Have you ever bought a home? Was the experience enjoyable? Or were you, like many others, overwhelmed by all the hoops you felt you had to jump through to get to the finish line?
Buying a home can be a daunting task, especially for the first-time home buyer. The sheer amount of work it takes to go from saying “let’s buy a home” to closing can challenge anyone’s patience. That gets even worse when the mortgage company starts asking questions about your finances; questions that you will probably feel like are none of anyone’s business. Nevertheless, all those hassles are an important part of the process, necessary to get you into the home of your dreams.
But buying that home is an important part of your financial plan. For many, it is the biggest single investment they make towards their retirement. That alone is motivation to put up with all the problems and push your way through. To make that process easier, we’ve compiled our ultimate checklist. You’ll definitely want to understand these before buying a home.
1. Pre-Qualify Before Buying a Home
If you’re buying a home, you’ve got to know how much you can spend. That means getting pre-qualified for a mortgage. This is a quick, easy process, that can be accomplished in a trip to the lending institute. How much a lending institute is willing to pre-qualify you for will depend on your income, payments on outstanding debts, and your credit rating.
It really doesn’t make any sense to begin looking for homes before pre-qualifying; because you won’t know how expensive a home you can afford to buy. If you start looking at homes before pre-qualifying, chances are that you will fall in love with a home, and then find out you can’t afford to buy it.
There are several financing options you can use when buying a home. Not all mortgages are the same, so it’s a good idea to explore the options. The major types of mortgages include:
- Conventional mortgage – This is a loan which is not guaranteed in any way by the federal government. It may have either a fixed interest rate or an adjustable rate; but in either case, it follows guidelines established by Fannie Mae and Freddie Mac.
- FHA – The major difference between a FHA loan and a conventional one is that the mortgage is guaranteed by the Federal Housing Administration. Borrowers pay for mortgage insurance, which protects the lender from loss if the borrower defaults on the loan.
- VA – If you are a veteran, you will have a benefit when buying a home. That benefit is the ability to take out a VA mortgage loan, in which the Veteran’s Administration guarantees the loan, much like the FHA guarantees them. For those who can use it, this is a great way to buy a home when the economy is down and lenders are repossessing properties.
There are also some alternative financing options when buying a home, if you can’t qualify for the above mentioned mortgage loans:
- Hard money – Rather than a loan from a mortgage company or bank, hard money loans come from private investors. These are short-term loans, which need collateral (real estate) to guarantee the loan. While only a short-term loan, it provides the opportunity to improve your credit rating, so that you can later transfer to a conventional mortgage.
- Lease option – Leasing the property, with an option to buy it later. Typically, a portion of the amount paid in monthly rent is applied to the cost of the property at the time of purchase.
- Seller financing – Some sellers are willing to finance the property themselves, acting as the lender for the mortgage.
2. Buying a Home that You’ve Been Dreaming Of
Once you’ve qualified for your loan, you’re ready to start looking, finding that home of your dreams. Take some time to sit down and list what you want in your home, getting input from the whole family. Break that list down into “have-to have” and “want-to have” before you do any serious looking.
You’re better off getting some professional help for finding your home. Websites that list homes tend to be out of date enough that many of the homes which are listed will already be under contract. New homes won’t show up there as quickly as you’d like. Realtors have access to the Multi-Listing, which is constantly updated with the latest information.
You definitely don’t want to go with a listing agent, regardless of what promises they might make. It’s likely you won’t get a better deal from them, even though it is common for them to advertise this way, especially over the internet.
Find your own agent who is representing not the seller’s agent of a home you are interested in. Their commission is paid by the seller, not by the buyer. So if they’re trying to give the seller the best representation, there is no way that they will give you the best possible representation too. A realtor isn’t an arbitration service. For this reason, it is illegal for realtors to do dual-representation in 48 of the 50 states.
It’s a good idea to take the time to interview three different realtors before choosing one. You want to find someone who is going to work for you; so an agent who is a little hungry for business, is an advantage. At the same time, experience helps, especially when it comes to negotiating the deal.
A good real estate agent is going to work hard for you, searching for potential properties for you to look at, arranging a time when you can see the property, accompanying you and advising you through the negotiating process. Sadly, the nature of their work makes them some of the most abused professionals you’ll ever find, as people expect them to spend hours of time in helping them, and then buy a home without their help, cutting them out of the commission.
