Better Homes and Gardens Real Estate Life

Tag: 10 steps to buying a home

  • Step 10. Building Wealth through Homeownership

    step 10Buying a home is viewed as a symbol of the “American Dream” for many and provides a sense of security in an often-unstable economy. Many desire this, but are not sure if it is a tangible financial investment that can turn into a profitable venture long-term. Understanding the meaning of wealth can help you make the entire process more reassuring in the long run.

    What is Equity?

    Equity is the amount of home that a person actually owns. This total is not the mortgage amount, but loan balance subtracted from the value of the home. If this number is positive number, congratulations, there is equity in the home and therefore wealth. If the number is a negative number, then the buyer will likely owe if the home is sold and be indebted at the sale.

    Example:

    Home market value    $322,000

    Mortgage Owed          $100,000

    Your Home Equity      $222,000

    If you sold the home at the market value, you would have $222,000.

    This value can fluctuate dependent on the market, but statistically stays within a 10% average, making homeownership a smart choice. Equity is valuable to the consumer because a homeowner can use these untouchable funds later in life to pay for burdens or unforeseen costs such as home improvements, a new home, college or emergencies. This of the home as a savings fund that will not be touched until the transfer of ownership.

    Overall, this is a popular way to increase wealth because the net worth of the family increases over the years. According to the Federal Reserve, the median net worth of a homeowners in 2016 was between $225,000-$230,000. For families that rent, the average net worth was $5,000.

    How Does Equity Grow

    Equity grows with the value of the home, not just the amount paid down by the homeowner. If a home is in the right market, values can increase as the area becomes more desirable, increasing the property value and the equity margin. For example, if a home is appreciating at a rate of 4% per $10,000, this can be leveraged from a $10,000 investment to a $100,000 investment.

    Benefits to Homeowners

    • Forced savings: This is a way to create a steady savings without having the cash in hand to put into a savings account. For buyers who may have a hard time putting money aside for the future, this is a great way to save funds without manually putting the money aside.
    • Value Versus Renting: People who rent have nothing to show for their payments towards a property when they depart a home. This is the downside to renting. Renting is great in the short-term, but provides zero benefits to most Americans when trying to save for wealth.

    When weighing the pros and cons to a home purchase, consider long-term goals. If a goal for the family is to save for future needs, purchasing a home in the right market can make profits that outpace even the stock market. Weigh the options and choose what is best for the family by discussing the decision with lenders, agents and family.

    Build Wealth
    Build Wealth

  • Step 9. Closing on A Home

    Finally, the home stretch of the buying process: Closing! All inspections have been completed and the appraisal has been processed. This means the next steps for the buyers, sellers, agents and lenders is to work with the title company to become clear to close on the property. Closing is the formal process where a seller transfers ownership of the property to the buyers. After this final process, the buyer owns the home outright.

    On average, this process takes 30-45 days, but 60 day closings are not uncommon. The timeframe of this process is dependent on when the buyer wishes to gain possession, when the seller is willing to vacate and if there were any issues during the inspection period.

    Get an Updated Loan Estimate

    During the initial loan attainment, the lender likely provided a loan estimate (LE), which included the mortgage amount, monthly payments, insurance fees, and any additional fees associated with the closing including title insurance and closing fees. Be sure to attain an updated LE halfway through the buying process and compare numbers. Usually, about a week before the closing, the title company will provide a Closing Disclosure (CD) that breaks down the updated fees for the buyer and seller. If there are any questions or discrepancies, now is the time to ask/amend. Remember that a CD:

    • Is Required to be Provided to the Buyer & Seller at Least 3 Days Prior to Closing
    • Includes All Loan Terms, Projected Monthly Payments, Closing Costs & Fees

    Not sure what all the details are on the CD? Use this interactive closing disclosure explainer.

    What Is Title Insurance?

    The term “title” refers to the collected ownership records of a piece of real estate, including the transfer of any property rights, and any loans using the property as collateral. A clear line of title makes you much less vulnerable to ownership claims from other parties and to outstanding debts of previous property owners. This is part of the closing fees and essential to ensure no other person has claim to the property.

    *Note: The title company can be a separate entity from the settlement company, but is often the same organization.

    Where Is the Closing & What Happens?

