Learn more about the Home Buying Process from start to finish at TheMurenTeam.com
The Home Buying Process, Start to Finish
Buying a home can be very exciting and scary at the same time. Most first time home buyers will experience a full range of emotions as they go through the buying process. This is a completely normal reaction. Homeownership is at an all-time high in America, not just because of low interest rates, but also because more and more people are realizing the benefits, such as:
•Credit - having a mortgage that you pay on time every month improves your credit.
•Investment - home values are constantly appreciating which helps you build equity. That makes real estate a good investment.
•Pride - there's nothing like the feeling of buying and owning your own home.
•Tax Advantages - interest on your home is tax deductible.
It takes three things to buy a house: some cash, dependable income and good credit. If you fall short in any of these areas, don't worry. There are plenty of programs out there to help achieve homeownership no matter what your financial situation.
Before you begin the process of buying a property or home you need to consider the following:
1) Determine Your Buying Objectives. Why do you want to buy a home? Need more room? Downsizing? Tired of paying a monthly rent for nothing in return?
2) Determine Your Needs. Prioritize what is most important to you in a home (style of home, size of home, neighborhood, schools, cost, etc.) Keep in mind, there is a difference between what you need and what you want, so be realistic.
3) Become Informed. If you're a first-time home buyer, learn everything you can about the buying process. This series of informational sections will help. Research the market by searching the internet to see what homes are for sale in the areas you desire. As well as looking at classified ads and home for sale magazines you should also be driving around neighborhoods you're interested in. After that you should have a good feel for what's available. My advice is to take these neighborhood tours in the evening when children are home from school and adults are home from work to get a good feel for the neighborhood.
4) Get Your Financing in Order. This is not the time to make any major purchases on a credit card. Don't change types of work. More financing tips will be covered in the next section.
Knowing What You Can Afford
The first thing you need to decide is how much you can afford. Determining this early in the buying process will save you a lot of time and frustration. Not only will you have a clearer idea of the amount you can spend, but you can also eliminate all those homes that are not in your range. You may even find that being pre-approved opens the doors to a home you hadn't considered before.
Steps To Home Financing
1) Credit Report - Contact a credit bureau or a Mortgage Lender and get a credit report on yourself, just to make sure your report is accurate. If you don't like what you see, it's time to try to clean up any problem items or clear up any mistakes. You may also want to consider contacting a consumer credit counselor for help.
2) Save Money - Skip a vacation, movie or dinner out to save money for a down payment and closing costs. Try not to buy anything on credit and if you do, pay it off quickly. Try to avoid taking on another large credit expense or even applying for another credit card. That will directly effect what you and qualify for.
3) Get Pre-Approved for a Mortgage. It pays to get pre-approved for a mortgage early in the process. Some think pre-qualifying for a loan is enough, but it's not. Pre-approval gives you more power when you've found that perfect house. To do this simply contact ar mortgage lender you plan to use, feel free to ask your realtor for advice.
4) Gain Knowledge. Lets you know in advance how much you can afford to spend on a home. This will allow you to look with more confidence and act faster when you find a home you like.
5) Get More Control. You have the negotiating power of a "cash" buyer when you can prove that you have financing in place.
6) Obtain a Faster Closing. You can close in as little as 15 to 25 days compared to the average 60 days for those that are not yet approved. This can make the difference betwen you getting the deal or not if you are in competition with a second home buyer.
What's the difference between Pre-Qualification and Pre-Approval?
Pre-Qualification is a "guesstimate" of what a buyer might qualify for prior to actually submitting a mortgage application. Based on the unverified financial information you provide, the lender uses a quick calculation to arrive at a loan amount. Pre-Approval means that the lender has verified your financial information and has actually committed money in your name for a specific loan type and amount. With today's technology, you can receive loan pre-approval in minutes.
Getting a Loan
If you haven't already been pre-approved for a loan, now is the time. Pre-approval lets you know in advance how much you can afford to spend, gives you more negotiating power because you have financing in place and can save you money by locking in an interest rate early in the buying process.
Getting a loan to buy a house is now easier than ever. You can actually receive loan approval in as little as four minutes. No money for a down payment? Poor credit? A first-time home buyer? No matter what your needs are, there are hundreds of loan products available to suit most financial situations.
What Type of Loan Is Right For You? When choosing a mortgage, find out about:
•The down payment that is required.
