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Home Buying BasicsWhere to begin the steps in Buying a HomeBuying a home, especially buying your first home, is a major event in anyone’s life, and a journey that can end in joy or tragedy depending on how you go about it. The following article divides the process into five steps and explains each in some detail, and with links to even more detailed articles on specific subjects mentioned herein. For a focused, productive and successful home buying experience, you must start by setting realistic goals for what you need, want and can afford. You must prepare yourself financial and otherwise before you begin looking at houses, you must do your homework on any particular house and the surrounding neighborhood before making an offer, and you must, above all else, remain calm and avoid being swept up in the experience and swept away into a house you don’t want or can’t afford. Finally, once a house is found and price agreed upon, you must follow through and protect yourself by insuring that you will get good title on a fit home at a fair price before you go through with the closing. SET YOUR GOALS
One of the worst mistakes you can make in buying a home is to start the process without first deciding what you need and want in a house and what you can afford. Once you get started, are working with realtors, making offers, etc., it can be difficult to put the brakes on and spend time thinking about what kind of home is right for you. While it’s alright to “window shop” to get ideas about what you might like in home, don’t start the real shopping until you’ve taken the time to know yourself and set some goals for your home buying journey.
You’ll want to start by making a list of things you want in a new home, and just as importantly, of things you don’t want. As you make these lists, remember that no one ever finds the perfect home. Every decision to purchase a home involves compromises, so in addition to listing your likes and dislikes, consider ranking the lists in order of what’s most important to you. The goal is to get the most important things you want, while avoiding the most significant negatives.
As you begin your lists, consider your home ownership timeframe. Are you looking for a starter home that you will sell in a few years, a home to raise a family in that you will keep until your youngest graduates from college, or a home to which you plan to retire? How you rank your lists may well depend on how long you plan to stay in the house. For example, resale value would rank higher for a starter homes than for one you plan to live in for the rest of your life.
Do you have children or plan to? Don’t forget to consider the quality of the school district, and distance from the schools to where you work for those days when a sick child has to be picked up. How big does your house need to be for the kids you have now and the kids you may have in the future? How easy would the house be to add on to if you have more children? Do you prefer a large lot so your children have room to play, or a home in a neighborhood where your children have others to play with?
How much time do you want to spend in your car? Decide up front how much of a commute you’re willing to accept and limit your home search area accordingly. Likewise, consider how far you’re willing to drive to buy groceries or do other shopping. Your home location will be a tradeoff between seclusion and quiet on the one hand and convenience on the other. Decide how much of each you want.
If you’re considering buying an older home or “fixer upper”, be realistic about your own abilities, and more importantly, about the amount of time you would have to devote to repairs and upgrades. If you don’t have a lot of free time currently, or activities you’re willing to give up to free up such time, you want have the time after you move in either.
Finally, take a hard look at your finances and decide how much you can afford to pay for a home. If you don’t have a budget, create one. It doesn’t have to be overly complicated, but you should know how much income you bring home, and what your non-home owner expenses have been. The cost of the new home shouldn’t exceed the difference between these two figures. A good rule of thumb is that the total cost owning the new home should not exceed 25% of your gross income.
When adding up the cost of a new home, don’t forget to include the cost of insurance, taxes, utilities, and an estimate for general upkeep. If you currently renting, you’re not used to thinking about those other expenses because they are included in the rent. When you switch from renting to owning, it’s easy to compare the future house payment to your current rent and forget to add in the other expenses which aren’t included in the house payment for you.
If you take the time to reflect on what you need, want and can afford before your home search begins, you will have a more focused and productive search and a happier ending. You will buy a home that meets your most important needs, avoid your biggest dislikes, and doesn’t break the bank.
BE PREPARED
Once you have a good idea of what you need, want and can afford, it’s time to get lay the ground work for your home purchase. You’ll need to get your finances and credit rating in order, and get pre-approved for your mortgage. You’ll also need to make some decisions about realtors, inspectors, attorneys and other professionals you’ll be working with as you move towards home ownership.
It’s always a good idea to get pre-approval for your mortgage before you start shopping for you new home. If you’ve taken the time to evaluate your own budget and finances, you should have a good idea how much home you can afford, but you also need to make sure the bank agrees. You don’t want to find a house you love, make an offer, sign a contract, or any of the other things necessary to complete the purchase only to find out that you don’t qualify for the loan. You also want to give yourself every advantage over competing home buyers. Being pre-approved can move you to the front of the line when more than one person is interested in buying the same home.
