Home buyer's Guide - a list of things a home buyer should know
Buying a home is one of the most important personal and financial decisions you'll ever make. This step-by-step guide will help you find and buy your first home.
The following Guide explains the real estate process in plain English. What you're about to read is an overview of the procedures normally followed in a typical home purchase.
- Preparing to find and buy a home
- Make good use of real estate professional services
- Have a financial plan before you find a home
- Establishing credit
- Your search for your dream home
- Questions to ask when buying a home
- Making an offer
- Contingencies
- Your earnest money deposit
- The home inspection
- Indispensable home insurance
- The final walk-through
- The closing
What do you need to do before buying a house?
Before you start looking for a home, become an educated consumer. Knowledge is power and misinformation gets in your way. First, learn about the process and requirements for buying a home. There are common misconceptions out there such as renting is always cheaper than buying, you have to be a Permanent Resident of the United States to buy a home and you have to have a huge down payment to qualify for a mortgage. If you are not sure whether it is a myth or truth, find out from real estate professionals and let them guide you through the process or learn some basics here.
Well, here are the facts. You only need a work permit to buy a house. And in some cases, the starter costs of renting may be about the same as a house down payment. As you start your search to find a home, keep informed. Talk with people who've gone through the home-buying process ... attend home-buying seminars ... and visit with knowledgeable real estate experts.
Deciding to find and buy a home is one of the most important decisions of your life. It combines your personal hopes and dreams with wanting what's best for you and your family. It means making changes. That's why it's in your best interest to choose an experienced real estate agent who listens to and understands your needs, and works in the area where you want to live. You should know about the neighborhood where you want to live, home prices, schools, transportation, and the surrounding commercial and residential areas. Before you find a home, it's helpful to get pre-approved for your home loan so you'll know how much money you have to spend.
You can reduce the stress of home buying by thinking ahead. Before you find a home you want to purchase, develop a financial plan. This plan becomes your guide not only for saving money for the down payment, but also for covering other expenses such as your credit check, mortgage application and closing costs. Talk to mortgage specialists and find out how much you can borrow and let them pre-approve your loan for the money to buy your dream home.
Having an established credit history plays an important role in the home buying process. It's never too soon to start building a good credit history. Start by diversifying how you pay for things; don't pay for everything with cash. Pay your bills on time, limit your debt, reduce the number of credit cards you have, and use them responsibly. Your goal is to show that you are financially responsible and a "good credit risk."
Find out your credit report annually. Federal law mandates that every consumer should have a right to inquire about credit report once a year. This is a record of past and current debt that states when, how and if you paid. Make sure that the information contained in your credit report is accurate. By reviewing your credit report now, you'll have the opportunity to correct any errors. If you have less than perfect credit, you should consult the credit counselors who may be able to help repair your credit over a period of time.
Why is this so important? Your credit history is one of the documents that give the mortgage lender confidence in you. The better your credit history, the better your credit score. And the higher your credit score, the more likely your mortgage lender will offer you more mortgage options with better terms.
You're smart to think ahead. The best approach to buying a home with few financial surprises is to learn how homes are financed, find out how and where to get financial assistance, and understand all the costs involved in addition to the cost of the house. What follows is a brief explanation of (1) Mortgage Pre-approval, (2) Down Payment, (3) Mortgage Options, and (4) Closing Costs.
Mortgage pre-approval
A pre-approval is a simple calculation done by a mortgage lender that tells you (a) the amount you'll be able to finance through a loan and (b) what your monthly payment will be. When you find a home to buy, a pre-approval also reassures the seller that you have the financial means to purchase his or her home.
Once you know the amount the bank will lend you, the next step is to determine how much to save for your down payment. This will help you define the types of homes within your budget. Keep in mind the monthly costs associated with home ownership include not only your mortgage payment, but also real estate taxes, homeowner's insurance and utilities.
Your down payment
A down payment is the money you pay up front toward the purchase of your new home. Typically, the larger your down payment, the less you pay each month on the mortgage, and the lower the interest costs will be over the life of the mortgage.
How large should your down payment be? Many people make down payments of 5%, 10% or 20% of the sales prices of the homes they buy. There are also loans available for buyers with down payments of under 5%. However, the right percentage for you depends on many factors.
Your Mortgage
Your options for financing the home you find depend on your personal financial situation and your unique needs. Here's an overview of typical financing options available:
- Adjustable Rate Mortgage (ARM): This is a mortgage in which the interest rate is tied to a specific economic index and may adjust at specific times. Overall, your monthly payment may go up or down at intervals specified in the disclosure associated with this type of mortgage, depending on the current interest rate.
- Fixed Rate Mortgage (FRM): This is a mortgage with an interest rate that does not change during the entire term of the loan. This means the monthly payments for principal and interest are also fixed for the life of the loan.
- Conventional Mortgage: This is mortgage that is not part of a government-housing program, typically has a limit of $417,000 for one unit property, and is not insured by the federal government.
- Jumbo Mortgage: This is a mortgage that typically exceeds $417,000 for one unit property and is not insured by the federal government. These loans usually have higher interest rates.
