Buying a House
On average, homeowners in the United States move to new homes every seven years. With many homes available, many people looking for a new home, and many factors that effect home buying, it can make what would seem to be a fun adventure turn in to a difficult task. Whether you are a first time homebuyer or a homeowner deciding to make a change, there is a lot to know about buying a house. With the help of this article, you will be better prepared to make that giant leap and assume a responsibility that you may not have felt before.
That is right...house shopping and buying brings about a great responsibility. You probably wouldn't like to have such a big responsibility and not know how to assume it correctly. For example, some people would rather go it alone when shopping for a house. How about you, do you need a realtor? If so, who would you go with? And what about a loan? Can you get enough to buy the house, and if not, can you negotiate down the price of the house? So much to know and do. Just make sure you start out right.
Where to Start
The most important step in purchasing a house, and the place you should start from, is to look at the financial side of the adventure. There are three specific factors: 1) How much can I afford, 2) How much will it cost, and 3) Can I get the loan. Let's start with the first factor.
You really need to figure out how much you can afford to spend on a new home. Don't think of purchase price either. Think about what the monthly payments will be. Be sure to figure in the principle, interest, insurance, and taxes when calculating a monthly payment. You may also need to figure in mortgage insurance as well if you are putting less than 20% down on the house. But we will talk more about this later. What you need to focus on now is creating a budget to afford that house. If you haven't set up a budget that shows how much you are spending on everyday things, now is the time to do it. If you need some help creating a budget, or would at least like some information on creating and maintaining budgets, refer to the article on Budgeting.
A good budget will help settle on the price range that you can work with as well as help you stay clear of spending more than you can really afford. This is extremely important because many lenders will say that you qualify for a certain amount, that when broken down to the monthly payments, is more than you can really afford. Do not be fooled by this...instead, have a budget created so that you know what you can afford to get into. That way you will be able to control the process, and may end up in a better situation than you could possibly imagine.
Pre-approval for the Loan
After you get an indication from your budget of what you can afford, you need to know if you can even get a loan for that amount. This will put you one step closer to getting into a house, and it might just speed up the process a little bit.
You will hear two similar sounding terms: pre-approval and pre-qualified. Do not let your mind be tricked into thinking that these are the same. Pre-qualified means that you have told the lender how much your income and debt you have. With these numbers the lender can give you an estimation of what you can afford.
Pre-approval is actually a lot more than pre-qualification. With pre-approval you will provide income and debt information as you do for pre-qualifications, but for pre-approval the lender will request your credit report. Checking the credit report tells the lender what your debt-to-income ratio is. If the debt-to-income ratio is too high, you may be limited on the amount or you may have a higher interest rate. Worse yet, you may not even get the loan.
The lender will also look at your credit report to see your history and determine the likelihood that you will make the monthly payments on time. If they see from your history that you are frequently late on other debt payments, you may not get the loan and if you do the interest rate will be higher.
Because of emphasis that is placed on your credit report, you should request a copy and check it yourself before you visit a lender. This way you can know a little bit of what to expect in response from them. Review the articles under the "World of Credit" section for help on understanding your credit score and credit report.
So why is pre-approval so important? First, you will already know what you can afford before you look at any houses. This will narrow down your search before it begins. Second, if you are pre-approved for a loan and make an offer on a house, while another homebuyer that is not pre-approved makes a higher offer on the same house, it is likely that your offer will be accepted. The seller will see that you are pre-approved and can secure the loan while he will have to wait on the other person to get approved for a loan..something that might not happen. Most sellers won't want to take a chance on losing the sale, especially at a time when real estate is considered to be a buyer's market.
Let the Search Begin
Now that you know what you can afford, you are armed and ready to go out and find that house. Right? Actually, there is one more item for consideration: what do you need and what do you want. Fortunately, this can be part of the search process. As you get ready to look at houses, create a list with two columns; one column for needs and the other for wants. For example, having a minimum of four bedrooms is a need while central vacuums may be a want. Don't be surprised if during your search you end up moving something from the need column to the want column, such as walk in closets or that extra bathroom.