    A closing typically occurs at a settlement agent’s office, which can be at the title company’s office or executed by a mobile notary as well. Typically, three documents are signed:

    • Deed of Trust: A deed is the records with the local Clerk of Courts of the transaction and the mortgage lien on the property now owned by the buyer.
    • Promissory Note: A legal agreement that the buyer will pay the lender for the mortgage principal, plus the agreed upon interest, as well as where fund are to be sent.
    • Closing Disclosure (CD): The itemized list of all debts and credits to complete the closing that are associated with the contract.

    If documentation of homeowners insurance has not already been provided, it must be provided at closing. If the down payment and funds for closing have yet to be received, this must be provided at closing as well. This is typically 2-5% of the home’s value and can include recording fees, loan origination fees, notary fees title insurance and homeowners insurance.

    Who Attends a Closing?

    • Buyer or Buyer Rep
    • Agents
    • Seller or Seller Rep
    • Lender Rep
    • Closing Agent
    • Notary Public

    Not all are required to attend and the selling party can sign in a different location than the buying party. This is very typical when one of the parties lives in a different state or during a VA loan closing.

    Closing on a Home
    Closing on a Home

  • Step 8. Purchasing Home Insurance

    Now that such a large investment is drawing to a close, it only makes sense to insure the property for both parties: the lender and buyer. Homeowners insurance protects the homeowner and the contents of the home in case of accidents, theft and other disasters. These unforeseen circumstances can cause serious stress to homeowners and force a default on the loan, without this assistance. Knowing that insurance is needed is one thing, but how much insurance is needed and who to choose to have the policy through can be a headache for some buyers. Feel more at ease by using these guidelines to find the ideal policy for this upcoming purchase.

    A home is typically the largest purchase of your life, protect yourself and your family with the proper insurance.

    Shop Around

    Never go with the first policy submitted for review. Shop around and receive numerous policies to compare coverage and rates. Get quotes from a variety of servicers ranging from local to national companies. Ask neighbors and family members who they would suggest for that specific area. One provider may be excellent in one area, while not as strong in others. This is critical when buying in high-risk flood areas.

    When speaking with these providers, be sure to ask qualifying questions of each provider to determine if they are the correct provider.

    • What percentage of possessions does the policy cover for partial and total loss of home?
    • During a disaster, does the company pay out any funds prior to an inspection of the home?
    • Does the policy cover living costs when unable to stay in the home?
    • Does the policy cover full replacement, or a percentage of the contents in the home?
    • What provisions does the policy incur for floods?
    • Does the policy replace the contents of the refrigerator?
    • How many days can the family stay in temporary lodging covered?

  • Step 5. Real Estate Contract Negotiation

    As a buyer, finding the perfect home in a realistic budget can be one of the most exciting purchases in a lifetime. Now that the desired home has been found, it’s time to create a contract in coordination with the buyer and their agent. A contract, or purchase offer, is a legal transaction that outlines how much you want to pay for the home, all terms and conditions of the purchase, and legal requirements based on state and local laws. Buyers, sellers, agents and the chosen title company are all involved in the coordination of the successful accepted offer.

    You will work with your agent to determine what is an acceptable offer on the property. Trust the agent’s advice as they know the area extensively and can dictate if the asking price for the home is above the value of the home. Hot markets may also require a higher offer price dependent on bidding wars. No matter what your proposed offer is, consider these tips and questions when making an offer on a home.

    • Condition of Home: Does the home need minimal or extensive renovations? Are these renovation projects something you can handle as the buyer? Will you need to hire contractors? These questions should affect the offer to the sellers.
    • Are there HOA limits? There may be numerous renovations that could improve the home, but these must fall within HOA guidelines. This can affect the price presented as some restrictions may increase or decrease the value of the home.
    • Pet Laws: Consider if four-legged friends are accepted in the community or neighborhood desired. Many breeds such as Pit Bulls, Dobermans, Rottweilers and Chows are restricted. Weight limits can also be an issue.

    Research Contract Language

    As with any contract, the language within can be confusing for even the most knowledgeable of buyers. Research and ask your agent to explain standard stipulations in a real estate contract to help make the decision quick for contract offers. For example, in many areas a home inspection must occur within 14 days unless otherwise mentioned in the contract. Who pays for this home inspection is something that can be negotiated and must be mentioned in the offer.

