2019 Home Buying Guide
Buy a House
Homeownership is at an all-time high in North America, not just because of low-interest rates, but also because more and more people realize the benefits, such as:
- Credit – having a mortgage that you pay on time every month improves your credit
- Investment – the value of homes today are appreciating which helps you build equity. That makes real estate a good investment.
- Pride – there’s nothing like the feeling of owning your own home.
- Tax Advantages – interest on your home is tax deductible
It takes three things to buy a house: some cash, dependable income, and good credit. If you fall short in any of these areas, don’t worry. There are plenty of programs out there to help achieve homeownership no matter what your financial situation.
Before you begin the home buying process you should do the following:
- Determine Your Objectives – Why do you want to buy a home? Need more room? Downsizing? Tired of paying rent?
- Determine Your Needs – Prioritize what is most important to you in a home (style of home, size of home, neighborhood, schools, cost, etc.) Keep in mind; there is a difference between what you need and what you want. So be realistic.
- Become Informed – If you’re a first-time buyer, learn everything you can about the process. Research the market by looking at classified ads and homes magazine to get a feel for what’s available, drive around neighborhoods you’re interested in, scan the Internet and maybe even talk to a Realtor® if you decide you want their help.
- Get Your Financing in Order – This is not the time to make any major purchases on a credit card. Don’t change types of work.
Knowing What You Can Afford
The first thing you need to decide is how much you can afford. Determining this early in the process will save you a lot of time and frustration. Not only will you have a clearer idea of the amount you can spend, but you can also eliminate all those homes that are not in your range. You may even find that being pre-approval opens the doors to types of homes that you hadn’t considered before.
Before you begin searching for a home, you should take a few steps to prepare for financing:
- Credit Report: Contact a credit bureau and get a credit report on yourself, just to make sure your credit report is accurate. If you don’t like what you see, it’s time to try to clean up any problem items or clear up any mistakes. You may also want to consider contacting a consumer credit counselor for help.
- Save Money: Skip a vacation, movie or dinner out to save money for a down payment and closing costs. Try not to buy anything on credit and if you do, pay it off quickly. Try to avoid taking on another large credit expense or even applying for another credit card.
- Get Pre-Approved for a Mortgage: It pays to get pre-approved for a mortgage early in the process. Some think pre-qualifying for a loan is enough, but it’s not. Pre-approval gives you more power when you’ve found that perfect house.
- Buying Power – Lets you know in advance how much you can afford to spend on a home.
- More Control – You have the negotiating power of a “cash” buyer when you can prove that you have a financing in place.
- Faster Closing – You can close in as little as 15 days compared to the 60 days if you’re not yet approved.
- Saves Money – You can lock in an interest rate early for a faster closing and better rate. (Ask your lender about a 30-day rate lock instead of the standard 60 days.)
- Get Your Financing in Order: This is not the time to make any major purchases on a credit card. Don’t change types of work.
What’s the difference between Pre-Qualification and Pre-Approval?
A. Pre-Qualification is a “guesstimate” of what you might qualify for before actually submitting your mortgage application. Based on the unverified financial information you provide, the lender uses a quick calculation to arrive at a loan amount.
B. Pre-Approval means that the lender has verified your financial information and has actually committed money in your name for a specific loan type and amount. With today’s technology, you can receive loan pre-approval in minutes.
Searching for Homes
Before you get started, you need to determine if you want to hire a Realtor® to help you or go it alone.
Using just any agent to buy a home can be a little advantageous. Having someone who knows the market negotiating for you is a plus. They know the area and can tell you the pros and cons of any particular community. They have access to most of the homes on the market through the Multiple Listing Service (MLS). They can handle the negotiating, contract and closing for you. And the seller typically pays the buyer agent commission.
If you decide to use an agent, you can expect them to do the following for you:
- Help you get pre-approved for a loan
- Recommend a specific price range
- Suggest different communities that fit your needs.
- Screen homes for you
- Show you properties
- Negotiate the offer and contract
- Set up inspections and help to clear contract contingencies
- Oversee the closing, escrow, and settlement
- Provide you information on securing a home warranty
If you choose not to use an agent and buy directly from a “For Sale By Owner”, the seller may reduce the price by the 2-3% they would have paid a buyer’s agent. If you don’t plan to use a real estate agent, it’s a good idea to protect yourself with a real estate attorney. Choose your attorney before you start shopping because it’s too late for legal advice after you’ve already signed a contract.