- Government Backed Loans: There are two types of government-backed loans -- FHA and VA. FHA loans are insured by HUD (the Department of Housing and Urban Development of the United States) and VA loans are insured by the Veterans Administration.
Closing and other additional costs
After you find a home and receive mortgage approval, the closing is when ownership of your new home officially transfers from the seller to you. In some cases, sellers pay the closing costs. If not, you need to be prepared to pay this additional cost. This can add another two to five percent to the home purchase price.
- Earnest money deposit: This deposit reassures the sellers you are genuinely interested in buying their home and are willing to make them an offer. An earnest money deposit can vary between 1% and 10% of sales price depending on the market and can be applied to the down payment.
- Mortgage application and credit report fees.
Where do you start when you're ready to find a home? Here are ways to find a home:
- Find a real estate professional
- Search for homes via online real estate listing web sites
You'll want to have an idea of the features you "want" versus "need" in a home. If you use a buyer’s agent, you'll have the chance to discuss the pros and cons of each house with her who has real estate knowledge and experience.
Internet is your friend too. Try to search different web sites to get some ideas. Places like
craigslist is so popular that you can
get a lot of listings. Also, don't forget our
real estate listings on findmyroof.com.
With each house you tour, ask yourself these questions:
- What features are most important to me? Number of bedrooms? Number of bathrooms?
- Does it have special features like a garden, a fireplace, a yard or a garage?
- Do I want a newly constructed house or a house that has been lived in before?
- Is it most important that the house be near a specific school, my job, or public transportation?
- What is the school district like?
- Are there kids in the neighborhood who are the same age as my own?
- Does this house need a lot of repairs?
When you find a home you want to buy, you'll make the seller an offer in writing. Your offer is typically the first step toward negotiating a sales contract. That's why determining how much to offer is more complex than simply determining a price. Because of the large amount of money involved, both the buyer and the seller need to protect their investments and limit their risk. This is why when you make an offer, you not only specify the price you are willing to pay, but also the other details of the purchase such as:
- How you intend to finance the home
- Amount of the down payment
- Who pays the closing costs
- What inspections will be performed
- Whether or not personal property is included in the purchase
- Terms of cancellation
- Any repairs you want done
- Date you will take physical ownership and possession of the property
- How to settle disputes should they occur
Contingencies generally allow you to anticipate potential problems so if something goes wrong, you can cancel the contract without penalty. If you cancel a contract without having agreed upon conditions and contingencies, you could find yourself forfeiting your earnest money deposit and money spent to inspect the property, as well as other damages. For this reason, it's recommended you retain an attorney. Your attorney will advise you about what to include in your offer to protect yourself.
Before making an offer, thoroughly evaluate the property (including but not limited to the following):
- Property Conditions
- Home Improvements
- Take note of what the previous owners have done to the house to determine if these improvements warrant the asking price and/or were done correctly.
- Market Conditions
- If the market is "hot," it's often considered a "seller's market." This may give you, the buyer, less room to negotiate your ideal price because there may be other people willing to pay more for the home.
- If the market is "slow," then it's considered a "buyer's market." In times like these, houses often sit for longer periods of time without receiving acceptable offers. When reasonable offers do come in, sellers may be more willing to negotiate.
- Seller Motivation
- If an individual needs to sell quickly due to his or her personal situation, he or she may be more willing to negotiate.
- Once you find a home and submit your offer, you then wait for the seller's response. The seller can accept, reject or counter your offer with one for a higher amount. This begins the process of price negotiation that continues until both parties either agree on a price or decide to go their separate ways.
Along with your offer, you'll provide an "earnest money" deposit that demonstrates to the seller your serious interest in buying. This is one of the additional costs mentioned earlier. This money is deposited only once the offer has been negotiated and accepted by both parties.
After you find a home and make an offer, a house inspection is often ordered. The seller should have the property available for inspection by a professional.
In a typical inspection, experts examine the existing conditions of the property. Inspections may be required by law with the elements inspected varying by region, state, and/or your agreement.
The most common type is the General Home Inspection. A home inspector can provide you with a complete service that covers from the basement to the attic, as well as the exterior of the home, walls, chimneys, and fixed appliances such as refrigerators and stoves. Other specific elements that can be included: (not a complete list)
- Termite inspection
- Plumbing
- Water Quality
- Lead
- Radon
- Septic Tank
- Asbestos
- Electricity
Before a mortgage company will approve your lending arrangement and allow you to close on your new home, they will typically ask you to show proof of title, title insurance, and homeowner's insurance. Your real estate attorney can also provide counsel on title issues and title insurance.
Before the closing and property ownership is transferred, you will want to visit your future house. This "walk-through" is an opportunity to ensure that the house has been left in the expected condition.
You should make sure that all the items the owner agreed to leave are still there, such as kitchen appliances. This may also include furniture and accessories listed in the final sales contract. If there are problems, discuss them with your attorney. In some cases, you can ask for a discount or credit at the closing to cover missing items or last-minute damages to the property.
To be knowledgeable and prepared, ask your attorney to go over the details of the closing with you beforehand. The closing process can vary by area of the country and even within the same state.
Generally, the seller is required to provide clean title to the property at closing.
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