The process of buying a home, especially your first home, can be overwhelming. There many steps for one to take in buying one's home; such as, finding the perfect location, searching and choosing your dream home, financing your purchase, inspections and much more.
We, at Moaddab Realty, want to make every homebuyer's process as seamless and transparent as possible. We have summarized the buying process into three sections and 16 steps below:
1. Start saving for a down-payment (early), budget for closing costs, and have reserves for after move-in
In today's economy, one can purchase a home for as low as 3% down (from the purchase price) or 0% if you are a Veteran. But, by putting down less than the common 20%, one can be incurred with higher costs (one-time fees) and possible Private Mortgage Insurance (PMI - an ongoing monthly expense). The more you put down, the less you will pay in closing costs when you finance your home purchase. Read more about how you can save and budget for your next home from one of our previous blogs by clicking here.
In addition to saving your money early for your down-payment, you should also budget for closing costs. Typically, closing costs vary between 2% to 5%. Some of your closing expenses can be shopped around; such as, homeowner’s insurance, home inspections, title, and escrow fees. Another option is: you can negotiate with the seller to defray a portion of your closing costs.
After you have acquired your new home, you will need money to pay for what goes inside your new home. Some common expenses for a new home are: updated fixtures, new paint, appliances, furnishings, and various home improvements.
2. Determine how much you can afford
Before you start searching for your dream home, you need to know how much you can afford and what your price range should be. There are various home affordability calculators on the internet; but, the one that we recommend can be used by clicking here. This can help you determine how much you can conservatively afford to spend.
3. View your credit report from all three bureaus (Experian, Equifax, and Transunion)
Your credit history and credit score plays a significant role in qualifying and determining your interest rate and closing costs. Your credit score has an inverse relationship to your closing costs and interest rate. Meaning, the higher your credit score is, the lower your closing costs and interest rate will be. We recommend that you check your credit, verify all your credit information is accurately reported to the credit bureau, and, if needed, make strides to improve your credit (i.e., pay-off or pay-down a significant amount of your outstanding debt) prior to applying for a pre-approval and searching for your dream home. A good resource to utilize to help you to understand your debt and how it is impacting your qualification is with well-qualified Mortgage Loan Originator. They typically have an array of tools and tips to provide you and to assist you in improving your credit.
4. Pause any new credit activity
Each time you apply for a new credit line (credit card, personal loan, car loan, student loan, etc.), each financial institution will run your credit as a hard inquiry. In them doing so, these inquiries will lower your credit score (temporarily) and this might affect your home loan qualification terms, rates, and closing costs. If you're going to buy a home within the next six months, if needed, it is highly recommended to save those inquiries until after you have purchased your home (when you close escrow) to preserve your credit history and score as best as possible.
5. Explore various down-payment options
Do you need financial help with your down payment? There are various programs currently available that one can potentially utilize in assisting one with one's down payment.
Lenders who work with Fannie-Mae and Freddie-Mac can allow their qualified borrowers to put down as little as 3%.
Federal Housing Administration (FHA) loans allow their qualified borrowers to put down as little as 3.5%.
Veteran Affair (VA) loans can allow their qualified borrowers to put no down payment at all.
Crowdfunding or asking your family members for a gift with your down-payment can be other alternatives to assist you in your home purchase.
State and local assistance programs should be an additional avenue to research. Some of these programs can provide tax credits, low-down payment loans, and interest free loans up to a certain loan amount and time period.
6. Shop your mortgage options
What is your financial risk tolerance? How long are you planning to own your home? Is cash-flow more important than a fixed payment every month to you? These are some of the many questions that you should ask yourself to determine if a Fixed Rate Mortgage vs. an Adjustable Rate Mortgage (ARM) is better for you. Not all ARM's are created to hurt borrowers. If you can leverage the lower mortgage interest rate, lower monthly payments, and, in turn, increase the value of your home (i.e., applying certain upgrades to your home), you might be able to earn a higher return on your initial investment. We recommend to speak to a Mortgage Loan Originator as a starting point to evaluate your mortgage options. Subsequently, you can speak to your financial advisor and/or your tax accountant for further assistance to assess your options.
