This is designed to be a step by step process in the home buying scenario. We’ve tried to cover each step in order so that you may be more informed and prepared for this process. It is a long, complex process that can be confusing, but hopefully with our checklist, you feel more prepared.
Good Credit is important in the home buying process. The higher your credit score, the lower your APR for your home loan. The difference between rates seems low on paper, but the difference in dollars and sense is large in the short and especially the long term.
When buying a home you will need enough money for a down payment (usually 20%), closing costs and reserves. The good faith estimate will estimate how much cash you will need for closing. If you are getting an FHA loan you will need less cash down. There are different loans with different amounts required down. However, if you pay less down, you will owe more on a monthly basis and pay much more over the life of the loan.
Established income is very important for lenders. You must provide multiple months (around 6 months) of consistent pay stubs. This proves to the lender that you will be able to financially afford your mortgage. The lender has certain algorithms to determine if you are financially able to afford your loan. This takes into account how much you can prove you make and the cost of the loan.
Other Sources of Cash
Parents and Relatives can “gift” you funds up to $10,000. Buyers may also liquidate any assets they have to obtain capital for the home purchase. Amount of cash in savings also is a good thing for when lenders look to see how financially able you are to purchase a home. No savings is a bad sign for your ability to survive issues that will arise.
Since the mortgage collapse in 2008, it has become increasingly difficult to qualify for a loan. This is generally a good thing for all, in that lenders aren’t easily giving loans out to those who probably can’t afford them. A buyer should set a realistic budget and make sure to get pre-qualified for that amount prior to looking for a home. A buyer should have saved enough funds for the down payment as well as other upfront costs they may not be thinking about such as closing costs, realtor fees, and holdings.
Prioritize Needs & Wants
Most people struggle with the idea of needs and wants in everyday life. Most buyers don’t have the money to get their dream home, so prioritizing needs and wants in a house is a very important step. Figure out what you can’t live without, then list your wants so that you can try and obtain your biggest wishes without straying over budget.
City or Country
You will generally get less space and less high end finishes if you’re located in a large city as opposed to out in the country. If you work in a large city and hate long commutes it may be worth it to get less space but more accessibility. If commute is not an issue, you can have more amenities and space in the country.
Lifestyle is defined as a typical way of life for an individual or group. What kind of lifestyle do you live? Is it an active lifestyle? Or perhaps you lead an urban lifestyle? Lifestyle is an easy way to determine the ideal location of your new home and thus what type of home you may be looking for.
Detached or Condo
Do you think you’d prefer a detached home or a condo? Condos are going to typically be less cost and maintenance. Condos do however usually have homeowner’s dues. This attributes to the less maintenance but may make the condo more per month than the same size detached would be. Detached have no shared walls and thus less noise and neighbor issues but more maintenance.
New Home or This Old House
Buying new is great because usually everything is “turn-key”. One negative with buying new is that there generally isn’t any additional equity when you buy the home and lot sizes are going to be much less. Depending on how many homes were built in the same area you may not gain equity as quickly as if it were an older home where the availability of homes is less. Old homes tend to be less cookie cutter and offer more individualized choices and abilities to make it feel unique.
Solo or Realtor
Realtors provide an buyer with in depth information available to them on the MLS and other resources that the buyer cannot access alone. Realtors are trained to look at property objectively and will help you to negotiate the deal. If a buyer has experience and or knowledge of the buying experience and can negotiate and fill out a contract they could save quite a bit in realtor fees.
What to look for in a home
Every buyer is going to have different needs and wants, and also have different priorities within those needs and wants. A buyer should be very concerned about structural and safety issues and less so with cosmetic things such as paint that are easy to change. Buyers should understand clearly their needs and wants and make sure they look at homes that fulfill most of the needs on their list.
Positives and Negatives
There are going to be very few times that a buyer finds a home that fits their needs and wants to perfection. Any negatives to a potential home should be categorized as easily fixed or not, so that the homeowner knows whether it’s a problem that will always be around or if it is something that can be fixed over time. Positives should greatly outweigh the negatives or the prospective home is probably not the right choice.
Narrowing Down Process
In order to make your decision a little simpler, make a list of your needs and wants in order of most needed and make sure you only look at homes that at least check off the boxes at the top of the list. A buyer knowing what they want out of a house makes finding the right home for them much easier.
Making the Choice
Try and help the buyer find several homes that fit most of the criteria they are looking for. Show the buyer what positives and negatives come from different locations, styles, and sizes of properties. Help the buyer narrow their choices to a few and then again go over the buyers priority list so they fully understand what each property will and will not offer them.
Offer & Acceptance
Asking Price vs. Selling Price
Help the buyer know that the asking price is not necessary the selling price. In a buyer’s market the buyer should be able to negotiate the asking price down. In a seller’s market multiple offers are not uncommon and the selling price may be more than the asking price. Be aware of market you live in and make offers accordingly. Understand that the longer a home is on the market, the better chance the buyer has in lowering the selling price.
Remember often the seller is either in a hurry to sell or has no plan in place of where they will be moving. As a buyer if you are able to be flexible then you will perhaps be in a better position for negotiations.