    Speaking with a real estate attorney is another option for those that wish to be 100% sure that an offer is legal, fair and beneficial. Don’t be afraid to ask the agent or real estate lawyer any question. No question is silly when making such a large purchase.

    Set The Price

    The offer price is the final number brought to the seller for the property. As mentioned above, work with the agent to determine a fair price for the home. Is the area a buyer’s market or a seller’s market? Have homes sat on the market for extended periods of time? Will this home require serious renovation? Is the asking price set to the comparable market value for the area?

    Down Payments

    The lender can help determine an acceptable down payment on a home based on how it affects the mortgage payment and what is an attractive escrow amount for the seller. In previous years, a FHA or Conventional loan down payment was as high as 20%. After the market drop, this has decreased significantly. In 2017, the median down payment was 10%. A down payment is not required with VA loans, but VA funding fees will be required at the closing which can either be rolled into the mortgage or paid at closing. The types and requirements of loan options can be confusing, work with your lender to find the option best for you.

    There are also payment assistance programs available that assist homeowners in specific areas, incomes, ethnicities and additional criteria with providing funds for down payments on homes. To determine what the monthly mortgage payment will be based after the down payment, ask the lender to run the numbers, and/or use mortgage calculators to determine the estimated payment per month.

    Earnest Money Deposits (EMDs)

    An Earnest Money Deposit (EMD) is an initial deposit submitted with an offer to show a seller that the buyer is serious about purchasing the home. This can range between $1,000-$10,000 depending on the price of the home and the area. This deposit will be held in escrow by the title company and go towards the closing of the home. Note: If the buyer backs out of the deal, the buyer may lose this deposit. Choose wisely and read the contract carefully.

    An Offer is More Than a Number

    A final number is extremely important to an offer, but other stipulations and instances affect whether an offer is in favor of a buyer or seller. Here are some additional items to consider when providing an offer.

    • Form of Payment: All cash offers are extremely attractive to sellers as this removes lender contingencies and takes the concern away from the seller as to if a buyer can truly qualify for the loan.
    • Clear Title: If a home does not have clear title, outstanding permits and/or code enforcement issues, this can take additional funds to clear. The contract should dictate in the additional terms who will take care of these issues, whether the buyer or seller. Usually buyers ask sellers to fix and provide an asking price that reflects the headache.
    • Outstanding Taxes/Utilities: If taxes or utility bills are outstanding, this should be reflected in the contract as well.
    • Deeds: There are numerous types of deeds including: General Warranty Deeds, Special Warranty Deeds, Deeds Held by Trusts and Deeds Executed by Courts (Foreclosures). Each has their own pros, cons and headaches. Discuss these differences with the agent and lender and adjust the price dependent of the situation.
    • State Specific Clauses: Each state has their own rules regulations to follow for transactions. Discuss these differences with the agent before submitting a final offer.

    Contingencies

    Contingencies are steps or provisions that must be met before the final transaction goes through (they keep the seller and buyer accountable and protected). Each agent (buyer & seller) should hold each other accountable to ensure that these are done in a timely manner as discussed in the contract and by the appropriate party. These seem like easy steps, but can hold up a closing more often than expected.

    Other Contingencies:

    • Financial: Missing Lender Docs
    • Appraisal: Delayed Production of Docs
    • Clear Title: Title Company Misses Information
    • Home Sale: Seller Needs More Time to Vacate, Buyer’s Current Home Sale is Delayed

    Fine Print: Understanding the contract is so important. Be sure to read over all the fine print and discuss with the agent to not miss any discrepancies.

  • Step 4. Shopping for a Home

    Looking at homes can be an exciting adventure.  Once you decide you’re purchasing a home, window shopping becomes a more serious venture. Completing the preapproval process with your lender before beginning the serious home search is so crucial because some homes that may be “dream homes” can be out of the realistic budget. A pre-approval letter helps narrow the home search into a reasonable price point, helping real estate agents provide a list of attainable homes in the desired area. Now that the loan process has begun and the agent attained it is time to shop for your home! Here are some tips to narrow the search even further to the ideal home.

