What can you afford?
Determine what you’re going to spend. How do you do this? Simply talk to a lender. They can help you assess what price maximum you are financially qualified for and will lead you to focusing your search criteria based on price. They can help you also determine what you can afford on a monthly basis. Look at your budget to determine what you feel comfortable paying every month.
Choose an agent.
This part should be simple… you’ve come to the right place! It is important to have a professional on your side guiding you through the process from the beginning, especially for first time home buyers.
Determine what your must haves are.
Select your search criteria. With your maximum price in mind, select the neighborhood, size, bedrooms, bathrooms, quality and characteristics that you “must have” in a home. Keep in mind that every purchase of a home involves a certain amount of compromise. Prioritize your need. When you’ve discussed your criteria, your agent will begin searching for a home for you.
Look for homes.
That’s it. You and your agent will spend time searching for homes that fit the criteria you’ve previously identified.
You found the one, now what?
This is where you make an offer. Your agent will walk you through the purchase and sale agreement and explain the benefits and drawbacks of each section and each decision you make. They will help decide what price to offer, how much earnest money to provide, the closing date, as well as other important terms of the contract. Once it’s complete the offer may change through negotiations with the seller or they may agree outright. Once the seller signs and returns the offer you have a contract to purchase your home!
Schedule a home inspection.
Your home inspection occurs if you opted to have one. It is highly recommended on any home you purchase regardless of when it was built to have a professional inspector of your choosing inspect the home to search for defects or issues. Typically, a purchase and sale agreement is contingent on the home “passing” an inspection. Once the inspection is completed, the buyer and seller negotiate repairs or replacements based on the findings in the inspection. Some negotiation may take place around this until both parties agree on what improvements will or won’t be done to the home to complete the sale.
The loan process.
The loan process begins for this particular home as soon as the purchase and sale agreement is signed by both parties. Your lender works in the background to get your mortgage together. They will usually need paperwork from you throughout the process and it’s important to stay in communication with them to ensure a smooth closing and no delays.
The escrow and closing process.
Escrow also begins working in the background as soon as the purchase and sale agreement is signed by both parties. Escrow is an independent third party between you and the seller in place to protect both parties. Their job is to handle deposits, prepare the final settlement statement, arrange legal transfer of the property and release proceeds to the seller. Once papers are signed by both parties, the transfer becomes official, the deed is recorded with the city or county, and proceeds are available to the seller.
The search for a home or a buyer is a very time-consuming process, especially without the aid of a real estate professional. Agents belong to an MLS (Multiple Listing Service), which lists available properties by numerous searchable characteristics – much more detailed and advanced than the public has access to. Agents also have keys to all listed homes regardless of what company it’s listed by. Experienced real estate agents are experts at negotiating the best possible purchase price for your home. There are a lot of details involved in the purchase of a home and attempting to finalize all details and eliminate all mistakes on a home purchase is best left to a professional.
No Cost to the Buyer.
If you are a buyer, you don’t pay for your agent’s services. All agents in a transaction usually are paid by the seller from the sales proceeds. The seller agrees to pay their listing agent a certain amount of commission and the listing agent agrees to pay a portion of that (usually half) to the buyer’s agent. Why wouldn’t you choose to have an experienced professional working for you for free?
There’s something to be said about the market knowledge.
A buyer’s agent will help you formulate your offer based upon recent sales in the area. The more information you have, the more educated your decision. The most important thing a buyer’s agent can do is look at comparable properties to help evaluate the price on your potential home.
How do mortgage loans work?
A traditional mortgage payment consist of two parts: (1) interest on the loan and (2) payment towards the principal, or unpaid balance of the loan. Many people are surprised to learn, however, that the amount you pay towards interest and principal varies dramatically over time. This is because mortgage loans work in such a way that the early payments are primarily interest with little reduction in principle, and the later payments are primarily towards the principal. To help calculate monthly payments for loans based on different interest rates, lenders utilize what are known as “amortization tables.” These tables make it fairly easy to calculate how much of each payment will be allocated to interest, and how much goes towards the principal balance. A full mortgage payment often includes more than just principal and interest though. Most lenders these days collect property taxes and insurance as well. This total payment is referred to as P-I-T-I (Principal, Interest, Taxes, Insurance).
