While the process of purchasing a home does seem quite intense, it is my goal to keep it fun and fairly painless. After all, this is one of the most exciting things you’ll do in your life.
There are many reasons why people jump into the real estate market. Reasons such as starting a family, first time homebuyers looking to buy their first home, real estate investors looking for good investments, relocating for business, or relocating for retirement.
The good news is the process, for the most part, is the same no matter the reason.
Here are a few things to keep in mind when you start the journey.
Know your credit score and understand your cash flow.
Like buying a car, your credit score is critical to your purchase if you need to obtain a mortgage loan. Your score will determine if you qualify for a loan, how much you may borrow and at what interest rate. The higher your score, the lower the rates. The lower your rates, the lower your monthly payments will be. If you have a low credit score, maybe the best thing is to hold off on the home purchase and find ways to improve your credit score.
Also important is understanding your cash flow. According to many personal finance experts, a good rule of thumb is to make sure the total monthly payment doesn’t consume more than 30% of your take-home pay. Knowing what you can and can’t afford will help you in many ways.
How much do you have for a downpayment?
If you talk to a mortgage broker, he or she will tell you that you do not always need to have any money to put down. The broker will also tell you that the larger your downpayment, the better off you will be. How much you put down will help lower your monthly payments and sometimes your interest rate.
If you can put down at least 20%, you’re in great shape. Anything lower is not a bad thing. It just means you’ll have an additional expense of private mortgage insurance (PMI), which covers the bank in case you fail to make your payments. You’ll want to do your research on the current PMI rates to find out how much it will be.
Expect the unexpected.
At this point, you’re in good shape. You know how much you can afford per month and how much you have to put down.
Now we remind you of “hidden costs” that pop up. Buying a home comes with many other expenses such as closing costs, property taxes, insurance, and, in some cases, home owners association or other maintenance fees. These can add hundreds of dollars to your monthly bill. It’s important to expect the unexpected costs of purchasing your house.
Pre-approval for a mortgage.
Obtaining a pre-approval letter from a lender is a great way to prove to a seller that you’re serious. It is recommended that you receive this even before you start your journey to finding a house.
You can work with your lender to get this approval.
Finding the right real estate agent.
Finding the right agent is like finding the right attorney. You need to be sure that everyone works well together in the best interest of you, the buyer. Your agent will be your voice, your confidant and your reality check. Having an experienced agent gives you his or her years of knowledge and understanding of markets. The agent will give you sound advice on each home you look at. Make sure you trust that person and his or her advice.
Look for homes within your price range.
Up to this point, you have done all the research and know how much you can and can’t afford. Now is the time to get moving. In today’s technological world there are many resources that can get you started. Websites and apps such as realtor.com and zillow.com give you the ability to search for homes faster than ever before. The important thing is to use their filters and don’t start “daydreaming” about houses that are out of your price range. Be realistic in what you are searching. Search for that $50 million home later.
This will help your agent immensely when setting up appointments. You will target your searches to only those houses you’re truly interested in and not waste time seeing houses you can’t afford.
These tools also allow you to check school districts and other factors that are important when purchasing a home. They can give you an idea of what properties have sold recently and for how much as well.
Making an offer.
Obviously this is one of the most stressful parts of the entire process. What amount do you offer? Is it too high? Is it too low? Are the sellers going to reject my offer? Buying a home is extremely emotional. Knowing that some of your offers will not be accepted and you may lose out on a house you love is very difficult to swallow. But you need to stay strong and smart.
This is where your agent should help you the most. A good agent will know the market and have an idea around what price the home will sell for. The agent should be able to know how hard to push.
But most importantly, you must be comfortable with your offer.
Finally time to close.
Okay, the seller has accepted your offer. Now you’ll enter into the contract. This is where you and the seller will work out the details of the deal. Don’t worry, it is still contingent on your ability to actually secure the loan, getting the home inspected and other important factors. This is another place where an experienced agent will guide you and hopefully protect you.
This process, while seemingly the last hurdle, can get extensive. For example, obtaining the loan largely depends on a home appraisal. If the appraisal comes in too low, there are three options. The buyer needs to make up the difference, the seller will need to lower the price or the deal is called off. But typically a lender won’t lend you more than the appraisal price. You will also negotiate further based on the home inspection report and other inspection reports.
Once all of that is done, congratulations! You are now a homeowner.