7. Compare your mortgage rates and points
Try to receive multiple (at least three) quotes from various financial institutions. In doing so, you will not leave any money behind. When you compare your offers, pay close attention to the mortgage interest rate and, if any, your discount point options. The discount points, if paid, are to secure a lower interest rate by paying the interest upfront. Discounts points might be a tax write-off; which, if they are a write-off, it might be financially beneficial to pay some discount points up-front, if you can afford to do so. We highly advise for you to speak to your mortgage loan officer and your tax accountant to understand the benefits and costs of paying discount points thoroughly.
8. Get a preapproval letter
Prior to searching for your dream home and submitting offers, you should get pre-approved. Do not be mistaken by getting pre-qualified; which, this simply states how much a lender may be willing to lend to you based on your income and debts. A lender that pre-approves you has thoroughly examined your finances and confirms in writing how much they are willing to lend to you and on what terms. Additionally, a preapproval letter helps show the seller(s) how serious and committed you are by taking that extra step. In having a pre-approval letter, this will help you to differentiate yourself from other buyers and potentially earning the upper-hand.
Searching for Your Home
9. Hire the right buyer’s agent
Hiring the right agent to find and close escrow on your dream home is a crucial step that should not be taken lightly. The right agent should be highly skilled in negotiating, motivated and focused to find your dream home, and knowledgeable about the area. You can read more about what questions you should ask when hiring your buyer’s agent by reading from one of our previous blogs, “Choosing the Best RealtorÒ,” by clicking here.
10. Choose the Right Neighborhood
Locating the right neighborhood is as important as locating the right home. Although you may or may not have children, research the schools as that affects a home’s value. Additionally, research local safety and crime statistics, nearest hospital, pharmacy, grocery store, and other amenities you will use. Lastly, we recommend that you drive through the neighborhood on various days and at different times to see the traffic and hear the noise, if any.
11. Let the little things go and be prepared to compromise
When you find your dream home, do not get caught up on superficial details (i.e., the paint color, fixtures, type of flooring, etc.). Once the home is yours, these features are easily changeable. Additionally, finding your dream home that is perfect in every way is rare. Consider and carefully determine what you are willing to compromise and what is uncompromisable while you are searching for your dream home. Perhaps a home without a kitchen island is a deal-breaker, but an outdated guest bathroom can be tolerable until you can renovate it.
Making an Offer and Closing Escrow
12. Step forward with your best foot forward
Your buyer’s agent should inform you on what type of real estate market you are in (buyer’s market vs. seller’s market), help you understand what other offers the seller(s) currently have (if any), recommend your lowest and highest offers for each particular home (make sure you do not go over budget), and review with you your possible tactics to win over the seller (i.e., writing a personal letter to the seller). In completing such actions before submitting an offer, you might be able to save more money in the end. When you present your offer with your best foot forward (which might be the lowest reasonable price), which you believe the seller will accept, you will be able to minimize back-and-forth negotiations and save a lot of time and money in the end.
There are several items that can be negotiated in your home buying process, which can result in saving you a lot of money. For example, are there repairs (major or minor) that you can get the seller to cover – either crediting you monetarily at the close of escrow or fully repairing the defect prior to the close of escrow? Will the seller be willing to pay any portion of your closing costs? By choosing the best Realtor®, such as one of our own, for your home buying process, he/she can help streamline this processes for you.
14. Purchase homeowner’s insurance
Prior to closing escrow on your dream home, your lender will require you to purchase a homeowner’s insurance policy. We recommend that you shop around and compare prices from a few insurance companies to find the best suitable price. When you shop around, if you have other additional items that you want to insure (i.e., car, jewelry, etc.) ask and compare umbrella policies. In doing so, by having more than one insurance product with your insurance company, they might offer a larger discount. But, more importantly, look at what is covered and what is not in their quoted policy. Typically, by choosing a less expensive policy means fewer protections and more out-of-pocket expenses if you file a claim. Additionally, flood and earthquake damage is not covered by homeowner’s insurance, so if your new home is in a flood or earthquake zone, you may want to get quotes in purchasing separate flood and/or earthquake insurance.
15. Understand the limits of home inspection
Once your offer is accepted, you might want to conduct a home inspection to examine the property’s condition inside and out; however, not all home inspections test for things such as radon, mold, or pests. Make sure you ask your general home inspector what is included in his/her home inspection, and, if needed, make sure you inspect your prospective dream home with all types of inspections you would like to be completed prior to closing escrow. The additional inspection costs might be worth