Complete Home Buyer’s Guide

Posted

Q: I think I want to buy a home. Where do I start?

  1. Figure out how much you can afford

    • Saving up for a down payment
      1. There are so many programs out there these days that the old advice of saving up 20% down just doesn’t apply. Of course, putting less than 20% down does come with its downsides, namely in higher interest rates and a monthly PMI (private mortgage insurance) fee, but also, in a seller’s market, your offer can be less desirable than a competing offer, potentially having difficulty getting an offer accepted.
      2. Consider also what is happening in your market. While there are good government programs allowing you to put down 5%, or even 3.5%, and these can be a good shortcut to home ownership, they do come with their own risk. Were the market to dip at the same time a need were to arise for you to sell your home, your property could be worth less than what you owe the bank – and you must pay the bank the difference. Avoid going underwater by working to save at least 10% for your down payment.
      1. Review your current debt and payments
        1. Did you know that the total amount of debt you have is less important to lenders than the minimum monthly payments you make? So long as your debt ratio remains at or below 36% of your total monthly income once you include your monthly mortgage and monthly debt payments, most lenders will consider you qualified. Be sure to add up all student loans, personal loans, auto loans, credit card debt, and so on, to get an accurate picture of your financial health.
        1. Be confident in your ability to prove your income
          1. You can get a pre-approval without this step, but be prepared to supply information the moment you formally apply. If you collect a regular paycheck (also known as W2 employment), this step is pretty simple. However, if you are self-employed or work as a 1099 contractor, be prepared to provide proof of income (in the form of 1099s and tax returns) to demonstrate that you have consistent income. Some lenders will allow for a shorter period of time provided that your income and assets are quite healthy.
      2. Still reading? That means you are ready to talk to a lender!

        • Shop Around
          1. Not every mortgage lender is created equal. Ask people you trust for recommendations, then contact at least three of them to compare rates and programs. If you aren’t already working with a REALTOR®, reach out to one for referrals – we rely heavily on lenders to do a good job for us and can guide you to people who aren’t afraid to work hard. If you don’t want to do the work, you can use a mortgage broker to research. Even mortgages are not without deals and promotions, so shop around for those as well. For example, I currently have a coupon from a local lender for $495 in closing credits. There are also national promotions, and regardless of whether you use those companies, you can always use the deal as a point of negotiation with your lender.
        • Get pre-approved
          1. Generally you’ll need: 2 recent pay stubs, two months of bank statements, two years of tax returns.
        • Proving your income
          1. You can get a pre-approval without this step, but be prepared to supply information the moment you formally apply. If you collect a regular paycheck (also known as W2 employment), this step is pretty simple. However, if you are self-employed or work as a 1099 contractor, be prepared to provide proof of income (in the form of 1099s and tax returns) to demonstrate that you have consistent income. Some lenders will allow for a shorter period of time provided that your income and assets are quite healthy.
      3. Keep yourself prepared

        • Build cash reserves
          1. Not only is it a good idea to maintain cash reserves for the myriad expenses that come with purchasing a home, you’ll need to keep in mind that lenders have specific requirements for cash reserves as well. You’ll need, at a minimum, enough cash to cover your earnest money payment and your inspection fee, and will likely need anywhere from $5-11,000 to cover your closing costs.
        • Guard your credit score
          1. Preapproval is NOT the end! Once you have an accepted offer in place, you’ll need to make sure that there are no changes to your credit score. Even a simple thing such as opening a store credit card to save 15% on your purchase could be enough to tip the scales and cause you to lose your current loan eligibility. Save your shopping spree for after you close or you could find yourself losing out on your dream home.
      4. Get out there and house-hunt!

        • Start searching
          1. Your REALTOR® will help you narrow down the choices out there and weed out properties that are a poor fit. Once you find a place that has promise, your agent should provide you information about fair market value, usually by supplying you with an adjusted list of comps. This information is valuable not only to ensure that you are getting the best deal, but also to help avoid overbidding on a property that can’t appraise for the purchase price.
        • Make an offer
          1. Once you’ve got an accepted offer, your mortgage lender will review various options and begin drafting your mortgage documents. Ask them to give you all potential options, and feel free to do your own research on the side, or consult your financial advisor for additional advice.
        • Schedule a home inspection
          1. Your contract will include a due diligence period allowing you time to call in experts to ensure that you don’t run into any hidden costs. A base home inspection will cost from $350-450, with additional charges for testing such as radon, surveying, etc. Make sure you give your inspector enough time to complete a report within your inspection contingency deadline.
            1. The inspector will typically spend 3-4 hours going through the property and will then invite you to walk through with them, providing details about the level of repair needed. This is your time to ask lots of questions. It’s the inspector’s job to point out every single item they see – it’s your job to take that information and find out how much it’s going to cost you to fix, how urgent the repairs are, and how common or uncommon the issues are. Your REALTOR® can help guide you through this process to ensure the right questions are being asked and that ultimately, you’re comfortable with the condition of the home you’re purchasing.
            2. Negotiation of terms may be necessary at this point. Your real estate agent will guide you through this process and negotiate on your behalf.
          2. Read your title commitment
            1. Your title commitment is a document that outlines all liens, defects, burdens, and obligations that affect your new home. There are specific exceptions and exclusions that are also detailed in this report. For instance, mineral rights are typically not covered in basic title insurance. If mineral rights are critically important to your purchase, additional policies may need to be purchased or a real estate attorney hired to ensure there are no encumbrances on the property.
            2. Typically you’ll have 5 business days to review this document once it is sent by the title company. Keep in mind that this is a preliminary commitment and that just prior to closing, your escrow officer will run another report to ensure that no liens have been filed in the interim. Your REALTOR® serves as a middle man during this process and will help clear up any questions you may have regarding title by partnering with the title and escrow officers.
          3. Unleash your inner zen
            1. There’s a lot of behind-the-scenes work to purchasing a home. Between the inspection, title commitment, appraisal and underwriting process, a lot of people are working on your home purchase while you are dreaming about how you’ll arrange the furniture in your new living room. Enjoy the dreaming (but don’t buy any new furniture – see 3b, Guard your credit score, above) and make the best of the wait, because there’s not a lot else you can do until your closing date comes along.
          4. Closing Day!
            1. Within a day or two of closing, you and your real estate agent will conduct a walk-through of your new property to ensure that everything is in the correct condition. This is a time to ensure that any requested repairs from the inspection notice have been completed, and that the home is generally in the same shape as when you made your offer. Any items not to satisfaction must be addressed prior to signing the paperwork.
            2. Shortly before your closing date, the title company will schedule a time for you to sign your paperwork and provide the balance due. Your escrow officer will walk you through each page, and typically your agent and your mortgage lender will be present in case there are any last-minute questions they need to answer for you. There’s a lot of redundancy in these documents, so be ready to sign your name a LOT of times!
            3. At this point, you have to wait AGAIN – but not for too long. Title companies record deeds in the afternoon, and as soon as this step is completed, your escrow officer will inform you that you are official. Your REALTOR® will provide you keys and garage door openers and you can finally RELAX…until you start moving those boxes, that is!

        For more information about buying your first home, call (406) 600-1560 or email amyference@outlook.com

        Good luck out there!