    Know What You Want

    This may seem like an obvious statement, but dreaming of a home and purchasing a functional home in the correct price range is a different story. Make a list of your priorities and deal breakers in a home. For example, a buyer may need 4 bedrooms and 2 full bathrooms to accommodate family members, but cannot have the bedrooms on different floors due to smaller children in the household. This narrows the search for you and the agent. A large backyard may be desired, but a fenced backyard is a must which may lead a buyer to accept a smaller backyard. These specifics can make all the difference in a home search.

    Additional criteria may also come into play including specific neighborhoods desired, the safety of areas, the commute to and from work, school districts and future growth in an area. What may be a 20-minute commute today, could be a 45-minute commute in 10 years depending on area growth.

    The combination of this criteria can take the search from hundreds of homes down, to as low as 5-10 homes. This can lead to actual home viewings and the start of the final decisions.

    Begin on the Internet

    There are numerous websites to start the online home search. Some of the most popular are Realtor, Zillow and Trulia. These sites pull from real estate databases throughout the United States to populate area listings. Realtor is often the most up to date as its feed pulls from MLS databases. If you prefer mobile apps, Trulia, Homesnap, Zillow, Redfin and Dwellr are all popular mobile apps that can instantly pull the latest listings for the buyer on the road. This is a great option for buyers who are driving through neighborhoods who wish to attain instant information about a specific home.

    Pictures Are Not Worth a Thousand Words

    Pictures of a home online may be beautiful, but pictures can be doctored and photoshopped with ease in today’s technological-centric world. Pay attention to the description of the home for any keywords that suggest it may have issues. Also, if a home has been on the market for an extended period that is longer than normal for that specific area, there is likely a reason. Have the agent reach out and try to determine what the real issues are.

    Trust Your Agent

    Once the search is narrowed, lean on the agent for their expertise and area knowledge. A home may be beautiful, but could back up to a freeway or some other issue that only an experience agent can identify. These issues can affect the resale value and need to be identified before proceeding. Remember, this is why choosing an agent that is an area expert is a must.

    Attend Open Houses with Intention

    Search for Open Houses within your price point to view homes in person that are like the criteria desired. Viewing homes in person can change the desired criteria compared to what a buyer thinks will work mentally. Ask the agent to send notifications of upcoming Open Houses as well as check online and in social media.

    Arrive Early

    Arrive to Open Houses early to walk the neighborhood and even potentially meet some of the neighbors. Getting to know the neighborhood you potentially may live in can help in the decision process and eliminate homes as well. Envision yourself as part of that specific community.

  • Step 2. Lender Choice & Pre-Approval in The Buying Process

    The choice has been made; you’re buying a home! Congrats! Now, comes the “fun part”. Starting the home buying process continues with one of the more confusing parts of process for new buyers: lender choice & pre-approval. It is a standard in the real estate process for buyers to have a pre-qualification letter from a certified lender before any offer is taken seriously, so attaining this documentation is a must for a quick process. This approval process will include the vetting of sensitive information such as W2s, employment verification and bank accounts. Working with a trusted lender can make this process more streamlined and stress-free. Here are some tips for choosing the best lender for every situation and attaining a pre-approval letter.

    The Formula for Success

    The best formula for success includes three steps in the process:

    Trust + Service + Loan Estimate = Best Loan Choice 

    Trust

    Lenders and loan officers will be working side by side with the buyer throughout the entire home buying process and will be handling sensitive personal information about your family and financial wealth. No one wants to give this information to someone they do not completely trust. A good adage to choosing the best lender is to find someone with the heart of a teacher; someone that will work to ensure best program is available to the buyer and answer all questions. This lender should be someone that cares about your financial situation and works to be a cheerleader throughout the entire process. Find a lender that cares about buyer success and can answer the following questions accurately and with ease:

    • Howwillthelendercommunicatewithyou? Ideally the response will include 2-3 forms of communication: email, portals and phone communication.
    • What are the general lender fees?Some lenders will tact unforeseen charges onto the loan. Be vigilant and ensure that the lender is being transparent about all fees.
    • How many of the lender’s transactions close on time? A delayed closing can hurt the buyer and seller.
    • Are loan officers paid by salary or commission? Often, commission-based lenders will often provide better service because their income depends on receiving a quick and accurate closing. Your successful closing is their successful closing.
    • Can they provide a Loan Estimate? This is an important question in the process and will be discussed more at the end of this commentary. 

