So you want to buy a house! What an exciting time!
Many buyers dive right in by starting the process of looking at homes online and going to open houses.
While this is the fun part of the process, let’s make sure you have your ducks in a row before you find your dream home and lose it because you weren’t quite ready.
First… get prequalified
Many people want to jump right in by looking at houses that they think they can afford. However, before looking at properties it’s important to make sure you have a clear understanding of what you can afford.
Choosing a local lender who has loan programs that fit your specific situation is crucial, and your coice in lender can make or break your dreams of home ownership. There are many factors that play into how much house you qualify to purchase such as credit score, debt to income ratio, your income, and job stability. The best lenders will be able to work with you and suggest ways for you to improve your credit score or your debt to income ratio to put you in a position to either qualify for a better interest rate or qualify at a higher price point.
Most seller’s will not accept an offer from a buyer that does not have a pre-approval letter, so this should be your priority!
Count your pennies
When buying, you’ll need to make sure you have a “down payment” which refers to how much cash you will be pautting down at closing towards the property.
When most people think of the required down payment, they often think that 20% will be needed. However, there are many options that require much less cash out of your pocket.
While they aren’t quite as common, some loan programs will allow you to put 0% down which can be very appealing to some buyers. A VA loan is the most common of these programs specifically designed for veterans.
A FHA (Federal Housing Administration) loan will allow you to put as little as 3.5% down, but there are limits on the house you can purchase and your payment will include an additional fee called PMI (Private Mortgage Insurance) for the life of the loan.
The majority of Conventional Loans will have options for as little as 5% down. If you choose to put less than 20% down, you will typically carry PMI 9private mortgage insurance) until you reach 20% equity in the property, as you’re seen as a higher risk than someone putting a minimum of 20% down.
Timing is everything
Everyone wants to time the market and of course, buy when prices are low, and sell when prices are high. It’s difficult to predict when the market will change and by the time you see the change, you’ve already missed the peak.
Everything really boils down to supply and demand. Ideally you want to buy when the fewest buyers (your competition) are shopping for a new home. The spring and summer are typically the busiest times of year, so as a savvy buyer, these should be the times you avoid. Generally, the best time of year to buy is the fall and winter. Families tend to try and move during the summer in an attempt to not disrupt their kids during the school year.
During the cooler months sellers are generally more eager to get the property off their hands before the holidays are upon us, so they may consider an offer that they wouldn’t have during the summer when demand is higher. There are fewer buyers due to discretionary income needed during the holidays and people’s minds being elsewhere outside of the housing market — another reason this is a great time to buy!
You’ve found a home! Now what?
- Ask your REALTOR® to run a CMA (Comparative Market Analysis). This will help determine a fair offering price on the property. Every deal is different and depending on the current market conditions this could be an offer at, below, or above asking price.
- Write up the offer! Your REALTOR® will review all of the details of the contract and discuss then guide you through the process to put an offer together for the seller.
- Your REALTOR® will send the offer to the seller's agent. The goal with any offer is to elicit some sort of response from the seller. Sometimes lowball offers will not be considered and may be found to offend the seller and they will refuse to counter back. However, if you feel the low offer is fair, don’t be scared to do it. You just have to be prepared for an uphill battle if the seller is offended and refuses to work with you. You may have to just walk away and lose the house.
- If your offer is accepted, congratulations, you have successfully negotiated the terms of the deal and are now under contract!
- Once under contract, your Earnest Money will need to be delivered. This is similar to a security deposit with a lease. Your Earnest Money is now at stake and you may lose it if you back out of the contract. This amount is negotiable but generally equal to 1-2% of the purchase price.
- Your lender will order the appraisal. If you’re getting a mortgage to purchase the property, your lender will have a third party appraiser go to the property and give their estimate on the value. They want to insure that the price you are paying is at or below market value for the property, so they can protect their investment if the worst case scenario happens and you default on the loan.
- Congratulations, you’ve made it to the closing table and are getting the keys to your new home! If you are getting a mortgage, it’s probably been 30-45 days from the date your offer was accepted. The closing date would have been negotiated in the initial contract. If you are paying cash, you can close much quicker — the fastest I have seen is 10 days. Make sure to get your hand ready because at closing you will sign what feels like hundreds of papers to finish this part of the process up. The closing agent at the title company will review the closing and mortgage documents you will be signing, so if you have any questions whatsoever do not hesitate to ask.
What no one tells you.
- Just because you’re qualified for a certain amount doesn’t mean you should spend all of that. You know and understand your financial situation and lifestyle better than anyone else, so do not get out of your comfort zone when it comes to the monthly payment. Homeownership comes with more responsibility and expenses than renting does, so make sure you leave some cushion for yourself!
- DO NOT finance anything new while you’re going through the home buying process. Wait until you have keys in hand before opening a credit card to buy new shiny appliances, furniture, a car or anything else. Opening additional lines of credit will affect your debt-to-income ratio, which can and typically will negatively affect the possibility of you getting your home loan.
- Don’t be fooled by pretty staging. Seller’s will often “stage” their home with beautiful furniture and decor that looks pristine. This is a great thing to do as a seller, but as a buyer you need to pay attention to details of the home, not the distracting HGTV decorations. When looking at remodeled homes, the flooring, backsplash, and granite countertops are all good things, but what about the big ticket items that aren’t so sexy? How old is the HVAC system, sewer line, roof, etc.? These are the items that will cost you big money down the line to replace and should be considered when purchasing your dream home.
- Don’t rush, but when you find the right one, don’t delay! Buying a home is possibly one of the largest financial decisions you will make in your life, so take your time to make sure you know what you are getting yourself into by understanding the current market conditions and a fair price to offer. Some homes sell within a day or two so if you get that warm feeling that this is the house you want, let your REALTOR® know! They will guide you through the process and give you advice to give you the best possible chance to get the home of your dreams.