When you are looking for a house that fits what you can afford, you will realize what truly is needed and can be left out. If you don't get all those wants, don't worry. Like the opening line said, Americans move to a new home every seven years. Maybe the next one will have those things you didn't get this time.
As you create the needs vs. wants list, and as you are looking at houses and the neighborhoods they are in, keep in mind the fact that your life could change quite a bit over the course of time. What will the future bring, and will this house adapt for those future needs? You most likely don't have a crystal ball to tell you what you will be doing ten years from now so planning that accurately will be difficult. But if you have ideas about what changes may have taken place in your personal life, it could effect the decision you make on the house you buy.
Considering your wants, needs, and possible future requirements, you then need to take in one of the most key items in buying a house: location. We have heard that location is the most important thing to some people when buying a home. Interestingly, location requirements are about as different as each person looking to buy a house. Something to consider if you have kids is the proximity to schools and parks. You may also want to consider the quality of the schools and the education your kids will receive. This could completely change your mind on location.
Maybe you don't have kids and have a very social life. You may want to look in areas that are close to restaurants and shopping malls. Something else for every homebuyer to consider is proximity to employment and the transportation system to get there. Do you give up proximity to restaurants and work to enjoy a quieter lifestyle in the suburbs? Do you choose the suburbs to get more home for the price? Now you know why people say it is all about location, location, location.
A few other location-related items that you will also want to consider while shopping around are the crime rate for the area, the tax rate for properties, homeowner associations (and related fees), noise, restrictive covenants (nope, you can't have that yapping Chihuahua outdoors between 8:00 pm and 8:00 am), zoning (this is especially important if there is a lot of undeveloped area near the house that could be made commercial shopping malls...or it is good to know in case you would like to build an addition to the house ten years from now), and the neighbors (insert your favorite redneck joke here).
You may find more success in the house search by using a real estate agent. They have access to information that you will not get from a flyer on the "For Sale" sign or the internet. As you decide on whom to go with, there are a couple of things to remember. First, even though you are the one asking the agent to help you, the agent is always working for the seller, even if the agent has no clue who the seller is. Why? Because the seller pays the commission of the buyer's agent when the house sells. This is tough to swallow for some people but is good information to know as you work with them. But don't let this deter you from approaching an agent. Just be careful not to divulge information to the agent (such as the maximum you would offer for a house, what concessions you would be willing to make, etc.) that will work against you during negotiation. Since the agent is a representative of the seller, he/she must divulge all information you share with them that may help the seller in decision-making.
An alternative is to use a Buyers Agent. These are agents that work with your best interest in mind. They also will show you homes that are for sale by owner, something that traditional real estate agents won't do. Keep in mind, using a buyer's agent could have its down sides too. You may have to pay an hourly rate for the time they spend with you, or at least a flat fee. These are things that you don't pay to real estate agents. If you choose this route, make sure to sign an agreement of services provided and pay close attention to the terms of the agreement. You may decide to go with a real estate agent instead of the buyer's agent if you aren't comfortable with the terms of the agreement.
A third alternative is to go it alone. This is an okay route to go if you aren't in a rush. However, you miss out on information about the house that the agent can have access to. Also, unless you are qualified to do so, you will need to hire someone that can file the proper paperwork from submitting the offer to closing on the house. Even more, unless you can negotiate well, going this route won't save you any money.
Selecting the House
Based on the criteria that you established earlier with needs vs. wants, along with what you can afford, the agent will create a list of homes in the area you are looking that meet those criteria. You need to realize though that sometimes a house that you could potentially be interested in may not be on the list because it doesn't match your criteria 100%. Because of this, you may want to tell the agent to be flexible on sticking to the criteria. You may also want to do some searching on your own.
As you start to tour homes, make sure to take notes about things you like and don't like. This will be more helpful as time goes on and you walk through more and more homes. You will eventually become confused about features you liked in homes that you have looked at. Sketching the floor plan may be useful to you as well to more easily remember the layout of each home. If the homeowner will let you, you could even take pictures. All of these things are ways that you can help yourself as you are deciding which houses to remove from consideration.
