afford.
- Line up cash.You’ll need to come up with cash for your down payment and closing costs. Lenders like to see 20% of the home’s price as a down payment. If you can put down more than that, the lender may be willing to approve a larger loan. If you have less, you’ll need to find loans that can accommodate you.
Various private and public agencies — including Fannie Mae, Freddie Mac, the Federal Housing Administration, and the Department of Veterans Affairs — provide low down payment mortgages through banks and mortgage companies. If you qualify, it’s possible to pay as little as 3% up front.
A warning: With a down payment under 20%, you will probably wind up having to pay for private mortgage insurance, a safety net protecting the bank in case you fail to make payments. PMI adds about 0.5% of the total loan amount to your mortgage payments for the year.
Once you’ve considered the down payment, make sure you’ve got enough to cover fees and closing costs. These may include the appraisal fee, loan fees, attorney’s fees, inspection fees, and the cost of a title search. They can easily add up to more than $10,000 — and often run to 5% of the mortgage amount.
If your available cash doesn’t cover your needs, you have several options. First-time homebuyers can withdraw up to $10,000 without penalty from an Individual Retirement Account, if you have one, though you must pay taxes on the amount. You can also receive a cash gift of up to $14,000 a year from each of your parents without triggering a gift tax.
Check on whether your employer can help; some big companies will chip in on the down payment or help you get a low-interest loan from selected lenders. You can also tap a 401(k) or similar retirement plan for a loan from yourself.
- Find an agent: Most sellers list their homes through an agent — but those agents work for the seller, not you. They’re paid based on a percentage, usually 5 to 7% of the purchase price.
You need an”exclusive buyer agent.” Sometimes buyer agents are paid directly by you, on an hourly or contracted fee. Other times they split the commission that the seller’s agent gets upon sale. A buyer’s representative has the same access to homes for sale that a seller’s agent does, but his or her allegiance is only to you.
- Search for a home. Your first step here is to figure out what city or neighborhood you want to live in. Look for signs of economic vitality: a mixture of young families and older couples, low unemployment and good incomes.
Pay special attention to districts with good schools, even if you don’t have school-age children. When it comes time to sell, you’ll find that a strong school system is a major advantage in helping your home retain or gain value.
Try also to get an idea about the real estate market in the area. For example, if homes are selling close to or even above the asking price, that shows the area is desirable. If you have the flexibility, consider doing your house hunt in the off-season — meaning, generally, the colder months of the year. You’ll have less competition and sellers may be more willing to negotiate.
Be wary of choosing search criteria that are too restrictive. For example, select a price range 10% above and 10% below your true range. Add a 10-mile cushion to the location you specify.
- Make an offer. Once you find the house you want, move quickly to make your offer. Your agent will give you sound advice on your initial offer.
Your agent will line up data on at least three houses that have sold recently in the neighborhood. If you really want the house, don’t lowball. The seller may give up in disgust. Remember, that your leverage depends on the pace of the market. In a slow market, you’ve got muscle; in a hot market, you may have none at all.
Your agent will discuss creative ways ways to satisfy the seller’s needs. For instance, negotiate if the seller would throw in kitchen and laundry appliances if you meet his price — or take them away in exchange for a lower price.
- Enter contract. Once you have an accepted signed purchase contract along with your pre-approval letter from your lender showing your ability to obtain a mortgage your inspection period begins. Typically this is 10 days and will be reflected in your contract.
You also need to make a earnest deposit — usually 1% of the purchase price — that should be deposited into an escrow account. If the deal falls through, you will get the money back only if you or the home failed any of the contingency clauses. If the deal goes through you may use this money towards your closing costs or down payment. It is yours.
- Secure a loan. Your mortgage broker or lender and move quickly to comply to the regulations stated in the Purchase Contract. Expect to pay $50 to $75 for a credit check and another $150, on average to $300 for an appraisal of the home. Most other fees will be due at the closing.
If you don’t already have one, look into taking out a homeowner’s insurance policy, too. Most lenders require that you have homeowner’s insurance in place before they’ll approve your loan.
- Get an inspection: In addition to the appraisal that the mortgage lender will make of your home, you should hire your own home inspector. An home inspection costs about $300 on average and a termite inspection is around $150. The inspection takes around 3 hours with a wrap up at the end to discuss the findings with the buyer and his agent.
Having an inspection helps you to learn a lot about the home you are about to purchase, including its overall condition, construction materials, wiring, and heating. If the inspector turns up major problems the repairs can either be negotiated and remedied by the seller or the buyer can walk away from the deal.
- Close the deal. No later than 3 days before the actual closing, you will receive a final Closing Statement from your lender that lists all the charges you can expect to pay at closing.
Review it carefully. It will include things like the cost of title insurance that protects you and the lender from any claims someone may make regarding ownership of your property. The cost of title insurance varies greatly from state to state but usually comes in at less than 1% of the home’s price.
The lender might also require you to establish an escrow account, which it can tap if you fall behind on your mortgage or property tax payments. Lenders can require deposits of up to two months’ worth of payments.
The actual documents needing to be signed will be signed by both parties several days before the close of escrow. At close of escrow your money has to be received or “funded” and the deed “recorded” before you can have the keys to your new home.
Your buyers agent will give you the keys to your new home, garage door openers and mailbox key. Congrats!! Now wasn’t that fun??