How to Purchase a Home without going crazy.
Buying a home may be the most expensive and emotionally charged purchase of your life. You will probably live there for many years, possibly your entire life. This article helps you get through this rather difficult process in the best possible way.
Should you Buy or Rent?
Before taking the plunge you might want to consider whether homeownership is right for you. Should you rent or buy?
Buying may seem appealing because you will put an end to escalating rent and you can build equity. But routine maintenance and repairs, insurance, property taxes and other expenses like gardening and garbage collection can be an unpleasant surprise.
Here are some questions to ask yourself when you are thinking about buying a home:
· How long do you plan to stay there? If you expect to relocate in a couple of years, renting is likely better.
· How much home can you afford? If you can’t afford a home large enough to fit your expected family, it may be better to rent while you save a bit more.
· What’s on the market? If you can’t find a home you like, it’s likely not worth buying a house that is not suitable or adequate.
Here’s something to keep in mind; stretching your budget for that dream home may actually make you miserable. Money problems place great stress on a person and especially on marriages. The majority of divorces are caused by money problems. If you can’t afford the house you want, it might be best to wait a while and save for a larger initial payment.
Still can’t decide if buying is for you? Check out one of the many web sites that show how much you can afford based on your income and mortgage terms. You can find a very good source on www.judybernal.org by clicking on “Consumer Finance Information”.
If both your lifestyle and the hard numbers point toward buying, the next step is to determine how much home you can afford.
To determine how much you can spend on a home, take a close look at your budget. Review your bank statements and spending habits for the last couple of months to figure out how much you are spending on everything from cellphone bills to restaurants. The Consumer Finance web site mentioned above offers an excellent spending tracker that can help you figure out where your money is going each month.
Once you have a better picture of your spending habits, determine how much you want to allocate toward a monthly home payment. This figure includes your principal, interest, tax and insurance payment, which add up to your monthly mortgage sum.
The Federal Housing Administration formula, used by many lenders, recommends no more than 31 percent of your monthly income for your housing payment. This will change based on your amount of debt. Buyers with no other debt may be able to budget as much as 40 percent of monthly income to housing. Remember that you still have to cover heat, water, electricity, routine home maintenance medical, school, food and other expenses. Overall, your total debt-to-income ratio, including car payments and credit card bills, should not exceed 43 percent.
If you make $50,000 in annual gross income, your monthly gross income is $4,167. That should leave you with $1,292, or 31 percent to devote to your monthly mortgage, provided your overall debt does not exceed $1,792 a month. There are a number of web sites with mortgage calculators to tell you your monthly mortgage payment.
Remember that buying a home also includes additional one-time payments that can quickly add up, including closing costs, legal fees and other expenses associated with buying, such as a house inspection. And don’t forget about moving fees and home improvements.
Organize Your Finances
Now is a good time to assess your spending, clean up your credit and figure out what you can afford.
Once you have decided to buy a house, the next step is to get your finances in order. It will help you when you apply for a mortgage. It will also help you get some financial perspective, and will keep you from buying that “perfect” house that is clearly out of your range.
Lenders use credit scores, also known as FICO scores, to evaluate the risk of lending to you. The higher the number, which runs from 300 to 850 the better your score. The best mortgage rates go to borrowers with credit scores in the mid- to high-700s or above, according to the Consumer Financial Protection Bureau. Innovis, a smaller company, is also in the game.
Each company generates its own FICO score based on the data it collects. All three scores are shown on annualcreditreport.com Many credit card companies, like Discover, give you your credit score with every statement.
If your score is low, you can improve it by paying down high credit card debt. You can also correct mistakes, like errors resulting from identity theft or mixed-up files belonging to another person with the same or similar name. It takes time for these changes to be reflected in your credit score, so start soon. It can take years if you’ve had tax liens or bankruptcies. It is very important to clear up your credit rating, as it will make a big difference in your mortgage rate.
A preapproval letter is an estimate from a lender of how much you will be able to borrow from them. This helps you determine how much house you can afford, and shows that you can secure a home loan when you are ready to make an offer. The preapproval application for a mortgage often requires pay stubs, bank statements, tax returns and other financial documents. Take the time to get one now, so you’re ready to make an offer as soon as you find a home you love.
The more cash you can pay up front the less you will have to borrow with a mortgage. A bigger down payment lowers your monthly payments. You will also pay significantly less interest over the course of your mortgage. If you can make an initial payment of 20 percent or more of the total home price, you usually won’t have to pay for mortgage insurance, a premium that protects the lender in case you default on the loan. This saves you even more money.
Don’t use all your money toward a hefty down payment. Lenders want you to have some reserves. Closing costs typically add up to thousands of dollars. Take a look at Bankrate.com, which conducts a survey of closing costs nationwide and lists closing costs for each state. For example, closing costs in California are estimated as $2,225.