•Both the interest rate and the annual percentage rate (APR)
•Standard closing costs (and any extra fee the lender may charge and why)
•The possibility that your mortgage will be resold on the secondary market
•There are many different types of loans available:
Bridge Loan. Should you sell your home first before buying a new one or buy first and then sell? Most people need the equity in their current home to purchase a new one. But what if you sell first and don't have anywhere to go? A bridge loan may be an option. A bridge loan is a temporary loan that you obtain from your lender until the permanent one can be put in place. Once the primary mortgage is in place, the bridge loan is paid off and closed out. But understand that while waiting for a closing on your home, you will be making two mortgage payments. You will owe your present mortgage payment plus the payment on the bridge loan. Be certain you can afford it.
Conventional Mortgages. A conventional mortgage offers a fixed rate. They typically come in 10, 15 or 30-year loans. Although conventional loans used to require 20% down, most people today put 10% down (68% of buyers today put less than 20% down). Just keep in mind, if you put less than 20% down, you'll be asked to carry private mortgage insurance (PMI). If you're a first-time homebuyer, there are many low down payment loans available that ask for 3-10% down.
FHA Mortgages. Loans through The Federal Housing Administration (FHA) help low-to-moderate income home buyers purchase homes with low down payments (approximately 3%). You can use a gift or unsecured loan for the down payment and closing costs. Also, these loans are usually assumable (along with the current interest rate) by the next qualified home owner when you sell your home, which is an added benefit when it comes time to sell.
VA Mortgages. Veteran Affairs loans are great because they provide the opportunity to buy a home with no down payment. They are offered up to a predetermined loan amount (not more than $200,000) and are assumable by qualified buyers. To qualify for a VA loan, the veteran must be on active duty or have a discharge (other than dishonorable), along with one of the following:
•180 days active (not reserve) duty between September 16, 1940 and September 7, 1980
•90 days service during a war (Korean, Vietnam, Persian Gulf, etc.)
•Six years service in the National Guard.
Adjustable Rate Mortgages. Adjustable rate mortgages carry an interest rate that changes to keep pace with current market rates. This is a good idea for buyers planning to stay in their home for a short time. If you plan to stay in the home for an extended period of time, you're better of locking in a fixed rate with a conventional loan. When deciding whether an ARM is right for you, determine the following:
•Will I be able to afford higher mortgage payments if interest rates go up?
•Will I be making other sizable purchases in the near future such as a car or college?
•How long do I plan to own this home?
Assumable Mortgages. An assumable mortgage is a loan that stays with the property. It is simply transferred to the qualified home buyer. This means considerable savings for the next buyer. It may include no points, no interest rate change and low closing costs. Assumable mortgages are often the most valuable part of a property. FHA loans given before December 1, 1986 and VA loans given before March 1,1988 are completely assumable to the qualified buyer. This means that you can take the loan along with the real estate, just as it stands.
Balloon Mortgages. The Balloon Mortgage has a fixed rate for a certain time frame, typically seven years, followed by a "balloon" payment requiring repayment of the entire home loan balance. Interest rates are generally lower than conventional loans. People may choose this type of loan because they plan on either selling the home, paying it off, or refinancing before the balloon payment is due.
If you put less than 20% down on a loan, you will likely have to pay PMI or Private Mortgage Insurance. PMI protects the lender against a loss in the event of default by the borrower. You can ask your mortgage company to remove the PMI if you've paid 20% of the loan. However, you will be asked to provide an appraisal.
Most lenders require you pay real estate taxes and insurance on a monthly basis. This cost is included in your monthly mortgage payment, placed in an escrow account, and paid out by your mortgage company.
By securing financing, you are well on your way to your next home!
Searching for a Home
This is where the fun begins!
Beginning your home search
Become familiar with the area where you're considering buying in order to determine if it meets your needs (e.g. near a park, shopping, public transportation, etc.) You may want to select two or three neighborhoods to broaden your options. It may also be helpful to take photos of each of the home's you're interested in. Make personal notes on the back. This will help you stay organized and remember what you've seen.
You may also want to create a profile of what you're looking for in your next home.
•Goals - why are you buying a home?
•Features - what you need vs. what you want?
•Location - is it close to work, in a particular school district, near shopping, etc.?
•Style - what type of home fits your needs, lifestyle and taste?
