Buying a home
Whether you are buying your first home or are a seasoned buyer of real estate investments, the process can be both exciting and overwhelming at the same time. Following this simple checklist will help you get things in order and make the process enjoyable. I assume that you will be taking on a mortgage to buy your home. If you plan to purchase with cash, you won’t have to worry about a lot of these steps.
- Check your credit score – Make sure you have a good credit score to be able to get a good interest rate on your mortgage. Credit score is a very important factor for lenders. There are many websites that enable you to check your credit score for free. If your credit score is low, there are some ways to improve it. Pay bills on time. Do not open new credit cards. Do not close unused cards. Don’t take on additional loans. Pay credit card balances in full. Here’s a link on how to improve your credit score. It’s a slow process but a necessary one if you are looking to lower the interest rate on your mortgage.
- Calculate how much house you can afford – Here’s a link to a mortgage calculator. Once you enter your purchase price, down payment, interest rate, term, tax and insurance information, you’ll get an estimate of your monthly payments. I say estimate because your insurance and taxes will fluctuate over time. My recommendation is to put at least 20% down to avoid private mortgage insurance or PMI. This is an additional insurance that your lender would need to safeguard the lender in case of a default. This amount is not tax deductible.
- Get pre-approved – Get a pre-approval from your bank or any lender for the amount you are eligible for. A pre-approval letter helps establish your credibility as a serious buyer.
- Shop for houses – You can use a variety of online services such as Zillow, Redfin or Realtor. These services offer several options to set your own criteria. However, in my experience, I have seen that it takes these web services some time to update the status of a home. So the other route is a good real estate agent. Spring and summer are when most sellers put their homes on the market. Do take advantage of weekend open houses.
- Find a good real estate agent – A real estate agent can set up an automated email system that will forward you listings of homes that match your criteria. These are more real-time compared to web services listed above. As a buyer, you don’t have to pay the agent any commission. The seller pays commissions to both the buyer’s agent and the seller’s agent. Less established buyers’ agents may be willing to put part of their commission toward closing costs. So shop around and ask about this upfront. If the agent is willing to forego some commissions, she/he may not be willing to do a lot of the legwork like showing you a ton of different homes. Consider these factors when picking an agent to work with.
- Make an offer – Once you like a house and would like to purchase it, talk to your agent about making an offer. Your agent will be able to give you a good idea on how much to bid. If the location is in demand, another buyer may outbid you. Move quickly. Your agent will also guide you on the contingencies to put in your offer. Some locations are in such high demand that sellers often don’t even look at offers with contingencies. I personally would at least get an inspection done to avoid big surprises. Some buyers have an existing property that they would like sold before purchasing the new property and in that case would put down sale of existing property as a contingency. If your offer is accepted, sign the contract and start working on the contingencies. Choose a closing date 30 to 45 days in the future.
- Shop for mortgage interest rate – Once your offer has been accepted, you should aggressively shop around for a lender that offers the best interest rate. Lenders are pretty competitive. Please note that if multiple lenders pull your credit within 45 days, it doesn’t hurt your credit score so feel free to shop around. Along with the interest rate, pay attention to what each lender charges in closing costs. For a more comparable number, look at the annual percentage rate APR. This APR includes not only the interest rate but also any fees associated with the mortgage, any points that the lender charges.
- Inspection – Look for a good property inspector that serves your area and get the property thoroughly inspected. Walk with the inspector during the inspection to learn more about the property. Depending on the location of your property, you may want to get it tested for radon. If radon is present, you should consider asking the seller to put a radon mitigation system in place. An inspector will share more details if you are nice to him/her. We had three inspectors who came around lunchtime. We carried some Subway sandwiches for them and they were very happy. I was able to get some details and tips because of this small gesture that I otherwise wouldn’t have known.
- Insure the property – Shop around for homeowners’ insurance. There are several options available; many are competitive. Note that combining your home and auto insurance may get you a discounted insurance rate.
- Close the sale – The lender will appraise the property before finalizing the mortgage. You have to find a title company that will provide title insurance. A title company ensures that there are no existing liens against the property and provides insurance against future claims. Before the closing date, you should have your mortgage, insurance, and title insurance ready to go. The title company will send you a bunch of documents to go over prior to the closing date. On the closing date, you will sign the documents and receive the key to your new home.
When you get your pre-approval from any lender, they will ask for your financial details – pay stubs, investments, 401k, debt, etc. Based on your current financial situation, the lender will assess how much loan you are eligible for. Eligibility doesn’t equate to ability or willingness. Buy a home that you think you can afford comfortably without having to sacrifice your lifestyle.
There are additional expenses associated with owning a home. For example, if you are currently living in a small living space and planning to move to a bigger house, your utility bills may be higher. Your property may be part of a home owners’ association or HOA. Some HOAs charge very high fees. Set aside some allowance for upkeep and maintenance of your property (lawn mowing, trash removal, water-pump breakdown, etc.). Literally anything can happen. These invisible costs add up in your monthly bills very quickly.
In addition to saving money for your down payment, make sure you have set up an emergency fund that covers your living expenses for four to six months. Ask yourself if you have enough money to cover your expenses if you lose your job.
Buying a home is not an easy decision. Your first offer may not be accepted. Don’t lose heart. And don’t worry. Enjoy this process of buying a home. Good luck!