Beginning your home search
Become familiar with the city you’re considering to see if it meets your needs (e.g., near a park, shopping, public transportation, etc.) Drive around. Attend open houses. Talk to friends and colleagues. You may want to select two or three neighborhoods to broaden your options.
It may also be helpful to take photos of the homes you’re interested in. Make personal notes on the back. This will help you stay organized and remember what you’ve seen.
You may also want to create a profile of the home you’re looking for in your next home.
- Goals – why are you buying a home?
- Features – what do you need vs. what do you want?
- Location – is it close to work, in a particular school district, near shopping, etc.?
- Style – what type of home fits your needs, lifestyle, and taste?
- Lot – what is the size? What does it feature (wooded, fenced in, etc.)?
- General condition – is it in good shape?
- Neighbors – try to get an idea of what kind of neighbors you will have.
- Taxes – verify taxes and any current assessments on the home you’re considering buying.
Where to find homes?
- Yard Signs – Hit the pavement and drive around neighborhoods that interest you.
- Classified Ads and Homes Magazines – Start reviewing your local newspaper and pick up a free homes magazine at your local grocery store.
- Internet – More than 60% of homebuyers today begin their home search on the Internet. Chances are the real estate companies in your community post their homes on their own website. Use Home Sell Network to find For Sale By Owner homes for sale in your area.
- Open Houses – Check out the local newspaper and identify open houses you would like to attend.
- For Sale By Owners – You can find them by looking for yard signs and talking to people who are selling their own home or know someone who is.
Just remember to take your time, stick to your objectives and don’t let yourself get pressured into anything. Keeping your feet on the ground now will ensure you don’t get in over your head later.
By now you should be well into your home search. If you haven’t already been pre-approved for a loan, now is the time. Pre-approval lets you know in advance how much you can afford to spend, gives you more negotiating power because you have a financing in place and can save you money by locking in an interest rate early in the process.
Getting a loan to buy a house is now easier than ever. You can actually receive loan approval in as little as four minutes. No money for a down payment? Poor credit? First-time buyer? No matter what your needs are, there are hundreds of loan products available to suit most financial situations.
What Type of Loan Is Right For You?
When choosing a mortgage, find out about…
- How much down payment is required
- Both the interest rate and the annual percentage rate (APR)
- Standard closing costs (and any extra fee the lender may charge and why)
- The possibility that your mortgage will be resold on the secondary market
There are many different types of loans available.
- Bridge Loan – Should you sell your home first before buying a new one or buy first and then sell? Most people need the equity in their current home to purchase a new one. But what if you sell first and don’t have anywhere to go? A bridge loan may be an option. A bridge loan is a temporary loan that you obtain from your lender until the permanent one can be put in place. Once the primary mortgage is in place, the bridge loan is paid off and closed out. But understand that while waiting for a closing on your home, you will be making two mortgage payments. You will owe your present mortgage payment plus the payment on the bridge loan. Be sure you can afford it.
- Conventional Mortgages – A conventional mortgage offers a fixed rate. They typically come in 10, 15 or 30-year loans. Although conventional loans used to require 20% down, most people today put 10% down (68% of buyers today put less than 20% down). Just keep in mind, if you put less than 20% down, you’ll be asked to carry private mortgage insurance (PMI). If you’re a first-time homebuyer, there are many low down payment loans available that ask for 3-10% down.
- Adjustable Rate Mortgages – Adjustable rate mortgages carry an interest rate that changes to keep pace with current market rates. This is good for buyers planning to stay in their home for a short time. If you plan to stay in the house for a long time, you’re better off locking in a fixed rate with a conventional loan. When deciding whether an ARM is right for you, determine the following:
- Will I be able to afford higher mortgage payments if interest rates go up?
- Will I be making other sizable purchases in the near future such as a car or college?
- How long do I plan to own this home?
- FHA Mortgages – Loans through The Federal Housing Administration (FHA) help low-to-moderate homebuyers purchase homes with low down payments (approximately 3%). You can use a gift or unsecured loan for the down payment and closing costs. Also, these loans are usually assumable (along with the current interest rate) by the next qualified owner when you sell your home, which is an added benefit when it comes time to sell.