•Lot - what is the size? What does it feature (wooded, fenced in, etc.)?
•General condition - is it in good shape?
•Neighbors - try to get an idea of what kind of neighbors you will have.
•Taxes - verify taxes and any current assessments on the home you're considering buying.
If you would like information on a specific community, you can get great information by clicking here.
Where to find homes?
Yard Signs. Hit the pavement and drive around neighborhoods that interest you.
Internet. More than 70% of home buyers today begin their home search on the Internet. FrederickMDRealEstateSource.com has every listing for sale in the Frederick, MD real estate market.
Open Houses. Check out the local newspaper and local real estate websites to identify open houses you would like to attend. It may be a good idea to bring your buyers agent to open house with you.
Realtor. Your realtor can set you up with automatic updates so you are the first to know when a house that meets your needs becomes available on the market.
Making an Offer
Once you've found the home of your dreams but before you make a formal offer, you need to make sure the home is priced correctly. You don't want to overpay. A comparable market analysis (CMA) lists the recent sale information of nearby homes, including how long each home stayed on the market, how close the asking price was to the actual sales price, etc. It then compares the information regarding these houses with the one in question. If you're using an agent, they will do this for you to help you determine a realistic price. There are several online appraisal services that can provide you the same information as a CMA.
As you go through this buying process, remember that everything is negotiable, and everything should be in writing. You should be very specific when you prepare your purchase offer, and the seller should be equally specific when they issue their counter offer. Don't forget to think ahead in terms of the top price you're willing to pay. It's a very emotional time and making some decisions early on is a good idea.
Other tips include:
Don't make a verbal offer.
Don't offer full price unless the home is a real steal. You need room to negotiate.
Include home inspections. Make sure you have an "out" written into the contract if the inspection turns up major repair problems that cannot be resolved with the seller. Make sure the contract includes an "out" in the event you cannot secure financing. Our recomended Realtors will provide "outs" from the contract for you. Earnest money proves to house sellers that you're serious. After all, they're going to take their home off the market on your behalf. Earnest money is typically between 1-5% of the purchase price, but less is possible. The money should be held by an attorney or title company in escrow. Never give the money directly to the house seller. Such a deposit does not mean you're bound to the contract. Your full deposit is credited toward the down payment and closing costs.
Once your offer is accepted, it becomes a binding contract, so be sure to include the necessary contingencies. Contingencies are clauses that, if not met, will render the contract null and void. Common contingencies are the sale being subject to approved financing, the sale of an existing home and/or a satisfactory home inspection.
Home Inspections (Read More about Home Inspections)
You've made your offer. Now you need to have an expert verify "what you see is what you're buying." A formal inspection determines if anything needs to be repaired or replaced. If you're using a real estate agent, they'll arrange the inspection for you. If you're on your own, make sure the contract indicates who pays for the inspection and whether you or the seller is responsible for any necessary work. The contract should also include a contingency in case the inspection reveals any repairs that cannot be resolved with the seller.
Licensed home inspectors inspect homes to determine what, if anything needs repairing or replacing. Typical inspections may include...
•Termites - signs of termites in the home or foundation.
•Plumbing - checks for leaks, dripping faucets, toilet tank leaks, etc..
•Electrical - up to code? Checks that all light switches and wall sockets are working properly.
•Exterior - settling cracks, paint peeling.
•Interior - signs of leaks in walls or ceilings, structure and general condition.
•The Roof - checks for leaks or damage.
•Windows- good condition and sealed.
•Insulation - up to code?
•Appliances - checks that they work along with heating and air conditioning units.
•Radon Gas - an odorless and colorless gas that is sometimes found in the earth's rock and soil.
•Lead-Based Paint - some older homes may still have lead-based paint that can be hazardous if ingested.
•Asbestos - homes built in the early 1970s and before often had asbestos tile floors and asbestos ceiling tiles. This substance poses a health risk and must be removed.
The home inspector will write up an inspection report with all minor and major defects itemized. Good inspectors will find minor flaws in nearly any home. It's up to you to decide how important they are. It is also helpful to be present during the inspection. Inspectors often provide you tips on the maintenance and upkeep of the home and its systems. Now that the inspection is done, it's time to move into the title and closing phase.