    Service

    Customer service should be the highest priority to any lender before their bottom line. Choose a lender that is accessible and available for you needs. A lender should be able to meet with the you within 48-72 hours of a requested meeting as well as available via phone, text and even after hours. The lender should be straightforward with the buyer throughout the process, even when the information is something the buyer does not want to hear. The lender should be able to articulate the entire buying process with ease to the buyer and work with the buyer to choose the best loan options in addition to pre-approval assistance.

    Loan Estimate

    Coming full circle to trust factor above, receiving an accurate and competitive loan estimate is a must from lenders. A loan estimate helps you know exactly how much your monthly payment is estimated to be within a variety of home price ranges. This is critical to a successful home search. An inaccurate loan estimate can have buyers searching for homes that are unattainable, leading to heartbreak or stretching families financially.

    At the end of the day, the lender any buyer deserves is one that is upfront, efficient and interested in a successful, on-time closing, not the rate of the loan. The lowest rate is not always the best loan option, so a trusted lender can assist buyers in weeding through the process of determining the best loan. Exceptional service from lenders can make the entire process a simple one for buyers.

  • Step 1. Goal Setting & Budgeting for Homebuyers

    The desire for homeownership connects people from all walks of life. It creates the feeling of security and permanence. It leads to wealth building. According to Eye on Housing, Americans focusing on financial security have 24% of their wealth located in their primary residence. This is more than any other asset, including stocks, bonds, 401ks and business interests.

    Buying a home will be one of the biggest decisions and largest purchases in your lifetime. Understanding the home buying process can assist you in purchasing a home that fits your needs, budget and life plans without the fear of financial loss. The first step in the homebuying process is prioritizing goals and budgeting for the ideal home in an attainable price bracket. Here are some of the starting points to consider when beginning the home buying process to improve personal wealth long-term.

    What Are My Goals?

    Homeownership can be a lucrative way to increase financial wealth, if it fits into your long-term goals. Owning a home is considered an investment that pays out over the years for most Americans that use these homes as a primary residence. Answering these questions about long-term personal goals can help clarify if buying a home is the right choice for wealth growth:

    • Job Status: Are you only planning to stay with your current job a few years? Is this a job you hope to keep long term? Is there opportunity for growth within the company within the department? Will a move be required for career advancement? These answers can help determine if buying a home will work in the long run for your wealth growth. Job stability is one of the most concerning factors for all Americans when purchasing, but is more prevalent with millennials, who as a group lag behind in homeownership compared to previous generations.
    • Home Occupancy Length: This is a concern for many millennials, who as mentioned above, may find job-hopping as a part of their early job career. Military members also must consider the longevity of duty stations when considering a home purchase. Currently 18% of military members purchase homes. This number is increasing and the military has some of the highest rates of homeownership among millennials.
    • Is This the Start of Your Portfolio? Have a long-term goal to start using homes as investments? There is no better time to start than now. Overall, home equity is on the rise and starting now can increase the chances of profit long-term.

    How Much Can I Afford?

    Many potential homeowners are confused and unsure of how much “home” they can afford on their income. Use these guidelines when considering a budget for a home.

    • Mortgage payments: Your mortgage should be 25% or less of gross income. Monthly payments consist of the mortgage cost, homeowner’s insurance, property taxes and mortgage insurance (if a conventional loan is used). Some buyers can qualify for as high as 32% of total gross income, but this often is not a safe bet for buyers who wish to purchase conservatively. Shopping homes with monthly payments that fall into the range of 25% of gross income monthly is the safest and more lucrative way to gain wealth.
    • Down Payments: When using a FHA or Conventional Loan, a down payment is required for purchase. The total percentage needed varies from 0% to 20% depending on the type of loan. What can you afford with your current savings?
    • Request Credit Reports: Not sure where your credit score stands? Request credit reports from the three most commonly used credit bureaus about six months prior to beginning your hard search from Equifax, Experian and TransUnion. This will assist in guiding your budget based on calculators to keep the search within the loan ballpark for buyers.