Have you ever bought a home? Was the experience enjoyable? Or were you, like many others, overwhelmed by all the hoops you felt you had to jump through to get to the finish line?
Buying a home can be a daunting task, especially for the first-time home buyer. The sheer amount of work it takes to go from saying “let’s buy a home” to closing can challenge anyone’s patience. That gets even worse when the mortgage company starts asking questions about your finances; questions that you will probably feel like are none of anyone’s business. Nevertheless, all those hassles are an important part of the process, necessary to get you into the home of your dreams.
But buying that home is an important part of your financial plan. For many, it is the biggest single investment they make towards their retirement. That alone is motivation to put up with all the problems and push your way through. To make that process easier, we’ve compiled our ultimate checklist. You'll definitely want to understand these before buying a home.
If you’re buying a home, you’ve got to know how much you can spend. That means getting pre-qualified for a mortgage. This is a quick, easy process, that can be accomplished in a trip to the lending institute. How much a lending institute is willing to pre-qualify you for will depend on your income, payments on outstanding debts, and your credit rating.
It really doesn’t make any sense to begin looking for homes before pre-qualifying; because you won’t know how expensive a home you can afford to buy. If you start looking at homes before pre-qualifying, chances are that you will fall in love with a home, and then find out you can’t afford to buy it.
There are several financing options you can use when buying a home. Not all mortgages are the same, so it’s a good idea to explore the options. The major types of mortgages include:
There are also some alternative financing options when buying a home, if you can’t qualify for the above mentioned mortgage loans:
Once you’ve qualified for your loan, you’re ready to start looking, finding that home of your dreams. Take some time to sit down and list what you want in your home, getting input from the whole family. Break that list down into “have-to have” and “want-to have” before you do any serious looking.
You’re better off getting some professional help for finding your home. Websites that list homes tend to be out of date enough that many of the homes which are listed will already be under contract. New homes won’t show up there as quickly as you’d like. Realtors have access to the Multi-Listing, which is constantly updated with the latest information.
You definitely don’t want to go with a listing agent, regardless of what promises they might make. It's likely you won’t get a better deal from them, even though it is common for them to advertise this way, especially over the internet.
Find your own agent who is representing not the seller's agent of a home you are interested in. Their commission is paid by the seller, not by the buyer. So if they’re trying to give the seller the best representation, there is no way that they will give you the best possible representation too. A realtor isn’t an arbitration service. For this reason, it is illegal for realtors to do dual-representation in 48 of the 50 states.
It’s a good idea to take the time to interview three different realtors before choosing one. You want to find someone who is going to work for you; so an agent who is a little hungry for business, is an advantage. At the same time, experience helps, especially when it comes to negotiating the deal.
A good real estate agent is going to work hard for you, searching for potential properties for you to look at, arranging a time when you can see the property, accompanying you and advising you through the negotiating process. Sadly, the nature of their work makes them some of the most abused professionals you’ll ever find, as people expect them to spend hours of time in helping them, and then buy a home without their help, cutting them out of the commission.
You’ve looked at dozens of homes and finally found the one you want. Now begins the work of making a deal. Your realtor can really help you here, helping you determine the value of the home and reviewing any unique clauses in the contract.
There are a number of different ways of determining a home’s value; but the most common is by looking at the sales price of comparable properties. This is information that the real estate agent can readily access, helping you to determine a fair offer. You not only want to consider the size and makeup of the home, but also:
Based upon this, you make an offer through your real estate agent to the selling agent. The seller will either accept your offer, reject your offer or make a counteroffer. Be patient because it is not uncommon for counteroffers to go back and forth a few times, before a final price is agreed upon.
Other factors, such as work the seller will do on the home or the addition of a home warranty can be negotiated as part of this process. However, the seller needs to make enough profit out of the sale, so anything you add will probably add to the lowest price they will agree to.
Once your offer has been accepted and you sign a contract, you will need to provide an “earnest money” deposit on the property. This money is held in an open escrow by the title company or law firm (on the East coast). This company acts as a disinterested party, holding the escrow for both parties and ensuring that all the paperwork required for the transfer of property is properly filled and filed.
There are some important contingencies on your contract, which you need to be aware of. These exist to protect both the buyer and the seller. They allow the buyer to have the necessary time to ensure that they are getting what they think they are getting for their money. At the same time, they limit the amount of time the buyer has, so that the seller doesn’t have their property tied up in a contract that can’t be fulfilled for one reason or another.
Specific contingencies to the contract include:
Unmet contingencies create a situation where you can cancel the contract. In this case, you will receive your earnest money deposit back.
The most frustrating part of this entire process is waiting for the final approval of your loan. Don’t be surprised if the lending company asks for additional financial documentation or information. They may want to know what certain expenditures are for; especially if you make major purchase during the time that they are reviewing your package.
Finally, your approval will come through and the closing company will give you an appointment for the closing. This usually happens within a couple of days after approval. While there is a large amount of paperwork for the closing company to prepare, they are set up for and accustomed to handing it.
The closing itself is a legal meeting where the buyer and the seller sign the necessary documents. Both real estate agents will probably also be in attendance and a representative of the lending institution might be (although they usually aren’t). Often, the closing company acts as the lender’s representative.
You will be required to sign more documents when buying a home than the seller, simply because of the financing of the home. The seller is merely relinquishing title to the property, while you are both accepting that title and completing the transaction for your mortgage loan. That documentation will then be forwarded to the lending institution. Once they sign off on the mortgage, funds are released and the title is recorded with the county.
At this point, the property is legally yours, with one large caveat. As a part of your loan contract, the property is serving as collateral for the loan. Should you default at any time, the lender has the right to foreclose on the property.
There is one final detail when buying a home. File your homestead with your county’s property tax office. This will help protect you from creditors and circumstances that arise from the death of the homeowner’s spouse.
Have you been through this process? How was your experience buying a home? Is there anything you would do different the next time around, to make the process run smoother? We’d love to hear your comments.
If you are interested in real estate and financing strategies that could help position you better for retirement, check out our Real Estate and Finance online course.
All the best,
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