Before you go to the bank though, take the time to learn your credit rating score and then make sure you don’t do anything to hurt that score. A lot of events can effect the credit rating and timing can be everything. If you’re about to start searching for a new home, don’t make any other major purchases on credit. Put off buying that new car or boat until AFTER you’ve closed on the new house. Likewise, avoid disruptions like changing jobs right before buying a home. Lenders prefer stability, so even switching to a higher paying job can hurt you when it comes time to get a loan. Finally, avoid opening or even closing other credit accounts shortly before a home purchase. Any such activity raises red flags on your credit report and may make it harder for you to get approved, or may force you to settle for a lower spending limit than you otherwise think you can afford.
At the same time, you should try to reduce and eliminate as much of your other debt as you can. A home mortgage is a major financial obligation, so being debt free or having minimal debt in other areas of your life is a big help. If debt is a major problem for you, you may want to consolidate your debt and get it under control and then wait a while for your credit rating to settle down before beginning your home search. In other words, if you’re already in over your head, stop digging!
As you seek pre-approval on your mortgage, take some time to familiarize yourself with the different kinds of mortgages. A traditional fixed rate mortgage, in which your payment remains the same throughout the term of the loan, is generally safest and best for most people, but debt can be structured in any number of ways to suit your particular circumstances. Just be cautious when looking at other forms of financing where the payments are low at the beginning but may be more than you can afford in the future. Financing plans that rely on optimism or rosy projections of future income or interest rates or dangerous, so be careful.
Be particularly wary of seller financing plans in which you don’t receive clear title to the property at closing. These plans go by various names such as “lease to purchase”, “contract for deed”, and “wrap-around mortgage”, but all have one thing in common, that being that the seller retains title to the property. In a true mortgage, you own the property at the point of closing. While your ownership is subject to the mortgage, and you can lose it if you default, the title is in your name from the beginning. With alternate forms of financing however, the seller retains the title, usually until you’ve made the final payment, many years in the future. One late payment and you can lose the property. Even worse, you can find out that all of the payments you’ve made are considered rent, and that you’ve not built up one penny of equity in the property you thought you owned.
Once you get pre-approved at a certain level, do yourself a favor by reminding yourself that you don’t have to spend as much as you’ve been approved for. Write yourself a note and put it on your refrigerator, in your car, or at work. The note should read, “I do not have to spend $(mortgage amount pre-approved) on a house.” You may have a great job and little debt and be pre-approved for a half-million dollar loan, but if you can find a house that meets your needs for $250,000.00, all the better. Remember that the amounts you budget for yourself, and which the bank approves, are maximums, not minimums. If you can buy a house for less, save the rest for furniture and other things you want to do.
Finally, starting making some decisions about the professionals you’ll be employing in your home purchase endeavor. Start with realtors. You can shop around and contact the sellers’ realtors directly, or you can have your own realtor to help you identify potential homes and to guide you through the process.
Most home buying guides are written by real estate agents or developers that have a vested interest in your using their services. We don’t recommend against those services, as they can be valuable in making a home purchase, but we do advise against over-reliance on any agent or professional. Never forget that the only one who truly has your best interest at heart is you. While real estate agents may say they are working for you, they are first and foremost working for themselves. Closing the deal may be better for them than finding you the best deal, so don’t be overly trusting or fail to protect your own interests at all times.
That having been said, there’s generally little to gain by going it alone. A reputable real estate agent can be a great source of information about the local market and help you get in touch with other professionals you’ll need along the way, like lawyers, inspectors, appraisers, etc. Just don’t pick these professionals out of the phone book or at random. Talk to other people whose opinions you respect and who have bought or sold homes in the last few years. Once you select a real estate agent you think you can trust, don’t accept the agents recommendations as to other professionals without also doing your own checking. A real estate agent may recommend other professionals because they do a good job, or because they won’t rock the boat or raise any red flags that may kill the deal. Getting the opinions of professionals is a good thing. Letting professionals think or make decisions for you however, is not.
If you do decide against using a buyer’s agent, or locate a house you want to bid on without the agent’s help and chose to contact the seller’s agent directly, you should understand how commissions work and take advantage of your lack of agent to get a better deal on the house.
When two realtors are involved, they typically split the commission at closing, which is taken off the top of the final selling price. If only the seller has a realtor, that realtor gets the whole commission. If you make contact with the seller’s agent, without having your own agent however, why shouldn’t you get a cut? Of course, you’re not an agent, so you can’t formally get a percentage of the commission, but why roll over and let the seller’s agent get the whole thing? During negotiations, suggest that the seller’s agent accept a lower commission and a lower selling price to close the deal.
