By Michelle Higgins @michellehiggins
Buying a home can seem like a daunting process — it just may be the most expensive and emotionally charged purchase of your life. But with careful research and determination, the keys to that dream home can be yours. We’ll help you along your path toward homeownership.
The Decision to Buy
Before taking the plunge into the buyer pool, it’s important to consider whether homeownership is right for you.
RENT VS. BUY?
When looking for a new place to live, the first question you ask yourself will help drive the rest of your decision-making. Should you rent or buy? Buying may seem appealing because you will put an end to escalating rent and can build equity. But the reality of routine home maintenance and repairs can quickly drain a bank account.
In general, whether renting or buying is better for you largely depends on your specific circumstances.
Here are some basic questions to consider when thinking about buying a home:
- How long do you plan to stay there? If you expect to relocate in just a couple of years, renting is likely a better option.
- How much home can you afford? If you can’t afford a home large enough to fit your family in a few years, it may be worth it to rent while you save a bit more.
- What’s on the market? If you can’t find a home you like, it’s likely not worth tying yourself to something you’re unhappy with.
Still can’t decide if buying is for you? Check out The Times’s to dig deeper into the difference in expenses.If both your lifestyle and the hard numbers point toward buying, the next step is to determine how much home you can afford.
HOW MUCH HOUSE CAN I AFFORD?
To determine how much you can spend on a home, take a close look at your budget. Review your bank statements and spending habits for the last couple of months to figure out how much you are spending on everything from cellphone bills to restaurants. The offers a that can help you figure out where your money is going each month.
Once you have a better picture of your spending habits, determine how much you want to allocate toward a monthly home payment. This figure includes your principal, interest, tax and insurance payment, which add up to your monthly mortgage sum.
The Federal Housing Administration formula, used by many lenders, recommends allocating no more than 31 percent of your monthly income to your housingpayment. This figure will change based on your amount of debt. Buyers with no otherdebt may be able to budget as much as 40 percent of monthly income to housing. (But remember that the rest of your budget is going to have to go toward heat, water, electricity, routine home maintenance and food.) Overall, your total debt-to-income ratio, including car payments and credit card bills, should not exceed 43 percent.
So, for example, if you make $50,000 in annual gross income, your monthly gross income is $4,167. That should leave you with $1,292, or 31 percent to devote to your monthly mortgage, provided your overall debt does not exceed $1,792 a month. can help you determine what your monthly mortgage may be.
But remember that besides the mortgage, buying a home includes additional one-time payments that can quickly add up, including closing costs, legal fees and other expenses associated with buying, such as a house inspection. And don’t forget about moving fees or home improvements.
Organize Your Finances
It’s time to assess your spending, clean up your credit and figure out what you can afford.
COUNT YOUR PENNIES
Have you decided to buy? Before you jump into the world of open houses and real estate agents, take the time to get your finances in order. It will help you once it’s time to apply for the mortgage. It will also help you get some financial perspective before you fall in love with that perfect center-hall colonial or the studio with views of the park.
1. CHECK YOUR CREDIT SCORE
Lenders use , also known as , to evaluate the potential risk of lending to you. The higher the number, which runs from 300 to 850, the better your score. The best mortgage rates go to borrowers with credit scores in the mid- to high-700s or above, according to the .
To find out where you stand, go to , which offers a free report annually. Be aware that the three major credit-reporting bureaus, , and , generate their own FICO scores based on the data they collect; you’ll be able to find out all three
Is your FICO score low? You can by paying down high credit card debt, and by cleaning up any financial mistakes, like errors resulting from identity theft or mixed-up files belonging to another person with the same or similar name. Be aware that it takes time for these changes to be reflected in your credit score, from months for an inaccurate bill to years if you’ve had tax liens or bankruptcies. But if you can clear up your credit, it can make a big difference in your mortgage rate.
