However you define it, a large part of the 'American Dream' is owning a home. In fact, a recent Merrill Lynch study showed that 84% of us believe it is an important part. About 67% of USA citizens own homes according to the U.S. Census Bureau and that ranks us 42nd in the world of nations according to Wikipedia.
Buying a home is generally one of the largest financial decisions many of us make and the equity in that home remains one of our largest assets throughout our lifetime.
The benefits of home ownership are many. Security and privacy come to mind as well as financial gains realized through appreciation and tax advantages. Be it a cottage or a castle, there is also the simple pride of ownership.
Let’s take a closer look at the process of buying a home.
Select a Real Estate Professional
Real estate professionals are important partners when buying a home. They can provide you with helpful information and resources for all elements of the home buying process. Above all else, good real estate professionals put their clients first. They know that this is your dream, and will act as your advocate to help make your dream come true. It's why we at Daugherty Group like to say we 'Specialize in your dreams'.
Your real estate professional can guide you through analyzing your financial situation and getting you pre-qualified for a loan. They can help you identify your needs, wants and desires for your new home. They can keep you abreast of market conditions and guide you to homes that meet your criteria. Further, they can negotiate the best possible deal on your behalf and coordinate the work of other needed professionals throughout the process. They can also ensure deadlines are met and the documents are accurate and clear.
The best part of using a real estate professional is that it costs you, the buyer, nothing as the sellers pay the commission. Given all of this, why would you not use the services of a real estate professional and engage them up-front? Choose the best - choose Daugherty Group!
Analyze Your Financial Situation
Before clicking through pages of online listings or falling in love with your dream home, do a serious audit of your finances.
Start with your credit. Credit reports are kept by the three major credit agencies, Experian, Equifax, and TransUnion. They show whether you are habitually late with payments and whether you have run into serious credit problems in the past. According to law, you're allowed to receive one free copy of your credit report per year. You can get this by visiting annualcreditreport.com. Scores range from about 300 to 850. Generally, the higher your score, the better the loan for which you qualify. A low credit score may hurt your chances of getting the best interest rate, or getting financing at all. So, get a copy of your reports and know your credit scores. Errors are common. If you find any, contact the agencies directly to correct them. This can sometimes take two to three months to resolve. If the report is accurate, but shows past problems, be prepared to explain them to a loan officer.
Next, you need to determine how much house you can afford. You can start with an online calculator like this one. For a more accurate figure, ask to be pre-qualified by a lender. They will look at your income, debt and credit to determine the kind of loan for which you may be eligible. Lenders generally recommend that people look for homes that cost no more than three to five times their annual household income if you plan to make a 20% down payment and have a moderate amount of other debt. But you should make this determination based on your own financial situation. Another general rule of thumb is that all of your monthly payments should not exceed 36% of your gross monthly income. The size of your down payment will also determine how much you can afford.
Don't forget to factor in money you'll need for a down payment, closing costs and fees for such things as an attorney, an appraisal, inspections, etc. You will also need to account moving expenses and possibly the costs of remodeling or furniture. Remember that you don't always have to put down 20 percent. There are sometimes loans available with little to no down payment. An experienced home loan professional can help you understand all of your loan options, closing costs and other fees. Your Daugherty Group real estate professional is available to assist with this.
Get Pre-Qualified / Pre-Approved
As stated above, before you start looking for a home, you will need to know how much you can actually spend. The best way to do that is to get pre-qualified for a mortgage. To get pre-qualified, you just need to provide some financial information to your lender, such as your income and the amount of savings and investments you have. They will review this information and tell you how much they can lend you. This will tell you the price range of the homes at which you should be looking. You can, at this point, make a choice to get preapproved for credit later, which involves providing your financial documents (W-2 statements, paycheck stubs, bank account statements, etc.) so the lender can verify your financial status and credit. They will also look for any local programs that might be available for down payment assistance.
Understand that pre-qualifications are only a estimate based on what you tell the lender and are no guarantee, whereas a pre-approval will give you a better idea of how big a loan for which you actually qualify. The lender will actually pull your credit and get more information about you. However, you could even take it one step further by getting an actual approval before you start home shopping. That way, when you're ready to make an offer, it will make the sale go much quicker. Besides, your offer will look more appealing than other buyers since your financing is guaranteed.
