You’ve made the decision to buy a home. You want the stability of a place of your own, knowing that you will be in control of where you live over the next five to seven years or more.
Why five to seven years? The costs of purchasing a home and the ups and downs of the market make a shorter window less financially desirable.
So how does the home-buying process work?
1. Do I need an agent?
First, you will need to decide if you want the representation or help of a real estate agent. It's easy to find properties for sale on the internet.
In fact, finding the property may be the easiest part of buying a home.
The agent will help you locate properties; view them efficiently; compare them; decide on which one(s) to buy; negotiate the price and terms of the purchase and sale; and coordinate the inspection(s), survey, appraisal, repairs, closing and possession.
Be aware of who the agent represents and how she will be paid. The agent may represent you, the seller, or the transaction itself. The price of a home typically includes the fee for both the buyer’s and the seller’s agents.
2. What properties should I look at?
Price, condition, type of property and ownership, location, size, and features will together determine what properties you'll want to view.
How much do you want to pay when you buy a home? Your range will be determined by the number of homes on the market that fit your criteria, as well as how closely homes sell to their asking price.
If most homes sell for 95 percent of asking price in your desired neighborhood, then you will want to look at homes that are priced no more than about five to 10 percent above your target price.
You may also have a preference for a specific form of ownership. “Fee simple” means that you own and have the absolute legal right to the building and the land.
Condominium ownership means you have an undivided interest in the building and land, and title to the space inside your unit. Association fees and shared expenses can be associated with either form of ownership. Even with fee simple ownership, you may have association fees that pay for common areas, such as clubhouses or playgrounds.
You may have a preference for a single-family detached home, a duplex (two homes attached), a townhouse (several homes attached), or a unit in a low-, mid-, or high-rise building. Many people confuse the construction design with the form of ownership, but these are two different things. For example, duplexes, townhouses, and single-family detached homes may be either fee simple or condominium ownership.
The condition of properties you are willing to buy will also narrow your selection of homes.
If you aren't willing or don't have the cash to fix up a property, look at homes that are in move-in condition.
And don't forget that some loans, such as those from the Federal Housing Administration (FHA), have guidelines as to which properties they will approve. Conversely, if you are handy or have the cash, you may be willing to view homes that need work, knowing that you can pay less and you have the time, money, and inclination to renovate.
The location will be determined by factors important to you. Considerations may include the commute time (check on Google maps), school district, walkability, size, number of bedrooms and baths, floor plan, style (contemporary, traditional, loft, Southwestern, etc.), and other features you want.
Some features to consider include the exterior construction materials, a private yard, basement, deck, parking, and neighborhood amenities. Those amenities may include a clubhouse, a pool, tennis courts, and playgrounds.
3. How much cash will I need?
The purchase price includes how much you are paying for the house and the mortgage, minus the amount you paid as a down payment (also called “earnest money”) at the time of contract. You'll also need cash for closing costs – i.e. the costs associated with making the loan and closing the sale – as well as for your inspections, home insurance, moving costs, and possible repairs and renovations. Your lender and real estate agent can help you determine how much cash you need based on the type of loan and the specific property you choose. Still not sure what to expect? The Consumer Financial Protection Bureau provides a
Your lender and real estate agent can help you determine how much cash you need based on the type of loan and the specific property you choose. Still not sure what to expect? The Consumer Financial Protection Bureau (CFPB) provides a good example of a closing disclosure. This will give you an idea of what a closing may look like.
4. What type of mortgage should I get? How much will it cost?
After speaking with your lender, you'll decide which loan program to apply for based in part on how much cash you'll need at closing. Different mortgages will have different cash requirements. For example, FHA loans will allow a 96.5 percent loan to value, requiring only 3.5 percent cash. But remember that there are some properties that the FHA won't give you a loan for.
Your lender will run your credit and let you know what you qualify for and what your interest rate will be.
Your interest rate and mortgage amount will determine your monthly principal and interest payment. Add to that your home insurance bills and the monthly share of your annual property tax, and you've got your monthly payment. This is your total PITI (principal, interest, tax, and insurance payment).
5. When do I need to start the process?
Educating yourself on all the particulars of home buying and then finding that special home will take some time.
Are you on a lease? Do you know when you want or need to be in your new home? Give yourself enough time to hit your target date.
Real estate is local, meaning that the market is specific to the area you are in. Are homes selling quickly? Is there a shortage of inventory – too many buyers and not enough homes? Do you need to take the time to become familiar with the areas you’re interested in to decide where you want to live or to answer the questions above? It’s a good idea to start the process about four to five months in advance of your move-in date.
Take your time to educate yourself, line up your mortgage broker and real estate agent, and view properties that meet your needs. However, once you find your dream home, make sure that you're in a position to act quickly in order to successfully buy it.