Below is a step-by-step guide to purchasing a new home to help you along the way.
Deciding to buy or rent is as simple as debunking some of the myths about buying.
For starters, it is common to rule out buying when you do not have a large down payment. However, there are many programs such as FHA and HomePath Loans where as little as 3% can be used for a down payment, and that money can be a gift from a relative, a home's seller or a friend.
Many people are also concerned about buying a house and being responsible for all of the repairs.
HomePath Loans actually offer loans to renovate your new home. Home Warranties are also available to protect you in case of items breaking (after buying my first home and having the AC immediately go out the first summer and a pregnant wife sitting at home in the heat, I am grateful for the Home Warranty, which saved me more than 90% and made for a happy wife).
With the vast number of foreclosures recently, many are afraid of facing foreclosures themselves. It is important to understand the major issues behind most of these recent foreclosures. Not too long ago the economy was strong and many lenders were loaning 100% on properties. When property values dipped, buyers now owed more on their property than what it was worth. Since then, lenders have stopped lending at 100%. Another factor were the use of Adjustible Rate Mortgages (ARMs). Once a tool for real estate investors, banks began offering this to the public. With ARMs your monthly rate can drastically change, sometimes without warning, causing many people not to be able to afford their notes. With a trusted mortgage officer, these issues can be avoided.
Pros and Cons of Buying and Renting:
Renting
Buying
More Flexible (Unsure where you will be in 1 year?)
Mortgage Interest and tax payments deductible
Renting is maintenance free
Can sell every 2 years and avoid taxes on profit (most cases)
Less freedom to decorate
Values may dip, but ultimately will always be worth more
No equity
Must maintain property (typically adds value to the home)
Payments are not tax-deductible
Cannot move as freely (but home can be leased/sold for profit)
Risk of foreclosure on landlord
Could lose money (unless you could hold out for recovery)
Before you begin your search it is important to develop a price range. To do so you will need to be pre-approved for financing. A bank or mortgage broker will look at your information and determine an estimated amount of money which they will lend you. This process can take a few days so it is important to start early, and typically an offer will not be reviewed unless a letter is submitted proving the potential buyer can obtain the appropriate financing.
Keep in mind that being pre-approved for an amount does not necessarily mean you will easily be able to afford the payments for a loan at that amount. It is important to decide on a budget yourself and, using a Mortgage Calculator, determine the amount you should borrow (keeping in mind taxes, insurance and mortgage insurance will also be included in your monthly payment).
I personally recommend using a mortgage broker rather than a bank for their personal service and the ability to shop around for the best interest rates and terms. However, if you have a good, long standing relationship with a bank you may have better luck with them. It is important to shop around but find your lender early on, because they will be of great help along the way.
What you will need for a pre-approval:
Recent pay stubs (at least the 2 most recent pay stubs)
Bank Statements showing all of your bank and credit card balances
Copies of Driver's Licenses
Copies of Social Security Cards
Previous 2 years of Tax Returns, W2's and/or 1099's
If you currently own a home you will also need:
Current Mortgage Statement
Copy of Annual Taxes and Mortgage Insurance paid
Signed Lease or Sales Contract on your Current Home (in some cases this is not necessary)
Here you will want to narrow your search down to an area. Later you can decide on a subdivision or other specific location, but here you are more focused on the city or town, inside or outside the city limits, and so on. You may already know the area where you want to live, but based on the amount you will be able to finance whether the area you want will be right for you or if you need to focus on a location near your preferred area. Keep in mind commute times, crime rates and school districts.
Once you have found an area, it is important to find a Real Estate Agent that does business in that area.
As a home buyer, you pay nothing for the expertise of a licensed Real Estate Agent. When a home is listed for sale the seller and their agent negotiate a sales commission (typically 6% of the purchase price of the home). That commission is divided between that Real Estate Agent and the buyer's Real Estate Agent. If you do not use an agent of your own then the seller's agent receives the full commission. Many buyers believe they will save the seller money, which will be passed on to them as a price reduction, but this is not the case. Therefore, it is beneficial for you to have an agent working to help you with all the details along the way.
What a Real Estate Agent can do for you:
- Constantly researches the market
- Educates you on the market conditions
- Analyzes your requirements for a new home
- Locates and guides you to homes that meet your needs
- Orchestrates the work of
dozens of individuals necessary in each transaction
- Negotiates a deal on your behalf
- Explains all contracts and paperwork required
- Checks all contracts and paperwork for accuracy
- Refers other professionals for your benefit
- Solves problems that may arise
- Saves you time, money and effort by doing the work for you (for FREE!)
Now that you have a licensed Real Estate Agent to assist you, narrow down your search to a particular subdivision or other local area. Make a list of subdivisions that you like, in order, and hit the pavement. Beginning with your favorite, start driving, jogging, or biking through the area on a regular basis to determine if the area has the environment you enjoy. Also keep an eye out for available properties listed for sale. If you leave for work at 7:00 AM every morning and return at 5:00 PM every evening, drive the neighborhoods, during the week, at those times to check out the daily traffic situation.
Your agent should also be able to recommend subdivisions based on your price range and other requirements. To view a list of subdivisions, Click Here.
When you have completely narrowed your search and have determined the house on which you want to make an offer your agent will review recently sold properties in the area and consider these "comps" and your needs in determining an offer strategy. Once you and your agent agree on a strategy they will prepare the contracts and paperwork.
The agent will facilitate the back and forth negotiations between you and the seller's agent. Not all negotiations are in the home's price. There are many factors that can determine a seller's willingness to accept your offer and your agent will help you tap into clues that could save you money (ie: Does the seller need a later closing date to allow enough time for them to move? Typically lower offers with the right terms can easily be accepted over higher offers).
All contracts are different and your agent will answer any questions you have at this point, but typically the timeframe goes as follows:
A contract is official and binding after it is signed by and delivered to both parties.
From this point you will (typically) have 10 days to have the property professionally inpsected to
determine the home's condition. Before the 10 days are up you will have the option to back out of the contract if the property condition was not what you expected.
Between day 10 and day 30 (when the contract typically closes) you will need to:
Obtain Home Owner's Insurance
Schedule for the electricity to be turned on in your name
Schedule the water to be transferred to your name
Schedule television, cable, telephone, alarm, and other services to be activated
Setup Mail Forwarding with your local post office
Update your address with your employer, bank, friends and relatives, etc.
It is also important to stay in constant contact with your mortgage broker or bank and the title company handling the closing to ensure they have all of the forms and documents necessary to close on time.
Now that you are a Home Owner (Congratulations, by the way) you can enjoy the equity being built in your home with each mortgage check you write each month. However, now is the time to keep your investment protected.
It is important to perform routine maintenance on your home. Although the home buying process is complete, your agent can still assist you in finding professionals to help you keep your home in tip top shape. In many cases your agent, who is an expert in all things real estate, can also offer tips on what you can do yourself to keep repair costs down.
If you have a Home Warranty, keep this in mind if any items go out. A quick call to the Home Warranty company will let you know if the problem is covered or not.
Apply for Homestead Exemption with the local tax accessor. (For Montgomery County Click Here) It is also important to monitor (yearly) your home's appraised value with the tax accessor. If your home is appraised for more than what you paid or what you feel it is worth, you can appeal the appraisal each year (as long as you owned the house on January 1st of that year). These simple steps can end up saving you hundreds in property taxes each year.
PMI (Personal Mortgage Insurance) is paid on loans that are greater than 80% of the home's value. However, PMI does not automatically end. It is up to you, once you have over 20% equity in your home, to contact your lender and have this fee dropped from your payment.