To find the right mortgage lender, it's best to shop around. Get recommendations from your real estate professional or friends and family and check with the Better Business Bureau. Talk to at least two or three mortgage lenders. Ask lots of questions and make sure they have answers that satisfy you. Make sure to find someone with which you are comfortable and with whom you are at ease. Do some research online, but work with a live person who can review your situation, answer questions and, if necessary, suggest how you can improve your credit. Online calculators do not always include insurance and taxes or private mortgage insurance (PMI) which is required if the down payment is less than 20%. They're not always an accurate picture of what the payment or actual fees for the loan are.
Many real estate professionals choose not spend time with clients who haven't clarified how much they can afford to spend. And, in most instances, sellers will not even entertain an offer that’s not accompanied with a mortgage letter of pre-approval. That's why, if you don't have all cash, your next step is talking to a lender and/or mortgage broker. Your Daugherty Group real estate professional stands ready to guide you through this sometimes confusing process.
Search For Your New Home
With the above-mentioned preliminaries complete, it is now to time begin the exciting journey to your new home!
You'll want to begin with identifying your needs, wants and desires for your new home. For instance, you may need three bedrooms, but really want four and having a fifth you could use as an office would be even more desirable. You may need a basement, but really want a finished basement and finding one with a wet bar would be more desirable. You get the picture. The same goes for style. You need a home you can afford, but you really want a ranch-style home and one with a walk-out basement is even better. Most of us could live in a lot less space than we occupy, but we want more. In fact, over the last 40 years, the average home has increased in size by more than 1,000 square feet, from an average size of 1,660 square feet in 1973 (earliest year available from Census) to 2,679 square feet in 2013, according to the American Enterprise Institue in February, 2014. Why? Because it's what we want! Therefore, your home search will likely include most of your wants and a fair share of your desires when your budget allows. Try to be reasonable and remember that things like palatial baths and gourmet kitchens can drive up the price of a home exponentially. Obviously, your own circumstances are determinant in what is reasonable.
Next, you'll want to identify the proverbial 'location, location, location'. You may have a particular neighborhood in mind. This may or may not lead to disappointment depending on the size and transience of that neighborhood. It's generally best to consider a radius around a particular location with neighborhoods and homes that are similar. You will also want to look for signs of neighborhood vitality such as home maintenance, a mixture of young families and older couples, commensurate incomes and good schools. Then there are considerations such as traffic, parking and proximity to public transportation, major surface streets and interstates. Lastly, look for neighborhood and nearby amenities such as shopping, services, restaurants and parks. Be careful not to choose search criteria that are too restrictive. As with the location search radius, select a price range 10% above and 10% below your true range.
It will also be helpful to take notes on all the homes you visit. You will likely see many. It can be hard to remember everything about them, so you might want to take pictures or video to help you remember each home. While there, make sure to check as many details of each house as allowable. For example, test the plumbing for water pressure, leaks and how long it takes to get hot water to a room. Check electrical devices. Ensure windows and doors operate properly. Generally, assess the sellers attention to proper interior and exterior maintenance. If interested in the home, determine if it is in the 100-year floodplain and ask to see the Seller Disclosure of Property Condition and the utility bills.
Searching for a new home is a fun and exhilarating experience. Your Daugherty Group real estate professional will find homes that meet your criteria, set appointments to see them and lead you through your assessment of each.
Offer, Negotiate And Purchase
Once you've found the home that meets your criteria, you need to make an offer. Don't lose the home because you failed to act promptly. Work with your real estate professional to determine a fair offer price based on recent sales of comparable homes in the same neighborhood. If this is the home you really want, then don't make a low-ball offer. Sellers are often offended by such offers and less prone to negotiate in earnest or they may reject your offer outright. Be reasonable and fair.
Your offer should be contingent on your ability to obtain financing, the appraisal and the outcome of inspections at a minimum. Other contingencies such as the sale and closing of a current home may also apply. Some sellers are unwilling or hesitant to accept this type of contingency. Those that do usually continue to offer the home for sale and give you a 24 to 48 hour first right of refusal. This means that if they receive another offer you generally have 24 to 48 hours to remove your contingency on the sale and closing of your current home and proceed to closing of the sale on their home. If you accept these terms, you should immediately explore your options with your lender so you are prepared to act if the need arises. You may may able to obtain 'bridge' financing that allows you to proceed with the purchase while awaiting the sale and closing of your current home. You may not qualify for this or you may feel it too burdensome or risky for your situation which means when your first right of refusal time allotment elapses, you will need to start your home search anew.