Are interest rates negotiable?
It pays to shop around for loan rates and know the market before you go in to talk to a lender. You should always look at the combination of interest rate and points and get the best deal possible. Lenders are also required to give you a Good Faith Estimate (GFE) which spells out the costs of their loan and interest rate. It is a good way to compare apples to apples when looking at different lenders by getting a GFE from each lender.
What about equity?
Even though you pay a lot of interest up front, you’re also slowly paying down the overall debt. This is one part of building equity. The other is appreciation. Equity is difference between what you owe on the house and how much the house is worth if sold on the open market. Thus, even if you sell a house before the loan is paid in full, you only have to pay off the unpaid principal balance.
What types of loans are out there?
Today’s homebuyer has more financing options than have ever been available before. From traditional mortgages to adjustable-rate and hybrid loans, there are financing packages designed to meet the needs of virtually anyone. While the different choices may seem overwhelming at first, the overall goal is really quite simple: you want to find a loan that fits both your current financial situation and your future plans. Most loans fall into three major categories: fixed-rate, adjustable-rate, and hybrid loans that combine features of both. It is best to spend time talking with different lenders before deciding on the right loan for your situation.
As the name implies, a fixed-rate mortgage carries the same interest rate for the life of the loan. Traditionally, fixed-rate mortgages have been the most popular choice among homeowners, because the fixed monthly payment is easy to plan and budget for, and can help protect against inflation. Fixed-rate mortgages are most common in 30-year and 15-year terms, but recently more lenders have begun offering 20-year and 40-year loans. A shortened loan term can save you a significant amount of interest over the life of the loan. However, despite the interest savings of a 15 or 20-year loan, they’re not for everyone. For one thing, the higher monthly payment might not allow some homeowners to qualify for a house they could otherwise afford with the lower payments of a 30-year mortgage. The lower monthly payment can also provide a greater sense of security in the event your future earning power might decrease. Furthermore, with a little bit of financial discipline, there are a variety of methods that can help you pay off a 30-year loan faster such as increased principal payments when you can afford it or bi-weekly payment programs.
Adjustable-Rate Mortgages (ARM):
Adjustable-rate mortgages differ from fixed-rate mortgages in that the interest rate and monthly payment can change over the life of the loan. This is because the interest rate for an ARM is tied to an index (such as US Treasury Bills) that may rise or fall over time. The margin (also known as the “spread”) is a percentage added to the index to calculate your interest rate. The margin generally stays the same over the life of the loan (the changing index is what causes your monthly payments to change). For example, when you hear someone say a loan is “prime plus 2″ they mean that the loan’s interest rate is currently 2% above the Prime interest rate. In order to protect against dramatic increases in the rate, ARM loans usually have caps that limit the rate from rising above a certain amount between adjustments (e.g. no more than 2 percent a year), as well as a ceiling on how much the rate can go up during the life of the loan (e.g. no more than 6 percent). Another element of ARMs is the adjustment period, or how often your interest rate may change. Many ARMs have one-year adjustment periods, which means the interest rate and monthly payment is recalculated (based on the index) every year. Due to some of the built-in protections of ARMs, ease of qualifying and low introductory rates, ARM loans have become the most widely accepted alternative to fixed-rate mortgages. However, ARMS are not for everyone. Before choosing an ARM consider how long you plan to own the property, how frequently your monthly payment will change, your comfort level with risk and your expected income in the future.
Hybrid loans combine features of both fixed-rate and adjustable-rate mortgages. Typically, a hybrid loan may start with a fixed-rate for a certain length of time, and then later convert to an adjustable-rate mortgage. However, be sure to check with your lender and find out how much the rate may increase after the conversion, as some hybrid loans do not have interest rate caps for the first adjustment period. Other hybrid loans may start with a fixed interest rate for several years, and then later change to another (usually higher) fixed interest rate for the remainder of the loan term. Lenders frequently charge a lower introductory interest rate for hybrid loans vs. a traditional fixed-rate mortgage, which makes hybrid loans attractive to homeowners who desire the stability of a fixed-rate, but only plan to stay in their properties for a short time.