Another thing to consider doing is visiting the house more than once. You will find that after you have seen a house, if it is one that you are really interested in, you will want to see it again. You will start to wonder more detailed things like how your furniture will fit in the rooms, how much "remodeling" you will need to do to have it match the look you want, etc. You should make sure that you visit it at different times of the day as well. Daylight can show off blemishes that you didn't see at night. It can also help you know what the true colors of paint are. Something else that is equally important: if the homeowner was present when you went through the house the first time, go back at a time when the homeowner isn't there so that you can look around more freely without feeling like an intruder. It will also allow you to talk more freely with the agent.
As you start focusing in on a house and narrowing the choice to just a few, make sure to get information about restrictive covenants and homeowners associations. Don't buy a house without this knowledge or you may have an unpleasant surprise when unknown association fees are due.
Make the Offer
Well, the search is over and you have found the house you want. What are you waiting for? Make an offer. It's simple right? Wrong. There are several steps that need to be taken; one of them is to start drawing up contracts that include the initial offer. This is where having a real estate agent comes in handy. If you decided to go it alone, you can hire a real estate attorney to do this for you.
Your offer isn't going to be just a number written down of what you are willing to pay for the house. Generally you will also include contingencies (based on the home inspection, financing, and title status) so that you can back out if deal breaking problems arise, timelines, and inclusions (like that built-in firehouse pole going from kids loft on the second floor to the first floor family room).
Once the contract is drawn up with the offer, contingencies, and inclusions, you can expect a counter-offer. What is the counter-offer? It is a chance for the seller to say in essence, "You can't have all the stuff you want included for the price you offered, but you can have it all if you are willing to pay more money." And you may respond with, "Okay, I will pay a little bit more but not what you want me to pay." And this can go on a couple more times until you have agreed with the seller on the price and inclusions. Keep in mind, that firehouse pole is probably worth a lot less than thousands in price that you will negotiate about. Let the seller have the pole (or whatever the inclusion in question is), save some money, and buy your own pole (as well as new furniture, carpeting, etc.) with the money you save on the sale price. The main thing to remember is that the seller doesn't ever have to accept your offer. If you really want the house, make a realistic offer or be prepared to walk away from it.
From the Offer to the Closing
So you made the offer and now you just have to wait for 30 days for the loan to process. Easy sailing from here now, right? Not quite. If you are getting an FHA or VA loan, a professional inspection of the house is required before the government will fund the loan. Even if you aren't getting one of those loans, having a professional inspection is a good idea. It may identify some things about the house that may change your mind about having it. And remember that inspection contingency you put in the offer contract (and if you didn't you are kicking yourself about now)? That contingency gets you out of the contract if there are significant problems with the house. Or, it could be that the problem is not a major one and the offer contract states that the seller has to fix it before the funding can go through. At this point, it becomes the seller's responsibility to make sure the sale finalizes. They won't want to back out just because they can't fix it, because they may end up facing the problem with the next interested homebuyer.
Go on the inspection with the inspector and don't be afraid to ask questions. Also, make sure to get a copy of the results. You don't want to be stuck with a lemon of a house because you didn't go through all the steps that have been suggested here.
After you have completed all that has been suggested (either here in this article or by your real estate agent), you are ready to close. Here is how you proceed. First, if you have kids, get a babysitter. You do not want to delay or extend the process because Junior needs you to read a book to him. Second, rest your writing hand for a few hours previous. Sound goofy? Wait to you see the stack of papers that you will be signing. You will get writers cramp just thinking about it. Next, get a cashier's check from the bank with the amount you will have to pay for the closing costs and down payment. Lastly, plan to be there over an hour. You are probably thinking this sounds absurd because you are only signing your name, right? Well, you are correct, in a naïve way. You will be signing your name 235 times (give or take a few). Then there will be the times you have to print your name, sign your initials, etc. And if you have someone co-signing (spouse, parent, friend, etc.) they get to do it all as well.
After you have signed on the final dotted line you are now a homeowner. Congratulations. You may decide that this was an ordeal you never want to go through again. If not, and if you are an average American, see you again in seven years.