1. Can You Afford to Buy?
The first and most essential step to undertake when you make the decision to buy a home is to wrap your head around the costs involved; this will likely mean developing and sticking to a budget.
A good rule of thumb is you should spend no more than 30% of your gross monthly income on housing. As for what you will need to come up with for a down payment can range from 3.5% of the purchase price through FHA financing to a more typical 5-20% for conventional loans. If you are looking for a condo or town home, plan on using conventional financing as FHA is available only on a very limited basis based on the specific building so you likely won’t qualify. That means you’ll need to put down somewhere between 5-20%. The more you put down the better the interest rate (i.e. you pay less monthly for the same amount of money), and if you put down 20%, you avoid the dreaded private mortgage insurance (PMI for short). PMI is how the lender giving you the loan ensures he’s covered for at least 20% of his loss if you default (stop paying your bills and go into foreclosure). PMI can be very expensive and cost the equivalent of $50-100,000 in purchasing power so consider carefully before deciding on how to proceed.
2. Qualifying for and Getting a Loan
Before picking up the phone and calling your lender, here are some lending basics to help you feel comfortable about the pre-approval process.
- lenders like consistency–if you have been employeed or even at the same job for less than 2 years you may have trouble qualifying for a mortgage
- salary is treated very differently than commission or bonus. Don’t assume anything–make sure you explain every detail to your loan officer so he can give you the right guidance
- have your financial documents prepared in advance so you can give exact answers
- be prepared for your credit to be run and to have your interest rate depend on that score. If you have any open collections or other issues on your credit pay them off immediately. It’s also a smart idea to keep credit card balances below 30% of the limit at all times.
Once you establish a basic understanding of your financial obligation your next call to finish this step is to a good mortgage lender (I can refer you to one). The lender will tell you how much your properties of interest will cost on a monthly basis, what financing options are available to you, and how much this is all going to cost you). You should feel empowered and educated after this phone conversation. If you don’t, keep asking questions until you’re 100% comfortable. Once this conversation is over with the lender will provide you with a Good Faith Estimate –a legally binding form which spells out the financials involved with your loan so it’s 100% absolutely crystal clear what you’re signing up for.
Still confused? Follow this handy guide to make real estate financing a snap…
- plan on spending $450/month for each $100,000 you borrow on a monthly basis (ex: a $250,000 loan would cost $450×2.5=$1,025/month
- plan on closing costs (these are in addition to your down payment) being 2-3.5% of the purchase price depending on how you structure your loan (this covers everything: attorney fees, title fees, transfer stamps, etc.)
- you do not pay your realtor a commission–the seller does–so you do not need to factor this into your budget (Yes, you get the assistance of a top-notch realtor for FREE when you buy your home–how awesome is that?)
3. Property Searching
Ok now you’re cooking–you know how much you can afford, you know how much this is all going to cost, and you have now picked the best realtor in the entire world to represent you all using the amazing tips I’ve given you above–CONGRATULATIONS! Now the fun part can begin!
We can sit down for an old fashion in-person meeting to set up your search of available properties. You want to have maximum impact and see how I can setup your search so it’s exactly the way you want it. The last thing you want to do is waste 30 minutes a day looking at properties which were never going to work for you–it gets frustrating very fast.
Once the search is set up you’ll begin seeing places with your agent. Your agent’s job is to schedule the appointments, make sure everything runs smoothly, and to answer questions you have along the way (or get answers if they don’t know them). A good agent will know things like how much it would cost to add granite counters to your kitchen, replace a fridge, or the approximate cost of utility services to properties such as yours. In general, they should be a cauldron of knowledge bubbling over with tips that help you get educated and make the right decision. Depending on your schedule, the process of actually looking for a home can take from 1 week to several months.
4. Making an Offer
Once you find the property your agent’s job is to run numbers for you so you can both discuss what a reasonable purchase strategy is (i.e how much to offer). Once an offer is written up, your agent will walk you through each line of the contract so you’re fully comfortable and then you will sign.
This offer will then go into the seller’s agent and negotiations will begin. Just as with the home search process the time it takes to negotiate can vary wildly with some people taking hours and some days. Regardless of the timing, your agent and the other agent will go back and forth–with your permission- passing counters to one another until an agreement is reached. The updated contract is then sent to both parties for signatures and you are now officially under contract!
5. From Contract Pending to Closing
Once under contract you have 4 major milestones to complete before you get the keys and officially become a homeowner: home inspection and attorney review, mortgage contingency, final walk through, and closing day.
Step one is the attorney review and inspection period.
During this period the buyer would pay for a licensed home inspector to come out to the home and give it a thorough inspection. Any issues found during this inspection would then be brought to the attention of the attorneys who will go back and forth–similar to how you and your realtor did regarding the negotiation of price–until an agreement is reached. This is the same with the attorney review provision of this step. Your attorney will have the right to approve, disapprove, or make modifications to the contract. Just as with the inspection issues, the attorneys will go back and forth until an agreement is worked out.
Once the attorney review and inspection period is signed off on, the next thing for you to focus on is the mortgage contingency. This part of the contract will call for you to have X amount of days to work with your lender to secure an unconditional mortgage commitment (simply meaning your money is ready for you to use). Your lender will typically need AT LEAST 30 days to get a mortgage and if you and your realtor try and make the closing happen quicker you will likely run into problems. You will provide a plethora of financial documents (W2’s, tax and bank statements, debt documentation, etc) to your lender during this period and they will use those documents to work through the loan approval process for you. Once your loan is ready to close you will waive your mortgage contingency and move on to the next step.
Ok so you’ve worked out all the details of your deal and secured your financing–great–now it’s time to conduct your final walk through in anticipation of closing. The final walk through exists so you and your realtor can lay eyes on the property as close as possible prior to closing to ensure no new issues have popped up and that any issues you and the seller agreed would be addressed have been. In most cases, everything will be fine but occasionally something may not be done or a new issue has come up. Not to fear–the attorneys and your realtor will still likely be able to work something out at the closing table to ensure you stay on track to close on time!!
Once the final walk through is finished there is now only one more hurdle standing in your way before you get keys and it’s official–the closing. Your realtor, lender, and attorney will accompany you to sign & go over a ton of paperwork. Your attorney will go through every page with you to make sure you understand what you’re signing and you will proceed through that paperwork till it’s 100% finished. Once that happens, you will be handed keys, paperwork, and at that point you have joined the homeownership club and you’re officially done!
So now that you’ve closed what can you expect moving forward? Here are some amazing perks of homeownership that you may not even realize:
• tax benefits: you may deduct the interest portion of your mortgage and your property taxes from your income taxes (always consult a tax professional prior to filing)
• real estate historically appreciates at 4% annually which means if you buy a $250,000 property and hold it for 5 years before selling your gross profit would be about $42,500 (a 17% return on your investment)