FHA and VA loans:
U.S. government loan programs such as those of the Federal Housing Authority (FHA) and Department of Veterans Affairs (VA) are designed to promote home ownership for people who might not otherwise be able to qualify for a conventional loan. Both FHA and VA loans have lower qualifying ratios than conventional loans, and often require smaller or no down payments. Bear in mind, however, that FHA and VA loans are not issued by the government; rather, the loans are made by private lenders but insured by the U.S. government in case the borrower defaults. Remember too, that while any U.S. citizen may apply for a FHA loan, VA loans are only available to veterans or their spouses and certain government employees. There are no set interest rates for FHA and VA loans.
Where do I start?
Get your paperwork together. If you have all of your paperwork thrown in a pile on the floor, it may be time to start going through it. Compile your last 2 months pay stubs and bank statements. Two years of tax returns is also a good idea. For self-employed individuals this might mean a 1099, business license and proof of cash deposits from your business. Otherwise your W-2 forms will work. Lenders like to see steady income at the same occupation for 2 years or more. Occasionally a lender will ask for proof of rent paid. All of this will help you become pre-approved through a lender. While a pre-approval isn’t required upfront, it will often be needed when you make an offer on your home so it’s good to do it right away. This will also give you greater confidence that you are looking at homes in your available price range.
How much can I afford?
Knowing what you can afford is the first step of home buying, and that depends on how much income and how much debt you have. In general for standard loans, lenders don’t want borrowers to spend more than 36-40 percent of their gross income on debts (including the mortgage payment). This is called the Debt-to-Income ratio. It pays to check with several lenders before you start searching for a home to get quotes on interest rates. Most mortgage brokers will be happy to roughly calculate what you can afford.
What is earnest money?
On almost every transaction, you will have to make an earnest money deposit with your purchase and sale. The purpose of this is a “good faith” deposit to secure the contract and show the sellers you are serious. Earnest money is applied towards your costs or down payment at closing. The amount needed for the earnest money deposit varies, but typically depends on the cost of the home, the market conditions, the seller’s situation and their faith in you as a buyer.
When is an appraisal done?
Lenders require appraisals to ensure that they are not loaning too much on your property compared to its value. It is to protect their interest should you default. The appraisal occurs during the time between when the purchase and sale agreement is signed and when the transaction closes.
Is it okay to buy a car before I purchase a home?
To put it simply, It is best not to. In fact, you should avoid all major purchases that would create debt of any kind prior to purchasing a house. When determining your ability to qualify for a mortgage, a lender looks at what is called your “debt-to-income” ratio. This will include your monthly housing costs, including principal, interest, taxes, insurance, and homeowner’s association fees, if any. It will also include your monthly consumer debt, including credit cards, student loans, installment debt, and car payments. Even if you feel you can afford the car payment, mortgage companies approve your mortgage based on their guidelines, not yours.
Is it okay to change jobs before buying a home?
It depends. For most people, changing employers will not really affect your ability to qualify for a mortgage loan, especially if you are going to be earning more money. For some homebuyers, however, the effects of changing jobs can be disastrous to your loan application. If you earn your income from regular pay (i.e. not commissions, bonuses, etc) and are either a salaried employee or an hourly employee who works a straight forty hours a week, changing jobs should not be a problem as long as you are remaining in the same line of work. If, however, you are a commissioned or part-time employee or a substantial portion of your income comes from bonuses or overtime, you should not change jobs before purchasing a home. Lenders consider these to be unstable sources of income and would like to see at least 2 consecutive years with the same employer to average your income over the period.
What contingencies should be put in an offer?
Most offers include two standard contingencies: a financing contingency which makes the sale dependent on the buyers’ ability to obtain a loan commitment from a lender, and an inspection contingency which allows buyers to have professionals inspect the property to their satisfaction.