How To Buy a Home and What That Actually Looks Like Today
Moving away from being a real estate agent (where I learned so much in the heart of it all), and moving into a future buyer and investment perspective - sh*t gets real. Asking people for advice ensues a plethora of “well, for me…” or “are you sure you want to do that?” looks and opinions. Let me make something very clear - opinions do not matter in this game - facts are your friends. Buying a home or investment property is a very personal decision and getting the facts, real numbers, and timelines will only make the process so much easier for you! So I am sharing the in’s and out’s of the process and share the tools that will help you in this process. The current market is definitely a buyer’s market (a seller’s too, truthfully) and there is no need to scared. Instead, I want to provide you with the tools to be smart, savvy and on top of your game - whether you chose to work with an agent or not - it is crucial for you to be educated in process so you are ahead of the game. So, let’s dig in!
First thing’s first: get prequalified!
I couldn’t hear it enough during my time as an agent but now moving away from that and actually becoming a buyer - you have to know how much you can afford and what you are worth to a mortgage lender. Getting prequalified to know what you are worth and what you can afford is essential. Choosing a mortgage broker or lender who has loan programs that fit your situation is very important. The lender has the ability to literally make or break your dreams of homeownership. There are a lot of factors that play into how much house you can actually afford such as your credit score, debt to income ratio, income, and job stability. A great mortgage broker will be able to work with you and suggest ways for you to improve these factors so you can either qualify for a better interest rate or qualify at a higher price point. Moreover, if you do not have a pre-approval letter most sellers won’t even accept you.
Do not be afraid of this process either. You can be very empowering to know the truth and start from there versus being in an illusional state and get your dreams shot down. This process alone has helped me in numerous ways from building a much higher credit score and knowing my continual potential as an investor.
Know your money.
A “down payment” refers to how much cash you will be paying upfront at closing towards the property. Most people often default to 20% however, there are many options that require much less cash out of pocket. There are loan programs out there that will allow you to put 0% down which can be very appealing to some buyers. An FHA (Federal Housing Administration) loan will allow you to put as little as 3.5% down, but there are limits on the house you can purchase and you will carry what’s called PMI (Private Mortgage Insurance) for the life of the loan. The majority of Conventional Loans will have options for as little as 5% down. The caveat with putting less than 20% down is that you will typically carry PMI until you reach 20% equity in the property. You are typically seen as a ‘higher risk’ than someone putting down a minimum of 20%.
Very important note: In a multiple offer situation where there is a bidding war, the buyer with a higher percentage down will often be seen as a ‘safer bet’ and typically will be the one chosen by the seller. However, don’t let that deter you because other factors may bend to your favor. If not, keep it moving and find something better!
Timing is key.
Every market has its best/worst time to buy and there are a few best practices to keep in mind. Everything comes down to supply and demand. Ideally, you want to start looking when the fewest buyers (competition) are out there. Unfortunately, inventory is lower and there are fewer houses to choose from. Spring and summer are usually the busiest times of the year, so as a first time (or shall we savvy) buyer, you should avoid these times. The best time of year to buy is fall and winter. As a parent, this is not always easy with school schedules but I am sure you can work with it if you know you are getting a great deal! The sellers during these cooler months are pretty eager to sell their property, so they may heavily consider an offer that they wouldn’t normally during the spring and summer months. So for both buyers and sellers, it’s a good point of reference.
What are the next steps when you actually find your place?
A few things and here is the breakdown:
Time to run a CMA (Comparative Market Analysis): This will help you determine a fair offer price on the property. Since every deal is different and depending on the situation you can offer at, below, or above asking price. Running a CMA can only benefit you - so Google it and learn how to do it!
Present your offer: The goal is to receive a response from the seller. Sometimes low ball offers won’t even be looked at. However, if you feel the lowball offer is actually fair, don’t be scared just be prepared to lose the house or walk away from it.
Your offer is accepted: Congratulations! You have successfully negotiated the terms of the deal and are now under contract! There are a few checks that will have to be taken care of. There can be the Option Fee (if you have one) and Earnest Money. The Option Fee cost is given directly to the seller and the Earnest Money payment is paid out to the Title Company.
The Option Period: Ultimately, you will have negotiated what is called the “Option Period” into your terms. This is usually 7-10 days (ending at 5 PM on the final day) where you pay the seller a nominal fee for your unrestricted right to back out for any reason. Time is key during this period and must have the option fee money in the seller’s hand within 3 days from the effective date of the contract or you forfeit your right to the option period.
This is such a crucial time for you to have the property inspected and bring out any specialists as needed to further inspect concerns on the property. At the same time, you will negotiate repairs or money off the asking price due to items you uncovered during the inspection. If you decide to back out of the contract during the Option Period, you will not receive your Option Fee BUT you will get back your Earnest Money.
What is Earnest Money? Earnest Money is similar to a security deposit with a lease. The amount is negotiable but generally equal to 1% of the purchase price. You can offer more earnest money as an option. Once your Option Period expires, your Earnest Money is now at stake if you back out. There are a few exceptions to keep your Earnest Money if you need to back out. Some examples are if you don’t receive specific documents such as the Seller’s Disclosure or HOA documents in the time allotted by the contract or if the home doesn’t get appraised or you’re cannot obtain financing within the terms of the Third Party Financing Addendum. It’s not common for buyers to lose their Earnest Money, so just be on top of things.
Time to get an appraisal: If you’re taking out a loan on the property, the lender will have a third party appraiser go to the property and give their estimate on its value. The purpose of this is to confirm the price you are paying is at or below market value for the property, so the bank is able to sell the property if the worst-case scenario happens and you default on the loan. If the house appraises under the value you are offering, you have three options:
You can negotiate the price down to the appraised value with the seller and see how it goes.
You can come up with additional cash out of pocket to cover any difference between the sales and appraised value.
Back out of the contract if you have a Third Party Financing Addendum in place that allows that so you still retain your Earnest Money.
Time to close: Woohoo! You have made it to the closing table and are soon retrieving the keys to your new home! If you take out a mortgage, the closing date is typically 30-45 days from the date your offer is accepted. This is always negotiated in the initial contract. If you are paying cash, you can close much faster. You will have to sign a boatload of papers and you will be working with the Escrow Agent from the title company — they are there to help you with the process, so if you have any questions ask away!
What I learned because no one typically shares this with you:
Let me make something very clear, just because you’re qualified for a certain amount does not mean, in any way, you should spend every dime of it. Homeownership comes with much more responsibility and costs than renting does — you no longer have a landlord to call when your refrigerator breaks — so make sure you leave a cushion for yourself!
DO NOT take out credit on anything else while you’re going through the home buying process. Opening additional lines of credit will affect your debt-to-income ratio, which can affect your home loan. Wait until the keys in your hand before opening a credit card to buy new shiny appliances or anything else.
“All that glistens is NOT gold.” Do not be fooled by pretty staging furniture or fancy talk with the seller or their agent. Seller’s stage to up the value but what about the big-ticket items that aren’t so sexy? How old is the roof, plumbing, wiring, HVAC, etc.? These are the items that will cost you BIG money down the line to replace and should be heavily considered when finding your home or investment property.
Try not to rush, but when you do find the right one, don’t rest on laurels! Buying a home is possibly one of the largest financial decisions you will make in your life, so do not rush into it. Take your time, enjoy the process, and get what you need to be ahead of the game!
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