Anything permanently affixed to the property should stay with it unless expressly excluded in the listing agreement. Examples of this are bathroom mirrors, curtain rods, light fixtures and built-in appliances. Some items that are not permanently affixed to the property may be negotiable. Some examples of these are window treatments, refrigerators that aren't built-in and fireplace accessories. A home warranty may also be included with the cost negotiated between the buyer and seller.
Your offer should also specify deadlines for inspections and any testing to be performed as well as the negotiation of their outcomes. Ensure that you allow enough time to explore the costs of any repairs needed. Repairs are generally best performed by professionals and receipts provided. You should ask for a walk-through inspection of the home 24 to 48 hours prior to closing. There will also be deadlines for acceptance of the offer, closing and possession.
Sellers may choose to make a counter-offer to your initial offer and you, likewise, might counter-offer their counter-offer. Purchase offers should be clear and accurate and inclusive of your specifics. They should also be accompanied by an earnest money deposit and a mortgage letter of pre-approval. Remember, when the seller signs your offer, you have entered into a legally binding contract with legal ramifications should you not perform to its terms. Your Daugherty Group real estate professional will ensure the clarity, accuracy and specifics of the contract and use their experience and negotiating skills to obtain the best possible deal.
Secure Financing And Insure Your Interest
Once you have a purchase agreement with the seller, you should notify the lender of your choice and if not already approved, initiate the processing of your loan to approval. There are a variety of loan programs available and you should discuss each with your lender. These include conventional, FHA and, for these who qualify, VA. There are also a variety of loan durations with 15-year and 30-year being the most common. Payment frequency options may include quarterly or annual or semi-annual, however, the most common is monthly. There may be other state or local programs available to you which your lender can identify. Rates vary from lender to lender depending on the institution and type of loan and can be bought down through paying 'points' which, again, your lender can explain. Rates can also be fixed or adjustable and there can be advantages to both. Your down payment will also effect your monthly payment. If you put less than 20% down, you will likely face having to pay private mortgage insurance (PMI). This protects the lender against loss of asset value in the event of your default. Of course, there is no down payment requirement for a VA loan.
Mortgage loans work basically the same way as your credit cards. You pay interest on the unpaid balance each month and the remainder of the payment is applied to the principal. Our illustration shows a $200,000 loan over 30 years at 4.5% interest. You can see that it takes some time to make significant reductions in the principal. So, it pays to explore all loan options before signing on the dotted line. For instance, for a short-term purchase it may be advantageous to consider an adjustable rate loan with a lower rate over a fixed rate loan. Again, your lender can guide you to the decision that's right for you. You might also choose to make additional principal payments on your loan. These reduce the duration of your loan and the total interest you pay. Your Daugherty Group real estate professional can show disciplined ways to do this.
In parallel with contacting your lender, you should contact your insurance professional to have them initiate a home-owners insurance policy to protect your contracted interest in the property. Again, it pays to shop these policies for cost and coverage. Keep in mind that you're insuring the dwelling and other improvements and not the land. As Mark Twain once famously said, "Buy land, they're not making it anymore." It's hard to damage and almost always appreciates in value.
Your Daugherty Group real estate professional will always be available to help guide you through these processes and answer your questions.
Perform Due Diligence
You and the seller have agreed that you will have inspections and any necessary testing performed on the property and that you will have them completed in an certain time-frame. While the lender will contract an appraiser (at your expense) to determine value based on many parameters including condition, you need hire your own home inspector to assess the property condition on a deeper level. The appraiser works for the lender. The home inspector work for you. Therefore, you need to engage a reputable and licensed home inspector immediately to perform a thorough inspection of the property. These inspections cost $300 to $500, on average, but can run more for bigger jobs. They will generally take two or more hours to complete.