2. GET A MORTGAGE PREAPPROVAL
A preapproval letter is a written estimate from a lender of how much you will likely be able to borrow from them. This letter will help you determine how much you can afford, and help demonstrate that you can secure a home loan when you are ready to make an offer on a house. Getting preapproved for a mortgage is different from getting prequalified for a loan, which is essentially a back-of-the envelope calculation of how much of a loan you may qualify for based on unverified information. The preapproval application for a mortgage often requires submitting pay stubs, bank statements, tax returns and other financial documents. Take the time to get one now, so you’re ready to make an offer as soon as you find a home you love.
3. LINE UP CASH
The more cash you can pay up front toward your home, the less you will have to borrow. A bigger down payment means your monthly payments will be lower and you will pay less interest over the course of your mortgage. If you can afford to put down 20 percent or more of the total home price, you typically won’t have to pay for mortgage insurance, a premium that protects the lender in case you default on the loan. But don’t use all your money toward a hefty down payment. Lenders will want to see that you have some reserves in the bank. Closing costs typically add up to thousands of dollars, according to Bankrate.com, which conducts a survey of closing costs nationwide and offers a . You’ll also need cash on hand for moving, renovations and other incidentals.
The Search for a New Home
Now that you have a better sense of your budget, figure out where you want to live.
1. CHOOSE A NEIGHBORHOOD
What makes a good neighborhood? The answer to that question is going to be different for everyone. But you can quickly narrow your choices by focusing on some key factors:
- Where can you afford a home?
- What is the length of your commute?
- Do you want to be near good schools?
If you like a certain zone, go back at different times and days of the week to get a sense of what the traffic is like at rush hour and if that seemingly sleepy village at midday is party central at night. Some real estate firms have expanded their services by offering . (You may also want to take a virtual tour around the neighborhood using Google Street View.) There are also designed to help you find the right neighborhood.
2. COMPARISON SHOP
Once you’ve determined where you’d like to live, start browsing websites like , and , to see the homes available in that area. Eliminate sections of your chosen town that don’t have the style or size home you want at the price you can afford. Setting up alerts on these sites based on your criteria can help automate some of the work. Many search sites show how long a given listing has been on the market, if the price has been raised or lowered, past sales and other useful data that can help determine if a listing is overpriced or has been languishing on the market. From there, figure out which homes you want to see.
3. TIME TO VISIT
Visit a range of open houses to help narrow your preferences. This will help you get a sense of the housing stock in the area, and what is meant by a dog-trot house or a railroad flat. If there’s a crowd at an open house, you may also gain insight from the questions and comments made by other potential buyers.
When you have a better sense of what you want, line up some private showings. A private showing with a real estate agent will allow you to take your time at a place without the pressure or distraction of competing buyers. Tip: If you can, schedule a showing during the week before the open house, so you can use the open house for your second visit.
During your tour:
- Open the closets to check the storage space.
- Pull back the curtains to consider the view.
- Walk through the backyard and consider the maintenance needed to keep it in shape.
- Ask a lot of questions: How far is the home from trains and buses? Why do the sellers want to move? When were the last improvements? How much do utilities cost? Have any offers already been made?
Open houses can also be a good way to meet real estate agents with whom you might consider working.
4. FIND A REAL ESTATE BROKER
You can find homes for sale on your own, but a good broker can help you make sound decisions and guide you through the home buying process. They can also help you get access to homes as soon as they hit the market, before they may be listed online.
, talk to friends and family members who have bought or sold recently in your area. Look for a broker who has a track record working with buyers in your situation, and who will get back to you promptly. Keep in mind that your broker’s commission, typically 5 to 6 percent split with the seller’s broker, will ultimately come out of the sale proceeds. So even though you may not be paying your agent directly, you can expect that fee to be accounted for in the list price. And remember: your broker works for you, but he or she doesn’t get paid unless you buy a home.
Making an Offer
Once you find a home you want to make an offer on, don’t delay.
