IN 5 STEPS
1. KNOW WHEN YOU’RE READY. Buying a home is actually way easier than it seems to some people. Thinking things through is the hard part. Once you know you’re ready to buy a home, you might consider checking your credit. Next, set your budget. Determine how much house you can afford in advance of looking at your dream homes. You can start with an online calculator as a sniff test. One rule of thumb is to aim for a home that costs about 2.5X your gross annual salary. If you have significant credit card debt or other financial obligations like a car payment, then you may need to set your sights lower. Another rule of thumb: all your monthly home payments should not exceed 36% of your gross monthly income.
2. MORTGAGE LENDING 101. Talk to a lender and get pre-approved for a loan, which involves verifying your income, debt and credit to determine the loan programs available. Shopping for a mortgage is way more than being just about finding a low interest rate.
Line up your cash. You’ll need to come up with a down payment and closing costs. Yes, lenders love to see 20% of the home’s price as a down payment. If you have less than 20% (which most people do), there are loan programs as low as 3.5% and even zero down payment programs (with strings atached). The closing costs include loan fees, attorney’s fees (if applicable) and title company fees to help close the deal. They can easily add up to more than $2,500 and more for government-backed loans. if the seller is willing, the buyer can request the seller to pay some or all of the closing costs as part of the deal!
Once you’ve considered the down payment and closing costs, don’t forget about the cost of the inspection and appraisal which are paid out of pocket before closing. Both the home inspection and appraisal run about $350-ish each to start. Remember, the condition of the home might warrant additional inspection services or tests, like a septic or well test in rural areas.
If your available cash doesn’t cover your needs, you still have options; talk to your Realtor.
Pay special attention to districts with good schools, even if you don’t have school-age children. When it comes time to sell, you’ll find that a strong school system is a major advantage in helping your home retain or gain value.
Try also to get an idea about the real estate market in the area. For example, if homes are selling close to or even above the asking price, that shows the area is desirable. If you have the flexibility, consider doing your house hunt in the off-season — meaning, generally, the colder months of the year. You’ll have less competition and sellers may be more willing to negotiate.
4. THE OFFER. Once you find the house you want, move quickly and make your offer. If you’re working with a buyer’s agent, then they will be a great asset at this stage of the game. If you’re working with a seller’s agent, devise the strategy yourself. The first thought is always about price. Decide beforehand if you want a great house or a great deal; most of the time, you can’t have your cake and eat it too (you can’t have both). If you really want the house, don’t lowball. The seller may give up in disgust. Remember, your leverage depends on the pace of the market. In a slow market, you’ve got muscle; in a hot market, you may have none at all.
There’s no foolproof system for negotiating. Be creative. Create win-win scenarios, find ways to satisfy the seller’s needs as well as your own. The offer, written up on a Purchase Agreement, is about way more than just the price: it includes the terms of the sale, financing, appliances and other property included in the sale, contingencies, inspections and closing timelines.
5. CLOSING THE SALE. After the dance of offer and counter offers is finished and a deal is struck, it just comes down to executing the terms of the contract: officially applying for the loan you want, getting a home inspection and requesting repairs. Then, about two days before the actual closing, you should receive a final settlement statement from your lender listing all the charges, (credits and debits) you can expect to see at closing. Review it carefully with your lender and agent. It will include things like the cost of title insurance that protects you and the lender from any claims someone may make regarding ownership of your property, various other fees charged by the title company, lender fees, commission paid to the real estate agents, HOA fees, etc… there are a lot of hands in the cookie jar.
The actual closing is often somewhat anticlimactic because the hard part is done already. If there is a lender involved, the buyer can expect to sign a lot of paperwork: you might consider asking for their documents to review ahead of time to make the closing go more smoothly.