Understanding Title Insurance, Appraisal and Homeowner's Insurance
Some people can get confused about this area of the real estate transaction, but with a little knowledge and guidance, it's easy to understand. We'll break down the basics for you.
When you buy a home, a title company examines the chain of titles (previous owners) to insure that there are no problems with obtaining clear title to the property. Parties other than the current owner of the home may have rights to it for things such as mortgages, liens due to unpaid taxes, lien claims to those who the owner owes money, etc. As a new owner, you may know nothing about these risks, but you are still vulnerable to such claims on your property. A deed is not sufficient protection. That's why title insurance is necessary. It is very common for title companies to also handle the escrow portion of the transaction, meaning they serve as a neutral party to exchange funds and make sure both parties adhere to the agreed upon terms of the contract. To find a title/escrow company click here.
Lenders require appraisals to confirm that the home for which they're providing you a loan is in fact worth the amount you're paying. Appraisers are independent agents normally hired by the lender, however you may have a choice. The fees appraisers charge vary and are typically built into your loan costs. Your lender may also require a Location Survey that certifies the house is within the boundaries of the lot. The lender often selects the surveyor, but again, you may have a choice. The lender usually pays for the cost of an appraisal. Then it's factored into the buyer's closing cost.
If you are not assuming the seller's homeowner's policy, you will need to buy your own. Title will not be transferred until you can prove you have the home covered by insurance. This protects you for things such as fire, flood, tornados, or any other damage to the home. You may also consider additional levels of insurance to cover natural disasters that are more prevalent in your area.
Escrow and Closing
Congratulations! You're only a few steps away from being in your next home! You've purchased a home, but you don't actually own it yet. You need to close on it. This is known as closing or settlement.
The escrow agent conducts the closing and is often affiliated with the title insurance company. Their job is to ensure the buyer obtains a clean title, the lender obtains a good mortgage, that the costs of the transaction are paid, that the seller's mortgage is paid off, and that the seller receives their proceeds.
The escrow agent prepares a closing statement that outlines what the required funds are, who's paying and where the funds are going toward They will not disburse funds until they can guarantee that the above noted items have been taken care of.
Odds and Ends
Utilities - Water, gas and electric meters will be read on the day of closing and the seller will owe for the utility usage up until that day. You may also need to make deposits with both the water and electric companies.
Service Contracts - If you are taking over any service contracts from the home seller, you will owe the seller for the unused portion of those contracts that have been pre-paid. These could include pest control, pool and/or lawn services, home maintenance contracts, etc.
The title/escrow company you are using will tell you how much you need to bring to closing. Personal checks are not accepted, so bring a cashier's check.
Home Warranty - It's highly recommended that you purchase a home warranty. This will cover the repair or replacement costs in case items such as appliances break down after you purchase the home. The peace of mind is worth the expense.
There's nothing like the American dream of homeownership. The pride and stability you feel when you come home to a place that you know is yours is hard to describe. ForSaleByOwner.com's goal is to empower home buyers with easy to use information to ensure they make informed choices. We hope this guide provided you insight into and help with the home buying process.
The title/escrow/closing part of the home buying process is probably the most confusing from a consumer standpoint. But, at the same time, it's also the most important part when buying the home. For those of you who are new to the home buying process or are unfamiliar with the "closing" transaction, we have tried to outline (very briefly) the key elements of the transaction in the following paragraphs. When you buy a home, a title company examines the chain of titles (previous owners) to insure that there are no problems with obtaining clear title to the property. Parties other than the current owner of the home may have rights to it for things such as mortgages, liens due to unpaid taxes, lien claims by those to whom the owner owes money, et cetera. As the new owner, you will have played no part in accruing these liens but you will still be vulnerable to claims on your property. A deed is not sufficient protection. That's why title insurance is necessary.
It is very common for title companies to also handle the escrow portion of the transaction, meaning they serve as a neutral party to exchange funds and make sure both the buyer and seller adhere to the agreed upon terms of the contract. The escrow agent conducts the closing and is often affiliated with the title insurance company. Their job is to ensure the home buyer obtains a clean title, the lender obtains a good mortgage, that the costs of the transaction are paid, that the seller's mortgage is paid off, and that the seller receives their proceeds.
The escrow agent prepares a closing statement that outlines what the required funds are, who's paying and where the funds are going toward. They will not disburse funds until they can guarantee that the above noted items have been taken care of.