There is so much more to home shopping than just picking a neighborhood or style of house. Begin the journey at least a year in advance so that you can keep the home buying process as smooth and stress-free as possible.
1. Find a Mortgage Broker
First and foremost, shop for a mortgage broker that can provide you with a pre-approval letter to present to your realtor. Many realtors won’t even show property without a mortgage approval. Unless you are paying cash, a pre-approval letter will assist your realtor in knowing exactly how much house you can buy. It also provides the seller proof that your offer is reliable.
The mortgage broker will ask you for a variety of information that it’s best to have prepared before you start. They will request paycheck stubs and income tax records for the past two to three years, as well as bank balance records and a list of all debts and payments such as auto payments, child support, alimony, and any other regular payments you make. If you have several small credit accounts that you use once in a while, close them and edit down your credit cards. Keep just a few, and if they have balances, pay them off.
2. Know Your Financial Status
After you’ve saved enough for a down payment plus three to five extra house payments in case of emergencies, it’ll be time to think about what kind of home loan your down payment can get you. There are two kinds of loans: conventional loans, and government loans. The type of loan you choose will determine the down payment you’ll need, and the amount of your down payment will determine the size of your monthly payments. Keep in mind that if you are able to put down 20% or more, you will save a monthly expense on a mortgage insurance premium.
Know where you stand before you get all excited about a place you cannot afford. I highly recommend taking a look at your financial status. Have your lender provide you with a copy of your credit score, or pull it up yourself. Evaluate your monthly recurring debt. Underwriters are looking for excellent credit, little or no debt, plenty of savings, and time in the same job or the same industry. Knowing your financial status and doing what you can to improve it is the best way to get the loan you’re looking for.
3. Find a Realtor
Once you have selected a mortgage broker and figured out what you can really afford, find a neighborhood realtor. I recommend that you use a realtor that either lives in the area, or has an office in the area. Those local realtors keep a close eye on the best properties in the neighborhood and know every detail about where you want to live. A great realtor will pull up available properties each morning and know each and every street in your preferred neighborhood. It is perfectly fine to try out a few realtors until you find a good fit. But, it is certainly worth the effort to work with a professional realtor that is watching the market closely and being mindful of your wish list in a home.
4. Choose a Location
By now, you have most likely been on-line looking at properties and found a few neighborhoods that appeal to you. Location is the number one priority when looking for a home. So, finding a place that may need a little work in the perfect area may take priority to a newer home that requires a commute. Have your real estate agent run comparable homes prices in your preferred neighborhood to give you an indication of recent closings. This will tell you what to expect in price per square foot, and help you determine if your dream neighborhood is affordable to you.
5. Negotiate the Price
Once you find just the right home, it is time to make an offer. If you happen to be looking for a home in a seller’s market, then good homes will sell quickly and typically will have several offers within just a few days of entering the market. This is why it is so important to have all of your financial documents in order: to prove to sellers with many offers on the table that your offer is worth a second look. It is also the reason to use an aggressive realtor who will go to bat for your price range.
A buyer’s market is a different ballgame altogether. If you’re buying in a buyer’s market, you’ll typically have many properties to choose from. The market might be so competitive towards buyers that sellers may end up lowering their asking prices, plus throwing in appliances or extras to seal the deal.
Know what kind of market you’re dealing with before you make an offer and negotiate pricing. This will help you know what kind of leverage and wiggle room you have to get the best deal possible.
6. Hire a Home Inspector
Once you decide to make an offer, you will need to write an earnest money check to let the seller know you are serious. This amount is typically a few thousand dollars, depending on the price of the home you are buying. In many states, you also will write a check to the seller to pay them for an option period, which means that to they take the home off the market for a week so you can have it professionally inspected.
Hiring a home inspector is an important part of the homebuying process between making an offer and sealing the deal. The buyer hires an inspector to take a close look at the condition of the house, and reveal any large issues that may be costly to repair. If any big issues are found, it can be an opportunity to renegotiate the sale price of the house. If the inspection goes very badly, the buyer may opt out of buying the house, losing only their option period payment.
If you’re buying a fixer-upper, the seller will state in the contract that repairs are the responsibility of the buyer. In this case, you’ll be told ahead of time that the property needs major repairs, and the price will reflect the anticipated costs of the repairs.
7. Seal the Deal
Once the option period is over, the home will go into pending status. This is the time to start packing! The closing date should be in a matter of weeks. Typically, the seller has the choice on the title company used since they are paying the title insurance. Try not to close on the very last day of the month, since that is when most people close. It is best to go the day before to keep things running smoothly.
Buying your first home may seem like a daunting experience, but you can ease the stress of the process by being properly prepared.
Top Image Credit: Metcalfe Architecture & Design
What other questions do you have about the home-buying process?