- VA Mortgages – Veteran Affairs loans are great because they provide the opportunity to buy a home with no down payment. They are offered up to a predetermined loan amount (more than $200,000) and are assumable by qualified buyers. To qualify for a VA loan, the veteran must be on active duty or have a discharge (other than dishonorable), along with one of the following:
- Adjustable Rate Mortgages – Adjustable rate mortgages carry an interest rate that changes to keep pace with current market rates. This is good for buyers planning to stay in their home for a short time. If you plan to stay in the home for a long time, you’re better off locking in a fixed rate with a conventional loan. When deciding whether an ARM is right for you, determine the following:
- 180 days active (not reserve) duty between September 16, 1940, and September 7, 1980
- 90 days service during a war (Korean, Vietnam, Persian Gulf, etc.)
- Six years service in the National Guard
- Assumable Mortgages – An assumable mortgage is a loan that stays with the property. It’s simply transferred to the qualified buyer. This means considerable savings for the next buyer. It may include no points, no interest rate change and low closing costs. Assumable mortgages are often the most valuable part of a property. FHA loans are given before December 1st, 1986 and VA loans given before March 1st, 1988 are completely assumable to the qualified buyer. This means that you can take the loan along with the real estate, just as it stands.
- Balloon Mortgages – The Balloon Mortgage has a fixed rate for a certain time frame, typically seven years, followed by a “balloon” payment requiring repayment of the entire loan balance. Interest rates are generally lower than conventional loans. People may choose this type of loan because they plan on either selling their homes, paying them off, or refinancing them before the balloon payment is due.
If you put less than 20% down on a loan, you will likely have to pay PMI or Private Mortgage Insurance. PMI protects the lender against a loss in the event of default by the borrower. You can ask your mortgage company to remove the PMI if you’ve paid 20% of the loan. However, you will be asked to provide an appraisal.
Most lenders require you pay real estate taxes and insurance on a monthly basis. This cost is included in your monthly mortgage payment, placed in an escrow account, and paid out by your mortgage company.
Making an Offer
Before you make a formal offer, you need to make sure the home is priced correctly. You don’t want to overpay, do you? Typically used when selling a home, a comparable market analysis (CMA) lists the recent sale of nearby homes, including how long each stayed on the market, how close the asking price was to the actual sales price, and then compares the houses with the one in question. If you’re using an agent, they will do this for you to help you determine a realistic price. There are several online appraisal services that can provide you the same information as a CMA.
As you go through this process, remember that everything is negotiable, and everything should be in writing. You should be very specific when you prepare your purchase offer, and the seller should be equally specific when they issue their counteroffer. Don’t forget to think ahead in terms of the top price you’re willing to pay. It’s a very emotional time and making some decisions early on is a good idea. Other tips include:
- Don’t make a verbal offer
- Don’t offer a full price unless the home is a real steal. You need room to negotiate
- Make sure the contract includes an “out” in the event you cannot secure financing.
- If you’re not using an agent, make sure you consult with a real estate attorney.
Earnest money proves to sellers that you’re serious. After all, they’re going to take their home off the market on your behalf. Earnest money is typically between 6-10% of the purchase price, but less is possible. The money should be held by an attorney or title company in escrow. Never give the money directly to the seller. Such a deposit does not mean you’re bound to the contract. Your full deposit is credited toward the down payment and closing costs.
Once your offer is accepted, it becomes a binding contract, so be sure to include the necessary contingencies. Contingencies are clauses that, if not met, will render the contract null and void. Common contingencies are the sale being subject to approved financing, the sale of an existing home and/or a satisfactory home inspection.
Great… you’ve made your offer. Now you need to have an expert “kick the tires”. A formal inspection determines if anything needs to be repaired or replaced. If you’re using an agent, they will arrange the inspection for you. If you’re on your own, make sure the contract indicates who pays for the inspection and whether you or the seller is responsible for any necessary work. The contract should also include a contingency in case the inspection reveals any repairs that cannot be resolved with the seller.