You should make every effort to be present during the inspection because you will learn a lot about your new home. Your inspector will check such things as the roof, gutters, downspouts and overall water-tightness of the home as well as look for any signs of wear, decay or structural damage. He or she will also examine the windows and doors, the plumbing, electrical and climate mechanicals, appliances and more. Your presence will greatly inform your knowledge of any issues. Upon completion, your inspector will furnish a report detailing their findings and there will be findings. However, this should not alarm you unless the findings are major. All homes have some items that could use attention. Most of them are easily overcome. Those that aren't easily overcome can be negotiated or you can simply walk away from the deal.
You should thoroughly review the inspectors report and list any and all items that you want the seller to remedy. Once the list is compiled, you must present it through your real estate professional to the sellers in a time-certain defined in the purchase agreement. The seller then has an contractually-defined period to respond to your requests for remedies. They may choose to fix everything or they may choose to fix nothing. Most likely, it will be something in between. Another option may be to offer you cash to repair or replace things after you take possession of the home. After they respond to your requests, you have another contractually defined period to accept or reject their response. The remedies can generally be negotiated between you and the seller through your real estate professionals and requests for extensions of the time periods to investigate solutions is not uncommon. These requests should be in writing.
As if you didn't have enough to do following the excitement of agreeing to purchase a new home, you need to order a termite inspection. These are usually required by the lender and costs $60 to $100, on average, but could be more for bigger jobs. Evidence of termite infestation is not common, but is sometimes found. Again, this should not alarm you unless there is major damage. Most termite issues are easily remedied with treatment and possibly, minor repairs.
Lastly, any necessary testing should also be performed within your defined inspection period. Some examples of testing you might want to have done would be for radon, asbestos, lead-based paint, mold and mildew or soil percolation. Again, you should engage contractors for these services immediately as they sometimes require a few days to complete. Your home inspector may offer these tests as options on their menu of services or they may be able to refer you to other vendors. Your real estate professional will also have a list of vendors.
It's a lot to do in a defined time, so make sure to engage all of these vendors promptly. Use your Daugherty Group real estate professional for recommendations and coordination of these tasks. They've been through the processes many times. Also, keep in mind that your dissatisfaction with inspection results can be just cause for termination of the purchase contract.
Close The Deal
To use a horse racing analogy, we're now in the home stretch. You loan has been approved, you've done your due diligence and removed all of the contingencies from the purchase agreement. It's time to close the deal! This can also be known as settlement or closing escrow depending on your region of the country.
In order to ensure that you don't put your new home purchase at risk, you need to be very conscious of your finances and communications with your lender, real estate professional and the closing attorney's office. Keep your finances on a steady path throughout the entire home buying process. Do not make any large purchases during this time. Your lender can help guide you on this. It's important to stay in constant communications with your Daugherty Group real estate professional, your lender and the closing attorney's office. You need to return all phone calls and complete and return all required paperwork promptly. Don't hesitate to ask questions. We're all here to help you cross the finish line and begin life in your new home.
Talk to your lender and Daugherty Group real estate professional to understand the costs involved in closing so you aren't surprised by anything. Closing costs are likely to include, but aren't limited to, your down payment, title fees and insurance, appraisal fees, recording and attorney fees and points you may be paying to buy down your interest rate. In addition, you may have the added cost of funding you escrow accounts for taxes and insurance. The taxes will be prorated for the period of occupancy held by you and the sellers during the tax year. The sellers will pay you for their share at closing and you will pay the entire tax bill when it comes due either through your personal finances or your escrow acount, whichever applies.
About two days before the closing date you will receive a final HUD Settlement Statement from your lender that lists all the charges you can expect to pay at closing. Review it carefully. Your Daugherty Group real estate professional will do the same. Any discrepancies should be brought to the attention of your closing and real estate professionals immediately. Finding them at the closing table is disruptive, delaying and possibly a reason to postpone the closing. You should also do your final walk-through inspection of your new home on this day. Expected closing attendees would be you and any co-owners, the sellers, the involved real estate professionals and the closing attorney. You may get writer's cramp from signing all of the documents involved, but you'll have the other hand to happily accept the keys to your new home from the sellers.
By now, you should have a better understanding of the need to engage a real estate professional, at no cost to you, from the very beginning of your home buying process. We look forward to the privilege of working with you and your family.