Talk to friends and co-workers and find out where they live. Visit shops and restaurants in the neighborhood that you are considering to get a feel for the place. Talk to people you meet in stores and restaurants. Ask yourself whether you would like to have them as neighbors.
If you like a certain neighborhood then go back there at different times and different days of the week to get a sense of what the traffic is like at rush hour and what the area is like at night. Some real estate firms offer seminars and neighborhood tours. You might want to take a virtual tour around the neighborhood using Google Street View. There are also web sites that help you find the right neighborhood.
Once you’ve determined where you’d like to live, start browsing the web to see the homes available in that area. Realtor.com and Zillow are two possibilities. You can set up alerts on some of these sites using your criteria to automate some of the work. Many search sites show how long a given listing has been on the market, and whether the price has been raised or lowered. Also past sales and other information that help determine if a listing is overpriced or has been languishing on the market. A few hours using the Internet can greatly narrow your search and save you a lot of time and effort.
Visit some open houses to narrow your preferences. Open houses will be listed on realtor’s web sites, and there will be many local signs showing their location. You have probably seen them on each Tuesday and Sunday. This will give you a sense of the housing stock in the area. If there’s a crowd at an open house, you may also gain insight from the questions and comments made by other potential buyers.
You won’t have any trouble finding a real estate agent to help you with your search. They will find you, especially if you attend some open houses. The secret is to find a good one. Here’s what to look for:
A good broker can help you make sound decisions and guide you through the home buying process. They can also help you get access to homes as soon as they hit the market, before they may be listed online.
You can also talk with friends and family members who have bought or sold recently in your area. Before signing with a broker, work with them for a few weeks to find out what it is like. Note especially whether they get back to you promptly, and whether they listen to you carefully. If you feel any sense of discomfort with them it’s time to look further.
The broker’s commission is typically 5 to 6 percent split with the seller’s broker. This comes out of the sale proceeds. You don’t pay your agent directly but the fee is accounted for in the list price. Your broker works for you, but they don’t get paid unless you buy a home. You will find that an experienced broker will save you far more money than they receive in commissions. That’s one of things they do best.
It’s now time for some private showings. A private showing with your real estate agent will give you time without the pressure or distraction of competing buyers. If you can, schedule a showing during the week before an open house, so you can use the open house for your second visit.
Did you walk into an open house and feel right was that it was right for you? The home that has everything you’re looking for? Did you and your partner discuss the pros and cons of a number of homes and finally come to an agreement? However you came to a decision on the home you want to buy, the next steps you take are crucial.
Look for comparable homes of a similar size that have recently sold in the neighborhood and note their selling price. A good real estate agent will find this information for you, and help you develop an offer that is within your budget and attractive enough to get the seller’s attention. Your realtor will work with you to come up with an offer strategy that is attractive and has room for negotiation.
It sometimes happens that the home you want is listed with your real estate agent. They will be representing both the buyer and seller, which is a potential conflict of interest. Your agent may offer to cut the commission as they represent both parties. While such dual agency arrangements can work out, the potential conflict of interest may compromise your ability to negotiate. This involves lots of give and take, and can get tricky if your agent is also representing the seller. For your peace of mind, it’s O.K. to find another agent to represent you in this case.
In a seller’s market, where there are relatively few listings available and a lot of eager buyer, the decision is fairly easy. You offer something a little over the listed price, knowing that there could easily be a bidding war. This is common when real estate prices are rising rapidly. Also make sure that your mortgage is lined up and ready to go, along with any documents that you need. Your real estate agent will work closely with you at this stage. This is where they will save you significant money.
Understand that making an offer is just the start. You want to get the home for as little as you can without losing the house outright. The seller wants to maximize the selling price of the home without scaring you away. In a soft market, begin at 5 percent below the asking price. A soft market is when listings have been sitting unsold so you will have negotiating power. In a rising market prime listings will command the full asking price or more. Either way keep your budget in mind when you make your first offer and decide in advance how high you are willing to go.
In a seller’s market attractive listings are scarce. You will probably end up paying more than the listing price. While the highest offer usually wins, being the first to make a solid offer can give you an edge.
Once you and the seller agree on a price, your agent will draw up a formal offer for you to review and will then send it to the seller’s agent for review. If the offer is accepted, you will submit a cash deposit, called “earnest money”. This shows good faith. This money is held in an escrow account until closing, and will go toward your down payment.
The formal offer should spell out terms and conditions of the purchase including price. This includes how you will pay for the house along with any contingencies, which give you an out if something unforeseen arises. Contingencies usually include a home inspection which gives you the right to conduct a professional inspection within a specified time and to back out of the deal or renegotiate if the report comes back unsatisfactory. A loan contingency gives buyers the option of pulling out of the deal if they can’t obtain financing within a reasonable amount of time. If you need to sell your current home to afford the new one you can make your offer contingent on the sale of the home you own.