Licensed home inspectors inspect homes to determine what, if anything, needs repairing or replacing. Typical inspections may include…
- Termites – signs of termites in the home or foundation
- Plumbing – checks for leaks, dripping faucets, toilet tank leaks, etc..
- Electrical – up to code? Check that all light switches and wall sockets are working
- Exterior – settling cracks, paint peeling
- Interior – signs of leaks in walls or ceilings, general condition
- The Roof – checks for leaks or damage
- Windows – good condition and sealed?
- Insulation – up to code?
- Appliances – checks that they work along with heating and air conditioning units.
- Radon Gas – an odorless and colorless gas that is sometimes found in the earth’s rock and soil.
- Lead-Based Paint – some older homes may still have lead-based paint that can be hazardous if ingested.
- Asbestos – homes built in the early 1970s and before often had asbestos tile floors and asbestos ceiling tiles. This substance poses a health risk and must be removed.
The inspector will write up an inspection report with all minor and major defects itemized. Good inspectors will find minor flaws in nearly any home. It’s up to you to decide how important they are. It is also helpful to be present during the inspection. Inspectors often provide you tips on the maintenance and upkeep of the home and its systems.
Understanding Title Insurance, Appraisal and Homeowner’s Insurance
Some people can get confused about this area of the real estate transaction, but with a little knowledge and guidance, it’s easy to understand. We’ll break down the basics for you.
Title Insurance: When you buy a home, a title company examines the chain of titles (previous owners) to insure that there are no problems with obtaining clear title to the property. Parties other than the current owner of the home may have rights to it for things such as mortgages, liens due to unpaid taxes, lien claims to those who the owner owes money, etc. As a new owner, you may know nothing about these risks, but you are still vulnerable to such claims on your property. A deed is not sufficient protection. That’s why title insurance is necessary.
It is very common for title companies to also handle the escrow portion of the transaction, meaning they serve as a neutral party to exchange funds and make sure both parties adhere to the agreed upon terms of the contract.
The Appraisal: Lenders require appraisals to confirm that the home for which they’re providing you a loan is in fact worth the amount you’re paying. Appraisers are independent agents normally hired by the lender, however, you may have a choice. The fees appraisers charge vary and are typically built into your loan costs. Your lender may also require a Location Survey that certifies the house is within the boundaries of the lot. The lender often selects the surveyor, but again, you may have a choice. The lender usually pays for the cost of an appraisal. Then it’s factored into the buyer’s closing cost.
Homeowner’s Insurance: If you are not assuming the seller’s homeowner’s policy, you will need to buy your own. The title will not be transferred until you can prove you have the home covered by insurance. This protects you from things such as fire, flood, tornados, or any other damage to the home. You may also consider additional levels of insurance to cover natural disasters that are more prevalent in your area.
Escrow and Closing: Congratulations! You are just steps away from being in your next home! You’ve purchased your home, but you don’t actually own it yet. You need to close on it. This is known as closing or settlement.
The escrow agent conducts the closing and is often affiliated with the title insurance company. Their job is to ensure the buyer obtains a clean title, the lender obtains a good mortgage, that the costs of the transaction are paid, the seller’s mortgage is paid off, and that the seller receives their proceeds.
The escrow agent prepares a closing statement that outlines what the required funds are, who’s paying and where the funds are going. They will not disburse funds until they can guarantee that the above-noted items have been taken care of. Closing costs usually run between 3-8% of the purchase price.
Odds and Ends
- Utilities – Water, gas and electric meters will be read on the day of closing and the seller will owe for the utility usage up until that day. You will also need to make deposits with both the water and electric companies.
- Service Contracts – If you are taking over any service contracts from the seller, you will owe the seller for the unused portion of those contracts that have been pre-paid. These could include pest control, pool and/or lawn services, home maintenance contracts, etc.
- The Check – Your closing agent should tell you how much you need to bring to closing. Since your personal checks are not accepted, so bring a cashier’s check instead.
- Home Warranty – It’s highly recommended that you purchase a home warranty. This will cover the repair or replacement costs in case items such as appliances break down after you purchase the home. The peace of mind is worth the expense. There are companies that offer home warranties. Ask your real estate agent for a referral to such a company.
There’s nothing like homeownership. The pride and stability you feel are hard to describe when you come home to a place that you know is yours.