Buying a home is an intimidating endeavor. The process can be time-consuming, it has its own language of unfamiliar terms and acronyms, and it involves one of the largest outlays of cash you’ll likely make in your lifetime.
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Deep breaths. By doing your homework and thinking about the process as four smaller stages, shopping for a home can be less complicated and, perhaps, even enjoyable.
Step 1: Gather and prepare
Even before you start perusing real estate websites or visiting open houses, you need to find a local real estate agent you can trust. Get recommendations from friends and family; Zillow’s agent reviews can also be a great resource. Interview several agents before deciding which one you want to work with. You’ll want to hire an agent who is knowledgeable about the buying and selling process, knows your area and makes you feel comfortable. Once you’ve settled on an agent, you should set up a meeting to analyze your wants and needs.
Just as with your agent, you’ll want to shop around for the best possible lender. Again, rely on recommendations from friends and family, use sites such as Zillow to read online reviews and check with the Better Business Bureau to ensure potential lenders haven’t been fraught with complaints. Interview at least three mortgage lenders. In addition to technical knowledge you, again, need to find someone who puts you at ease.
Once you settle on a lender, you need to get pre-approved. A pre-approval is a preliminary commitment in writing from a lender stating that you will qualify for a particular loan amount based on your income and credit information. Getting pre-approved will give you an accurate idea of how much you can afford.
Step 2: Find
After meeting with your agent, you should both have a clear picture of which neighborhood you want to live in and the size home you’re after. Do you want a single-family home? Are you open to looking at condominiums or town homes? Do you need to be in a specific school district or near public transit? Is outdoor space important to you?
It’s likely you’ll do a portion of your house hunting online. Sites like Zillow allow you to look for properties within specific neighborhoods, price ranges and size parameters. These online searches can help you eliminate homes that don’t fit your needs and point you in the direction of more promising properties.
Once you’ve found a property you love, be sure to visit it at all times of the day. A street that’s quaint and quiet during the day could turn into party central on the weekend. Neighbors, too, can provide insight about your potential dream home.
Step 3: Buy
Your agent will write your offer to purchase. Most sellers price their homes a bit high with the expectation that back-and-forth negotiations will take place. A decent place to start is about 5 percent below the asking price. Your agent can tell you how much comparable homes have sold for, which will help you determine what you’re willing to pay. After you’ve made your offer, it’s likely the seller will make a counteroffer, to which you can also counteroffer. Once you’ve agreed on a price, you’ll make an earnest money deposit, which goes in escrow to give the seller a sign of good faith.
Typically, purchase offers are contingent on a home inspection to check for signs of structural damage or things that may need fixing. This contingency protects you by giving you a chance to renegotiate your offer or withdraw it without penalty if the inspection reveals significant material damage. Both you and the seller will receive a report on the home inspector’s findings. You can then decide if you want to ask the seller to fix anything on the property before closing the sale. Before the sale closes, you will have a walk-through of the house, which gives you the chance to confirm that any agreed-upon repairs have been made.
While the inspection is being arranged, you need to work with your lender to choose a mortgage. Many different types of mortgage programs are available. Three of the most common for first-time buyers are:
- Adjustable-rate mortgages (ARMs). These mortgages have an introductory interest rate that lasts a set period of time and adjusts annually thereafter for the remaining time period for a total of 30 years. After the set time period your interest rate will change and so will your monthly payment. The monthly payment amount is usually subject to a cap.
- Fixed-rate mortgages. Issued for 15, 20, 25 or 30 years, these are fully amortizing mortgage loans. The interest rate on this type of loan remains the same throughout the term of the loan, as opposed to loans where the interest rate may adjust.
- Interest-only. Both fixed and adjustable-rate mortgages can have an interest-only payment, which means for a period of time during the loan term, you’re allowed to pay only enough to cover the interest portion of your payment. You can still pay principal when you wish, but you don’t have to if your budget is tight. The benefit to interest-only mortgages is that you increase your cash flow by not paying principal.
Ask questions and provide a complete picture of your finances so that your lender can help you determine which type of mortgage is right for you.
Step 4: Close
Your real estate agent will help set a closing date that is agreeable for both you and the seller. Optimally, you’ll want to schedule your closing date to coincide with taking possession — either to move in or to begin renovations. You’ll also want to try to coordinate closing with the move-out date of the property you’re leaving so you don’t have to pay for temporary housing before your move.
Be sure you talk to your agent and lender so that you have a clear understanding of all the costs associated with closing. Closing costs likely will include your down payment, escrow deposit, title fees, loan origination fees, appraisal fees, survey fees, attorney fees, inspection fees, recording fee and points you may have bought to buy down your interest rate. Typically, home buyers pay between 2 percent and 5 percent of the purchase price of their home in closing costs. So, if you bought your home for $200,000, you might pay between $4,000 and $10,000 in closing costs.
Once the papers have been signed and the deal is closed, it’s time to move in. Whether you use a professional moving company is up to you and may depend upon your financial situation, how many boxes you have to move, how far you’re moving and whether you have friends who are willing to help for free.
Buying property is not without challenges, but by assembling an experienced and knowledgeable team of advisers, you’re taking the first step toward homeownership.
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