In a tight market where multiple buyers are competing you may feel pressed to waive contingencies. This is not a good idea unless you have the cash to cover your losses. Without a loan contingency you could lose your deposit if the appraisal comes in low and you can’t get as high a mortgage loan as you need. Or you would have to make up the difference with cash.
Be prepared for disappointment. Counteroffers are common. So is rejection. Even if the seller has orally accepted your offer, he or she may still be able to entertain and accept other offers (it may depend on your state). And even after you have a signed contract, issues can arise.
This is the part that will really try your patience. Once your bid on a house is accepted, you then arrange for your funding and start due diligence to make sure that the house is in good condition, is fairly priced and that you learn about potential problems. You will be surprised at the facts that come out, and by the mountain of paperwork involved.
Mortgage brokers are not tied to any one lender, so they can save you time and hassle by doing the legwork for you. A mortgage broker is paid a fee set as a percentage of the loan amount, but this may be paid by the lender. Banks may offer long term borrowers favorable rates. Whatever you do, make sure you consult with a few lenders to find the best deal. Your real estate agent will help you through all of this.
Schedule a home inspection as soon as possible to find out any defects that affect the value of the house. A standard home inspector’s report covers the foundation to the roof and includes heating, air-conditioning and plumbing, foundation, roof condition, dry rot, termites, electrical, and any needed repairs. This gives you the chance to reconsider or renegotiate if structural damage or needed repairs are discovered.
Ask local friends, family and your real estate agent for recommendations, then ask candidate inspectors for references from prior customers. You can also look up the inspector with your local Better Business Bureau. Your real estate agent will have several recommendations for you.
It is very important for you to be at the inspection. This allows you to insure that the inspector is doing a thorough job. He should get up on the roof rather than look at it from the ground. He should turn on the heat in the middle of the summer to make sure it works, You can also ask questions about the condition of the home and pick up some helpful information about maintenance.
Costs range from $200 for a home less than 1,000 square feet to $400 or more for large homes. Depending on the results of the inspection, other inspections may be warranted. Some examples are inspections of the foundation, sewer, tests for wood pests like termites, asbestos, lead paint, mold and radon.
Your lender will assess the property to make sure that the price is in line with the amount you are borrowing. An appraisal includes the home’s layout and square footage, its condition, and what similar homes are selling for in the area. The appraiser is chosen by the lender, but you can check them out in many states. (In California buyers have no contact with the appraisers.) Make sure they are licensed and are familiar with the area where the property is. Ask to see the appraiser’s credentials and find out how many appraisals he or she has performed in the area. If you are not satisfied then ask the lender to send someone else.
Appraisal fees, which are typically paid by the buyer, vary widely depending on the scope of the work and the size of the home. On average, appraisals can cost from $225 to $450, according to HomeAdvisor.com, but some can cost more than $1,000 in some states. The maximum in California is around $700.
You will need a homeowner’s policy as well as title insurance. Your lender will also typically require this as a condition of your loan. The American Land Title Association, www.alta.org, offers a searchable database of title insurance companies by state.
You can compare rates for homowner’s coverage at sites like Insure.com and NetQuote.com. You may also be able to cut your rate by buying your homeowner’s and auto insurance from the same company. For more information, Consumer Reports offers a guide.
Before you close on your new home do a last-minute walk-through to make sure everything is being left in the condition outlined the sales contract. Check that ceiling fixtures the sellers agreed to leave behind are still there. Note whether old built-ins they agreed to take with them. Go during the day and be thorough. Flip the light switches on and off, turn on the water taps, run any appliances and flush all the toilets. Make sure that no new issues have cropped up. If the attic or garage hasn’t been cleared out or anything is broken, you can ask for credit at the closing to pay for junk removal or repairs.
In California closing happens two or more days after all the documents are signed. The title company handles all the details. You have to wire transfer all necessary funding at least five days before the closing.
Things can be different in other states. Sometimes all parties involved — the seller, the buyer and their various representatives — will sign the papers officially sealing the deal. You bring a check to cover closing costs including title search fees, any attorneys’ fees, transfer taxes and homeowner’s insurance. Once all the documents have been signed, and all funds have been properly distributed, the deed of ownership will transfer to you.
I hope that this article is useful to you. Hopefully it has prepared you well for the many steps in buying a house. Correctly done this can be the best investment you could possibly make. When done incorrectly it can be a nightmare.
Judy Bernal is passionate about real estate and getting the right results for clients. She is ready to help you make your real estate dreams come true. A Los Angeles native and a Realtor since 1990, Judy does her homework: She consistently views new listings and knows the history of the market, as well as the homes that are currently available. Judy has a true insider's knowledge of the local area and the current market. She possesses excellent communication and negotiating skills and a genuine desire to help you achieve your goals.
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