Here’s an example. Assume a selling price of $100,000.00 and a 6% commission. If you have your own agent, each agent gets 3% or $3,000.00 and the seller keeps the balance of $94,000. If you don’t have an agent though, the seller’s agent would get the whole 6% or $6,000.00 and the seller would still keep the same $94,000.00. But what if the sales price were $99,000 and the seller’s agent accepted a 4% commission? Now the agent gets $3,960.00 (more than she would have gotten had you had your own agent), and the seller keeps $95,040 (more than he would have retained under the original agreement), and you save $1,000.00 on the purchase price. Everyone wins!
DO YOUR HOMEWORK
Too many people find a house they like and want to make an offer right away. Keep in mind that your home will probably be the most expensive thing you ever buy, will be the biggest asset you own, and will be paid for with the largest and longest term debt you owe. It’s a MAJOR purchase, so don’t start making offers until you do your homework.
Check out the neighborhood and area around the house. You don’t want to find out AFTER you move in that your home is in the middle of a high-crime area, or that the vacant lot next to your house is zoned commercial and that Wal-Mart is moving in next week, or that your scenic country home is down-wind from a hog farm.
Start by visiting the area more than once, on different days (weekdays and weekends) and at different times of day. A single visit can result in your missing a problem that is only present on other days or at other times of the day, or can lead you to think a major problem exists when it’s really a rare occurrence that just happened to take place when you were there.
Don’t be afraid to stop and talk to your future neighbors. If they aren’t friendly to you now, they won’t be after you move in either. Ask them about the neighborhood and how they like it there. Ask if there are any trouble-makers or people to avoid. Ask them about noise issues, traffic, anything that might concern you.
Many newer homes are in developed sub-divisions which have covenants or restrictions, and which may have homeowners’ associates with additional rules. Get copies of any rules regarding the use of the land and if there is a homeowners’ association, talk to its president about the association and the neighborhood.
You can also get a copy of the zoning map for your area (WHERE?). Be careful about buying a home if adjoining or nearby property is zoned anything other than residential or if looks like the non-residential zones may creep in your direction in the future.
Finally, find out what similar homes in the same area have sold for in the recent past. Don’t concern yourself so much with what other home sellers are asking, but for what past home sellers have settled for. The fair market value for a home is most accurately determined when a seller who doesn’t have to sell and a buyer who doesn’t have to buy can agree on a price. All homes are different of course, but the best estimate of fair value for a house is the selling price of similar homes in the area.
To many buyers base their offer price on the seller’s asking price, under the assumption that the seller has figured out the fair value and then added a few percent to the top of that. In other words, if the seller is asking $100,000.00, the house must be worth about $95,000.00, so I’ll offer $90,000.00 and negotiate from there. If a get the seller down to $93,000.00, I got a good deal.
Instead, make an independent determination of the value of the house. If similar houses in the area are selling for $150,000.00, there’s either something wrong with the one being offered for $100,000.00 and you need to proceed with caution, or the seller in a hurry to sell and you’d better pay what he’s asking before someone else buys it out from under you. On the other hand, if other houses in the area are selling for $50,000.00, the house you’re looking at is ridiculously over priced and you might not even want to make an offer at all. If you do make an offer, make it lower than $50,000.00 and put the burden on the seller to justify his high asking price.
If you do your homework before making an offer you’ll know enough about the neighborhood and the house to know if you even want to make an offer and to know how much to offer and at what price you should walk away and look elsewhere. Be prepared and you’ll avoid making the wrong purchase and when you make the right purchase, it will be at the right price.
STAY CALM
At this point you’ve set your goals, prepared yourself, and done your homework. It’s time to make an offer on a house. This is where most people get swept up and swept away and lose control of the process. Don’t panic. Stay calm.
Don’t fall in love with a house and always be ready to walk away, especially if the price is too high for your budget. Remember that a home is a total package, and you’ll be just as unhappy in a good house you paid too much for as in a bad house you got a great deal on. Remember the old adage, “if something seems too good to be true, it probably is.” It’s better to miss a good deal by being a little cautious than to jump on something because it seems like a good deal only to later learn it’s a dog.