3. Submit the Offer for Your New Home
You’ve looked at dozens of homes and finally found the one you want. Now begins the work of making a deal. Your realtor can really help you here, helping you determine the value of the home and reviewing any unique clauses in the contract.
There are a number of different ways of determining a home’s value; but the most common is by looking at the sales price of comparable properties. This is information that the real estate agent can readily access, helping you to determine a fair offer. You not only want to consider the size and makeup of the home, but also:
- Condition – Do you need to make repairs to the home you selected? If so, to what extent does this reduce your move-in budget?
- Time on market – How long has the home been sitting on the market? If it is more than 90 days, they’re probably asking too much for it.
- Type of market – What’s the home buyers market like? Are you in the midst of a hot seller’s market?
- Inventory – Are there a lot of homes on the market?
Based upon this, you make an offer through your real estate agent to the selling agent. The seller will either accept your offer, reject your offer or make a counteroffer. Be patient because it is not uncommon for counteroffers to go back and forth a few times, before a final price is agreed upon.
Other factors, such as work the seller will do on the home or the addition of a home warranty can be negotiated as part of this process. However, the seller needs to make enough profit out of the sale, so anything you add will probably add to the lowest price they will agree to.
4. Navigating Escrow while Buying a Home
Once your offer has been accepted and you sign a contract, you will need to provide an “earnest money” deposit on the property. This money is held in an open escrow by the title company or law firm (on the East coast). This company acts as a disinterested party, holding the escrow for both parties and ensuring that all the paperwork required for the transfer of property is properly filled and filed.
There are some important contingencies on your contract, which you need to be aware of. These exist to protect both the buyer and the seller. They allow the buyer to have the necessary time to ensure that they are getting what they think they are getting for their money. At the same time, they limit the amount of time the buyer has, so that the seller doesn’t have their property tied up in a contract that can’t be fulfilled for one reason or another.
Specific contingencies to the contract include:
- Due diligence – A ten day period is normally given for you for due diligence. This allows time for you to do an inspection of the home, verifying that it doesn’t have any serious problems. You may want to hire a professional for this. If you can, it is best to try and complete this in a shorter time period of 7 to 8 days, to make your offer appear stronger to the seller. However, if you find something wrong, you can cancel the contract in this time, without penalty.
- Appraisal – The lender will require an appraisal of the property, to ensure that you are not overpaying for it. Lenders do this to protect themselves. They will not loan more than the appraised value of the home. If your contract is for more than that amount, you will need to come up with the difference as part of your down-payment, unless you can talk the seller into renegotiating the contract.
- HOA package – If the property is subject to a homeowner’s association, the seller will provide a HOA resale package, outlining the requirements of the HOA. Once received, you have 5 days to review this package and reject the contract, if you so choose.
Unmet contingencies create a situation where you can cancel the contract. In this case, you will receive your earnest money deposit back.
5. Closing on Your New Home
The most frustrating part of this entire process is waiting for the final approval of your loan. Don’t be surprised if the lending company asks for additional financial documentation or information. They may want to know what certain expenditures are for; especially if you make major purchase during the time that they are reviewing your package.
Finally, your approval will come through and the closing company will give you an appointment for the closing. This usually happens within a couple of days after approval. While there is a large amount of paperwork for the closing company to prepare, they are set up for and accustomed to handing it.
The closing itself is a legal meeting where the buyer and the seller sign the necessary documents. Both real estate agents will probably also be in attendance and a representative of the lending institution might be (although they usually aren’t). Often, the closing company acts as the lender’s representative.
You will be required to sign more documents when buying a home than the seller, simply because of the financing of the home. The seller is merely relinquishing title to the property, while you are both accepting that title and completing the transaction for your mortgage loan. That documentation will then be forwarded to the lending institution. Once they sign off on the mortgage, funds are released and the title is recorded with the county.
At this point, the property is legally yours, with one large caveat. As a part of your loan contract, the property is serving as collateral for the loan. Should you default at any time, the lender has the right to foreclose on the property.
6. One Final Detail
There is one final detail when buying a home. File your homestead with your county’s property tax office. This will help protect you from creditors and circumstances that arise from the death of the homeowner’s spouse.
Have you been through this process? How was your experience buying a home? Is there anything you would do different the next time around, to make the process run smoother? We’d love to hear your comments.
If you are interested in real estate and financing strategies that could help position you better for retirement, check out our Real Estate and Finance online course.
All the best,
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