FHA loans are sometimes available to homebuyers who are do not have the 20% down payment. VA loans are available to all United States veterans and it qualifies them for a 0 down very low interest loan. Today mortgage rates are so low that most financing is recommended to a 30 year fixed mortgage. This will lock the homebuyer in at a very good rate and if the rates go up it will not affect the monthly payment.
It is recommended that all buyers write a special clause into their offer that allows for a home inspection. This way if anything is wrong with the property the selling price can be renegotiated to compensate for the defect or the offer can be terminated altogether.
The Negotiating Process
It always best to provide your “best offer” when going against multiple buyers. In general you do not want to low-ball the seller in such a way that is offensive. Offers should always be up to the buyer but it is important to remember that this can be sensitive issue for sellers.
Rate vs. Service
Rate should not always be the determining factor when choosing a loan officer. It is important to choose a company that has a high level of service. For example, choosing someone that does not offer weekend or evening service is most likely not going to work well in the transaction of property.
The FNMA Application Form
It is important to have a file that contains the latest statements from all your creditors and several months of bank statements and pay stubs on hand at all times (current copies). Although this initially takes some work to gather it will save you time in the long run.
Appraisal and Credit Check
Choosing a home that has built in equity becomes instrumental when the appraisal is conducted prior to closing. If the appraisal doesn’t come in as high as the selling price then the lender will not provide a loan on the full sale price and the buyer will be responsible for making up the difference with cash out of pocket.
VOE are often performed the day before closing to ensure that the buyer still has a job at the place that he/she has provided pay stubs for. This is to ensure once and for all that the buyer is in a good position to repay the loan.
The transaction is not contingent upon this date being met but if the commitment date is not met, it can give concern and worry to the seller that the buyer might not be able to buy their property. And if it is not met, in many cases, it allows the seller to put the property back on the market.
Earnest money is provided by the buyer as a commitment towards purchasing the property. If the transaction is canceled the earnest money can go to the seller.
Inspections and Certifications
After the offer is accepted by the seller the buyer then hires an inspection. The findings of the inspection report can be used to renegotiate the purchase price. It is always a great idea to join the inspector for this process to learn all the technical positives and negatives about you soon to be property.
The title report is very important in the successful closing of your property. If any kind of blemish or cloud exists on the title the buyer will not be able to purchase the property until it is fully resolved. This is something the agent should be able to look into before an offer is even made.
Meeting the Contingencies
Failure to act within the time required constitutes a breach of the contract. In other words if the buyer or seller does meet the contingencies than the deal can be voided. If the contingencies cannot be met before closing (e.g. repainting the exterior in the middle of winter) then a remedy could be that money comes out of escrow to satisfy both parties.
Setting the Date
You can close on a house any day during a month. Let’s say you close in the middle of the month; your initial mortgage payment would be due at the beginning of the month in a month and a half. That payment includes interest for the previous month. This interim interest (sometimes called pre-paid interest) is paid at closing. So the closer your closing is to the end of the month, the smaller this amount will be.
The selling agent is representing the seller whereas the buying agent is representing the buyer. The escrow office is working as a neutral third party.
The Loan Package
The loan package is the documentation given to a lender in order to determine whether to approve your request. The loan package should include a promissory note. A promissory note is defined as a financial instrument that contains a written promise by one party to pay another party a definite sum of money either on demand or at a specified future date.
The HUD-1 Form
“The HUD-1 contains a line-item listing of all transactions attributed to the mortgage borrower and the home seller for the sale. This includes the contract sales price for the home, any personal property exchanged as part of the transaction, and an identification of all taxes and assessments against the home. It also lists in detail the buyer’s deposit for the home, the amount of the mortgage loan and any other debts the borrower is assuming as part of the transaction.”
The keys should not be exchanged at the escrow office instead the buyer will receive the keys after the transaction is complete ant the deed has been recorded. The locks should be changed as soon as the buyer collects the keys.
The middle of the month is the best time to hire movers. If the sellers in unable to buy a new home until the close of the current property the buyer can charge the seller rent until he’s able to move out.
If you transfer utilities at closing the buyer can avoid costly turn-on fees. Once transferred, this also helps to ensure that the seller doesn’t owe large amounts to each utility.
Before you Un-pack
It is a good idea to check the home in its entirety to make sure all fixtures are still there and that the property was not damaged since inspection.
Postal and other services
As soon you’ve closed it’s a good idea to schedule things like address changes and garbage collection for the new property.
It is best to change the locks and move in within the same day. That way no valuables will be left unattended. If you can’t finish up within a day leaving a light on may help deter crime until you can occupy the property.
The Importance of Record Keeping
Keeping records of any remodeling and repairs you do to your new home may be very important come tax time or when you go to sell. If you make more than 250k when you sell the property there are tax implications…but you can deduct any improvements from your overall gross.
A capital improvement means that you’ve upgraded something in the house that adds overall value to the property which hopefully increases equity like adding wood flooring where it’s currently carpeted.
Up-keep are repairs that help to maintain the value of the home like replacing a bad roof or furnace.
This means that the value of your home is going up! This means when you go to sell you will be making more money than you owe to your lender.
Stepping up (to the next home)
The average time American’s stay in their homes now is seven years. When you go to sell it is best to make your home as neutral as possible by removing personal objects and keeping colors as simple as possible so that someone can envision their own tastes in the home.