If you fear you may have fallen in love with a home, make sure it passes the family and friends test before signing a contract. Pick a small number of people whose opinion you trust and take them to see the house. If you’re the only one who thinks you should buy it, you’ve probably allowed yourself to be blinded by the good things about the house and are either not seeing or minimizing the negatives.
At the same time, don’t allow yourself to be swayed entirely by the opinion of others. Take their advice, but make the decision yourself. Remember that it’s going to be you living in the house, and paying for the house, not them. Be especially careful of real estate agents that are eager to close the deal, earn their commission, and move on to the next customer. You’re going to have to live with your decision, while they are not. Make sure it’s a good one.
FOLLOW THROUGH
Once you’ve found a house and agreed on a price, it’s easy to let yourself coast through the rest of the transaction. The finish line is in sight and the race will be over soon. This is the time to sprint, not coast.
The most important consideration at this late stage is that when all is said and done, you walk away from the closing with good title to the property. Your purchase contract should be contingent on the seller being able to transfer clear title and you should employ a reputable attorney to conduct a full title search on your behalf. Any liens or encumbrances on the property allow you to back out of the contract. Without a good title search, you may purchase property only to find out that the seller didn’t pay for construction or repairs to the property and that a builder has a lien against the property that you can be liable for. Likewise, you don’t want to find out after you’ve moved in that there’s a utility easement across your property and that the power company is planning to build transmission lines through your back yard.
Next, make sure the sales contract is contingent on the house passing an independent inspection and upon correction of any issues that come up in that inspection. As mentioned earlier, you’ll work with a number of professionals while purchasing a home and the inspector is one of them. Your real estate agent may recommend one, but do your own checking around. Make sure the inspector is licensed, bonded and/or insured depending on the requirements in your area. Ask your friends who have bought homes what inspector they used and whether they were happy with the work or if any problems were missed and not discovered until after the closing. Before you hire an inspector, make sure you’ll be getting a written report, and if possible, look at reports issued from prior inspections to see how thorough they are. If possible, go with the inspector to the house so you can see for yourself what problems are found and better understand the issues. Make your own list of any problems that are found and check these off as they are corrected. Don’t close on the house until all of the problems have been resolved.
Your contract should also be contingent on an independent appraisal of the house and upon the appraised value being at or above the contract price for the house. Don’t panic if the appraisal comes in below the contract price, but do slow down and figure out why and whether you still want to go through with the purchase. As with agents and inspectors, make sure you use a reputable appraiser and don’t automatically accept the one recommended by your realtor.
You won’t typically need a survey of the property lines around your new home, but if the last survey of the property is pretty old or if there have been a lot of changes to the property or to adjoining property that may raise issues about the property lines, a survey is a good way to make sure you know exactly what you’re buying. Survey’s are cheap insurance against future land-line disputes with your neighbors. If you have any concerns at all, get a survey.
If you’re buying a new home, make sure you get a warranty. Any reputable builder should be willing to warranty his work for one year from the closing date, in case problems crop up that either hadn’t surfaced or were missed during the inspection.
As you approach closing and focus on what other people are supposed to be doing, don’t slip up and forget to complete your own obligations. Stay in touch with your lender especially and make sure you have homeowners insurance and other requirements taken care of before the scheduled closing.
Finally, insist on getting copies of the closing papers a couple of days before the closing itself so you have time to review them carefully. Most people don’t see the paperwork until the closing and are either too overwhelmed or too unassertive to force the closing attorney to slow down and explain everything. Do yourself a favor and get the paperwork early so you can review them at your leisure and make a list of questions to ask during closing.
Pay particular attention to all of the additional fees and costs that get added to the purchase price you agreed on. Most will be legitimate, but make sure you understand them all before you agree to pay. Potentially bogus charges will often be buried in sub-totaled amounts, so make sure you know how each figure adds up and where each dollar is going.
Finally, don’t forget the little things like getting utilities turned on before your scheduled move in date and informing people of your new address.
CONCLUSION
Buying your own home is a major event in most people’s lives. Make it a positive experience with a happy ending by understanding your needs, wants and budget and being realistic about your expectations. Avoid problems by preparing yourself financially and emotionally and by doing the necessary research to make good decisions and an appropriate offer before you find the house you want. Stay calm and don’t let emotion derail your home buying effort and land you in a home you don’t want or can’t afford. Once you’ve found the home, don’t let up but follow through and protect yourself with title searches, home inspections, appraisals, and other methods of making sure you get what you expect in a new house without surprises. Follow these guidelines for a focused, productive and successful home buying journey!
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