You've weighed the pros and cons of renting versus buying, and buying, with its promise of equity appreciation, won. Assuming the title of homeowner is one of the most significant financial commitments you will ever make, and the process can get messy if you’re not properly prepared. Here's a breakdown of what to expect.
1. Know your numbers
It all starts with money. Unless you're paying for your dream home in cash, you're going to need to borrow funds from a bank for a mortgage. What are you going to need to know to get one?
Your income and your debt (including credit cards, student loans, and car loans) are key. Then, you'll need your monthly expenses. While electricity, internet, and rent are tied to your current domicile, how much are you spending on food, clothes, entertainment, and transportation? Can you adjust any of these numbers down to make more money available for the mortgage?
2. Build your savings and consider financial assistance
You'll need to have at least 20 percent of the home price in your bank account to secure the loan. You'll also need money for property taxes, mortgage insurance, and closing costs. If this is looking too expensive, there are programs out there that can help you afford it.
Jason Mahoney, a Boston-based real estate attorney, home builder, and broker, says, "If downpayment money is tight or adverse credit situations exist, look into a Federal Housing Administration (FHA) loan." FHA loans allow you to buy mortgage insurance to protect lenders in case you default on payments. As a result of that protection, lenders offer you FHA loans with more flexible qualification terms. Also, look into state and municipal programs for first time homebuyers. Nearly every state and city offers something.
"Even if you don’t end up needing it, taking a first-time homebuyer class is a great idea to give you insight and information on what to expect from home ownership and the purchasing process," says Trip Miller, loan officer for Guaranteed Rate.
3. Find a lender
Once you have a handle on your personal finances, you have two options: getting pre-qualified or preapproved. Prequalifying is a lender's estimation of what you can afford based on your income, debt, and credit.
Preapproval is a firmer number because the lender has also pulled your credit, checked your debt-to-income ratio, and analyzed your tax returns and other parts of your financial picture. It's more work, but it allows you to stand out favorably as a serious buyer because you've taken the extra steps to get vetted and lock in a specific interest rate.
It’s a good idea to know this as soon as possible. "It is never too early to go through the preapproval process for your loan," says Miller.
Choosing a knowledgeable professional for this step is key to helping you understand your financial picture. "Don’t simply focus on rate when choosing a lender. Reputable lenders will be competitive on rate and ultimately the loan officer’s experience, communication, and response times will be as or more valuable than 1/8th in rate. Find someone to work with that you trust and have good rapport with because you will be working with them for a little while and they are handling one of your most important life transactions," says Miller.
4. Recruit the rest of your team
"Assemble the best team you can and let your team handle their individual jobs," says Miller. "Control the things you can control"—like returning your paperwork in a timely manner and not making large purchases during the homebuying process—"and try not to stress about the things you cannot."
Based on your prior work, you've already got a lender. So, next up:
Your attorney: Legal advice is not part of a real estate agent's job, unless they already have a law degree. "Agents and brokers typically use boilerplate contracts drafted by attorneys hired by the seller's brokers to protect the broker interest—not yours," says Mahoney.
Will Henchy, broker and education director at Freedom Trail Realty School, agrees. "You should always have a lawyer review your contracts before signing them. Don’t rely on a standard contract filled out by a real estate agent. Agents are salespeople, not lawyers, and in many states they’re not actually allowed to answer any legal questions that you might have about your contracts."
And lawyers can come in handy a little earlier in the process than you’d think. "Most buyers don’t think they need legal representation until their offer is accepted, but it is important to select your representation early on as they can also review any offers that are submitted and critique any critical terms of the offer," says Christine Garabedian, Principal Broker of the Garabedian Group.
"You will know within 30 seconds of entering a property if that home is right for you."
Your real estate agent: "A good buyer’s agent will know the market and will represent you on properties listed through Multiple Listing Service (MLS), and possibly off market listings or expired or cancelled listings," says Garabedian.
An agent will help navigate through reviewing property information, floorplans, condo documents, easements, or other details about a property. Since your buyer’s agent represent your best interests, not the seller’s, they can provide market information, property data that shows how long a home has been on the market, information on why the property is being sold, and if there is any urgency on the seller’s behalf to sell.
While you can obtain a significant amount of information online, your agent can manage all the information and interpret it to best represent you during the purchase negotiations.
They can also help you navigate markets that are more active and volatile. "In cities, where desirable properties tend to move quickly—sometimes selling within a day or two of listing—a savvy buyer agent will recommend ways to make your offer stand out from the usual multiple offer and bidding war situation," says Garabedian.
Keep in mind that real estate is an industry founded in negotiation. Mahoney notes, "Don't forget to haggle with your buyer's agent or broker. While the buyer's agent might get about 2.5 percent of the transaction price, you can expect to get about 25 percent of that fee rebated back to you." The higher the price, the more you get back, so your interests are aligned.