FINDING "THE ONE"
Did you walk into an open house and get goose bumps? Did you finally find the home that has everything you’re looking for? Did you and your partner sit down and weigh the pros and cons of three homes and finally come to an agreement? However you came to a decision on the home you want to buy, the next steps you take are crucial.
1. ANALYZE YOUR MARKET
Look for comparable homes of a similar size that have recently sold nearby to help determine a fair offer. A good real estate agent will pull such “comps” for you, talk through pricing and market dynamics, and work with you to come up with an offer strategy with room for negotiation.
If the home you fall in love with happens to be listed with your real estate agent, he or she may offer to cut the commission and represent both parties. While such dual agency arrangements can work out fine, there is the potential for a conflict of interest. Negotiating involves lots of give and take, and this can get tricky if your agent is also representing the seller. For peace of mind, it’s O.K. to find another agent to represent you.
2. BE WILLING TO NEGOTIATE
Understand that making an offer on a home is sometimes the start of a psychological game. You likely want to get the home for as little as you can without losing the house outright. The seller wants to maximize the selling price of the home without scaring you away. Where should you start with your first offer? Conventional wisdom says to begin at 5 percent below the asking price, but market conditions will largely determine how much wiggle room you have. In a soft market, where listings have been sitting unsold, you will have more negotiating power. In a rising market, prime listings will command the full asking price or more. Either way, keep your budget in mind when you make your first offer and set a cap of how high you are truly willing to go.
3. BE PREPARED FOR A BIDDING WAR
Things that can help you stand out to a seller in the middle of a bidding war:
- Try writing a personal letter about why the home is perfect for your family.
- Raise your down payment.
- Be flexible about the closing date.
4. MAKE A FORMAL OFFER
Once you and the seller agree on a price, your agent will draw up a formal offer for you to review and send it to the seller’s agent for review. If the offer is accepted, a cash deposit, also known as “earnest money,” is often required to show good faith. (This money will be held in an escrow account until closing, and will ultimately go toward your down payment.)
While the specific process and legal requirements vary in different parts of the country, the formal offer should spell out terms and conditions of the purchase, including how you plan to pay for the place along with any contingencies, which give you an out if something unforeseen arises. It’s typical to include a home inspection contingency, which gives you the right to conduct a professional inspection within a certain timeframe and to back out of the deal or renegotiate if the report comes back unsatisfactory. A mortgage contingency gives buyers the option of pulling out of the deal if they can’t obtain financing within a reasonable amount of time. And if you need to sell your current home to afford the new one, you should make your offer contingent on the sale of your own home.
In a tight market, where multiple buyers are competing for a dearth of listings, buyers may feel pressed to waive contingencies. But unless you have the cash to cover your losses, it’s not a good idea. Without a mortgage contingency, for example, you will lose your deposit if the appraisal comes in low and you are unable to make up the difference, or if the bank finds something wrong with the apartment building and will not lend the money.
5. HIRE A REAL ESTATE LAWYER
You will need a real estate lawyer to help you at this point until closing. He or she will help to negotiate any issues that come up over the course of a home inspection or securing a mortgage. Look for a lawyer who has a track record working with buyers in your situation, and who will get back to you promptly. If you are gravitating toward a New York City co-op apartment, for instance, you want a lawyer who understands the accounting methods used by co-ops and is able to mine the minutes of its board meetings for red flags.
6. DON'T FALL IN LOVE
This may be the hardest step in the process of buying a home. Be prepared for disappointment. Counteroffers are common. So is rejection. Keep in mind that even if the seller has orally accepted your offer, he or she may still be able to entertain and accept other offers (it may depend on your state). And even after you have a signed contract, issues can arise. If you’re buying in a co-op for example, the co-op board could decide to .
Getting from an accepted offer to closing requires patience and organization.
