Buying a home is a time-consuming and costly activity. If your only experience in buying a home is on an HGTV show, there’s a lot more to it than they show on TV.
A home is one of the largest investments you will ever make. Not only do you enter into an arrangement to pay for the home for 30 years, but there is homeowner’s insurance, property taxes, Private Mortgage Insurance (PMI), and more to consider.
The Mortgage Broker
The first person you should speak to before you even start looking at houses is your mortgage broker. This can be a bank’s mortgage broker or one from a firm that specializes in mortgages. They will want you to bring two months’ worth of bank statements, two years’ worth of tax returns, and possibly other information such as how much of a down payment you would be able to commit.
The mortgage agent will use this information, along with questions he or she will ask, to approve you for a mortgage. They will also know of any special government programs for which you may qualify.
The broker will tell you exactly “how much house” they think you can afford. They will use your monthly income and information from your tax returns to come to an estimated amount. Once you have this estimated amount, it is important to contact your financial advisor to understand the impact of a mortgage on other financial goals such as retirement saving, college saving, emergency fund, etc.
Once you know the home price range you can comfortably afford, the next person to speak with is…..
The Real Estate Agent
Your mortgage broker may know a real estate agent to refer you to, or your friends and family may have a recommendation. Of course, you can always just walk into an agency. It is important to choose a real estate agent you trust; they are your advocate in the home buying process.
When you meet with the real estate agent, one of the main pieces of information you will want to divulge is the price range the mortgage agent gave you. You will also want to tell the agent what kind of house you want, how many bedrooms and bathrooms, distance from town, and other things you are looking for in a home.
Your real estate agent will search the local listings of homes for sale and will arrange for you to see several houses. With each house, your agent will learn more about what kind of home you are looking for and refine the search if need be. If you find a home in your price range and it is the kind of home you would like to live in, you then make an offer on the house.
Your agent talks with the seller’s agent, and the seller’s agent speaks with the seller. After some back and forth, your offer is either accepted or declined and a counteroffer is sent. Once the offer is approved, the house is considered to be under contract.
This is a period that typically lasts 45 days. Some buyers wait until this period to seek a mortgage lender. This is not a good idea as you could find that the home you want is not one that you can afford. Completing that step first saves you embarrassment during this step.
The first thing to do during this step is deposit earnest money into an escrow account. This money is used to show a good faith commitment to the sellers that you want to buy the house. This becomes part of your down payment.
Your real estate agent will be indispensable during this period. The next thing on your list is to get an appraisal. Normally this is paid by the buyer but can be negotiated to be paid by the seller. The appraisal is important to the bank because they do not want to loan, for example, $150,000 on a house that has an appraised value of $120,000.
Along with the appraisal, the home needs to be inspected. A thorough inspection will reveal if there are any issues with the house, such as a cracked foundation, faulty roof, bad plumbing, and many other potential issues. If any issues are discovered, it can either ruin the entire arrangement, or the sellers will be required to fix the issues before the sale finalizes. It could also transpire that the seller will put money into another escrow account to pay for things to be repaired after the sale is complete. Like the appraisal, this is also usually paid for by the buyer.
Next on the agenda is homeowner’s insurance. This is buyer’s discretion, but the mortgage company will stipulate what minimum level of coverage they want.
Many mortgage companies will roll the property taxes, homeowner’s insurance, and PMI into the same payment. This makes it so the buyer does not have to worry about coming up with multiple payments.
PMI is a special kind of insurance that some states require if the buyer of a home does not make a down payment of at least 20% of the purchase price. It goes away once 20% of the home’s value is paid for, though a buyer can apply to have it removed earlier.
The Big Day
After inspections, appraisals, and waiting for what feels like forever, the big day arrives! The signing of the papers and the giving of keys.
You are almost a homeowner. You will need to have your identification on hand so that your signature can be notarized on each page of the contract. As the buyer, you will sign your papers first, and the seller will sign theirs later that day or immediately after you. But don’t drive the U-Haul to your new home just yet. Until such time as they finish signing their documents, you are not allowed to go to the property, even if you were given the key.
The Morning After
Next comes the hardest but most exciting part. You are now a homeowner! You’ve got this. We help clients walk through this process all the time. If you have any questions about your specific situation, please reach out to us, and one of our advisors would be happy to work with you.