The first step to undertake when you make the decision to buy a home is to wrap your head around the costs involved in the process.
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, it can range from 3.5% of the purchase price through FHA financing, to a more typical 5-20% for conventional loans. The more you put down, the better the interest rate and if you put down 20%, you avoid the dreaded private mortgage insurance (PMI). 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). So if you are purchasing a home that cost $150,000 and you want to put 20% down, you would be putting $30,000 down when you purchase the property.
Qualifying For 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 employed 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 pay. 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 checked; your interest rate depends 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 (ask your realtor for recommendations). The lender will tell you how much your property’s interest will cost on a monthly basis, what financing options are available to you, and how much this is all going to cost. 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, 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% crystal clear what you’re signing up for.Get Prequalified
Finding a Realtor
Wow that was easy! Now that you have found me, let’s make this a fun process!
Did you know that 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?
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 picked the best realtor in the entire world to represent you using the amazing tips I’ve given you above–congratulations! Now the fun part can begin!
We will start with an in-person meeting to set up your search of available properties. You want to have maximum impact and see how your agent is setting up your search so it’s exactly the way you want it.
Once the search is set up you’ll have a bit of homework to do. I ask that you select around 10 properties that best fit the needs we discussed in our meeting and that you drive by those properties to get a feel for the neighborhood. After you have done this we can narrow the list down to 5-7 properties you would like to see. My job is to schedule the appointments, make sure everything runs smoothly, and to answer questions you have along the way (or get answers if I don’t know them). Depending on your schedule, the process of actually looking for a home can take from 1 week to several months.
Making an Offer
Once you find the property, my job is to run numbers for you so we can discuss a reasonable purchase strategy (i.e how much to offer). Once an offer is written up, we will go through 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 taking hours and some days. Regardless of the timing, the seller’s agent and I 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!
Contract Pending to Closing
Once under contract you have 5 major milestones to complete before you get the keys and officially become a homeowner
- Home inspection-During this period the buyer would pay for a licensed home inspector to come out to the home and give it a thorough inspection; this will cost anywhere from about $300 for a small condo to upwards of $1,000 + for large single family homes. Any issues found during this inspection would then be brought to our attention and we will go back and forth–similar to how we did during the negotiation of price–until an agreement is reached.
- Title work-The title company makes sure a property title is legitimate, so that the buyer may be confident that once he buys a property, he is the rightful owner of the property. To ensure that the title is valid, the title company will do a title search, which is a thorough examination of property records to make sure that the person or company claiming to own the property does, in fact, legally own the property and that no one else could claim full or partial ownership of the property. During the title search, the title company also looks for any outstanding mortgages, liens, judgments or unpaid taxes associated with the property, as well as any restrictions, easements, leases or other issues that might impact ownership. The title company may also require a property survey, which determines the boundaries of the plot of land that a home sits on, whether the home sits within those boundaries, whether there are any encroachments on the property by neighbors and any easements that may impact an ownership claim. Before a title company issues title insurance, it will prepare an abstract of title, which is a short summary of what it found during the title search (basically, this is the history of the ownership of the property). Then, it will issue a title opinion letter, which is a legal document that speaks to the validity of the title.
- Mortgage Approval-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). 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.
- Final walk through-The ffinal 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!
- Closing-Once the final walk through is finished there is only one thing left to do-the closing. I will accompany you to the title company where we will head to a small room where a mountain of paperwork will be waiting for you. Your escrow closer will go through the paperwork page by page to make sure you fully understand the documents you are signing until 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!
You're a homeowner!
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.