THE ROAD TO THE FINISH LINE
Once your bid on a house is accepted, you set in motion the process that will take you to finally holding a set of keys in your hand. While you may be eager to move into your new place, it is in your best interest to do your due diligence to make sure you get a home that it is in good condition and at a good rate.
1. APPLY FOR A MORTGAGE
You have several options for obtaining a mortgage:
- Approach bank lenders or mortgage companies directly to get current rates.
- Ask people you know who have recently bought a home for their recommendations.
- Get a mortgage broker to do the work for you.
Because mortgage brokers are not tied to any one lender, they can save you time and hassle by doing the legwork for you. (Note: A broker is paid a fee set as a percentage of the loan amount, but this may be paid by the lender.) Banks may offer long term borrowers favorable rates. to go, make sure you consult with a few lenders to find the best deal.
2. GET A HOME INSPECTION
Schedule a home inspection as soon as possible so you can learn about any issues that may prevent you from buying. A standard home inspector’s report will cover the condition of the home from the foundation to roof, including heating, air-conditioning and plumbing, giving you the chance to reconsider or renegotiate if structural damage or needed repairs are discovered. Ask local friends, family and your real estate agent for recommendations, then ask those inspectors for references from prior customers. You can also look up the inspector with your local Better Business Bureau.
Plan to attend the inspection. It will allow you to see that the inspector is doing a thorough job, such as getting up on the roof rather than looking at it from the ground and turning on the heat in the middle of the summer to make sure it works, But you can also use this time to ask questions about the condition of the home and pick up some helpful information about maintenance. The inspection will typically from $200 for a home less than 1,000 square feet to $400 or more for large homes, according to HomeAdvisor.com. Radon and mold tests apply to all homes, while if you’re buying an older home, you may also want to check for asbestos and lead. These tests obviously add to the cost of the inspection.
3. GET AN APPRAISAL
Before you can finalize a mortgage to buy your home, the lender will want to assess the property value to make sure it is in line with the amount you are borrowing. An appraisal considers everything from the home’s layout and square footage to what similar homes are selling for in the area to determine the home’s value. While the appraiser is chosen by the lender, a buyer can make sure his or her appraiser is licensed and familiar with the area where the property is. Ask to see the appraiser’s credentials and find out how many appraisals he or she has performed in the area. If you are not satisfied, you can ask the lender to send someone else.
Appraisal fees, which are typically paid by the buyer, vary widely depending on the scope of the work and the size of the home. (On average, , according to HomeAdvisor.com, but some can cost more than $1,000.)
4. SHOP FOR HOMEOWNER'S AND TITLE INSURANCE
To protect your investment, you will want to secure a good homeowner’s policy as well as title insurance. Your lender will also typically require this as a condition of your loan. The , a trade association, offers a searchable database of .
You can compare rates for homeowner’s coverage at sites like Insure.com and NetQuote.com. You may also be able to cut your rate by buying your homeowner’s and auto insurance from the same company. For more information, Consumer Reports offers an .
5. DO A FINAL WALK-THROUGH
Right before you close on your new home, it’s important to do a last-minute walk-through to make sure everything is being left in the condition outlined the sales contract — like ceiling fixtures that the sellers or old built-ins they agreed to . Go during daylight and be thorough — flipping light switches, turning on the water taps, running the appliances and flushing toilets — to make sure no new issues have cropped up. If the attic hasn’t been cleared out or a broken window is found, you can ask for a credit at the closing to pay for junk removal or repairs.
6. CLOSE THE DEAL
On closing day, all parties involved — the seller, the buyer and their various representatives — will sign the papers officially sealing the deal. (Parties may not always need to be present for the official closing.) Buyers must bring a check to cover , including title search fees, attorneys’ fees, transfer taxes and homeowner’s insurance. When all the documents have been signed, and all funds have been properly distributed, the deed of ownership will be transferred to you.
Finally, the place is yours. Take your new set of keys and enjoy the first time entering your (likely empty) home and start to picture your new life inside its walls.