5. Hunt for your home
Now that you know what you can afford, make a list of what you're looking for in a home. This may seem like an obvious step, but thinking about how your everyday life will change is key to making a solid decision.
Do you want a walkable neighborhood, or space for a garage and a yard? Are you going to start a family? Will you have frequent overnight guests? Do you prefer hardwood floors or wall-to-wall carpet? Would you rather have an extra powder room or an extra bedroom? Freestanding home or a condo? Full-time concierge or not? New construction or older stock?
While your agent will look at the MLS for properties, you should check out other sites that often list the same properties—Trulia, Zillow, and Realtor.com—and set up alerts for locations or homes that you like. Spend time visiting open houses to get a feel of what you can expect in your desired neighborhoods.
"You will know within 30 seconds of entering a property if that property is for you," says Rich Hornblower, realtor with Coldwell Banker and an accredited buyer’s representative.
Come back for repeat tours at different times of the day so you know what the neighborhood is like at night, and how much light comes into the home during the day. If you’re buying pre-construction the case, check the floorplans and the reputation of the developer to get a sense of the final home.
6. Do your due diligence
"You should double check any property information provided by the seller’s agent against publicly available property records; don’t assume that what the agent says is correct," says Henchy.
For example, the square footage listed on MLS might be much larger than the square footage listed on local property tax records. "This could be an honest mistake, the agent might be using a bit of creative math, or you could be dealing with unpermitted additions—work that was done without building permits, which can create serious headaches down the road," says Henchy
7. Organize your paperwork and make an offer
Depending on the strength of your local market, you can offer below the listing price, but if it's a strong seller's market (as you may be already painfully aware), then you'll have to make an offer over ask. Decide what the house is worth to you personally—would you be devastated if your offer wasn’t accepted?—and work with your real estate team to solidify the best number.
"Having your preapproval in hand is a must so that you can enter into an offer with the least amount of contingencies as possible," says Garabedian. A contingency lists a circumstance in which you cannot go through with the purchase. The less you have, the more attractive your offer is, which matters if there are other offers on the table in a competitive market.
"You should double check any information provided by the seller’s agent against publicly available property records; don’t assume that what the seller says is correct."
"When all terms have been agreed upon, the purchase and sale agreement (P&S) is then prepared by the your attorney and executed generally within three weeks after the accepted offer," says Garabedian.
This is the point at which the buyer and the seller have agreed on a price. Both parties will likely feel some form of adrenaline and excitement. The P&S has the commitment letter, as well as the mortgage contingency, a provision in the purchase contract that states if you cannot get a mortgage within a certain time period with the specified terms, you can call off the whole deal and get your deposit back. Note that in some pre-construction projects, your deposit is nonrefundable, even if you don’t get the loan.
If you’re buying a condominium, always review the master condo documents, which will often be provided by the seller. Many states make recorded condo docs available online.
"When reviewing the docs, pay careful attention to the rules in the master deed, declaration of trust, and the building rules and regulations," says Henchy. Be sure to look over the building financials as well because condominium owners are responsible for a portion of the building’s costs.
8. The home inspection
Home inspections usually happen within eight days of an offer being accepted. The home inspection is paid for by the buyer since it has no benefit to the seller.
When hiring a home inspector, ask to see certifications: proof of state certification, or proof of membership in the National Associations of Certified Home Inspectors (NACHI), National Association of Home Inspectors (NAHI) or the American Society of Home Inspectors (ASHI).
Walk through the house with the home inspector, and make sure they’re looking at all of the key pieces. If there are any items of concern, you may need to negotiate further with the seller.
"During this time, you should also be sure that all documents are submitted to your mortgage broker for a completed application and verify that the mortgage contingency deadline, normally three to four weeks after the purchase and sale, can be met before closing which is usually 45 to 60 days," says Garabedian.
9. The appraisal
Before the sale is official, your lender will want to confirm that the home is worth what it’s selling for. Based on factors such as location, structural condition, and recent sales of comparable properties, the independent appraiser will walk through the property to find anything that may alter the value.
The appraiser will give the report to your lender, who is required to show it to you. You should obtain a copy for your own records.
10. The closing
The day before or morning of the closing, you should obtain property insurance for your new home, change all utilities in the seller’s name, and complete a final walk through to check for any outstanding items.
"If there are any pending items from the final walk through," says Garabedian, "it is possible there may be some last minute negotiations, closing may be delayed, or money held in escrow to assure that the items are taken care of after closing. The closing attorney will register your new property at the registry of deeds, which is often where the closing will take place."
At this point, you're gearing up to sign a lot of papers in an office, and you’ll have important documents—the settlement statement ("It’s like a receipt for the purchase," says Miller) from the Department of Housing and Urban Development, as well as title insurance, which will protect your homeownership against any claims by other parties on your home that you didn’t know about before you bought it—in hand.
"If you have the right team doing all the right things there is no reason that buying a home has to be a stressful process," says Miller.
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