It’s important to know how much you can comfortably spend and be able to back that up with verification from a bank or lender. In addition to that, buyers must also work with a real estate attorney to assist with the contract and closing processes of a home purchase as there can be many moving parts during a negotiation. Nest Lux agents will work with the most experienced attorneys and lenders in the business to ensure that our clients feel protected in their investments.
To buy a house, you should first team up with a trustworthy real estate agent and make sure your credit is in good shape. A home is a huge purchase, so you'll want to make sure you're making as few mistakes as possible along the way. That means putting together a team of people you trust, including a real estate agent, lender, and lawyer, which is often the bank's attorney, says Bull.
In most cases if you plan to get a mortgage, you need a loan pre-approval in hand before you can start looking at houses. You can do this yourself using a mortgage calculator on sites like Zillow or Trulia (just be sure to include property taxes and insurance in that estimate), or you can ask a lender to pre-qualify you for a loan. The general rule of thumb is to spend less than 30% of your take-home pay on total monthly housing expenses. But figuring out how much you can realistically afford will come down to your debt-to-income ratio. Chedid recommends your monthly debts, including your housing costs, not equal more than 40% to 45% of your gross monthly income.
Once you find "the one" and make an offer, you'll need to sign a purchase and sale agreement and get an inspection of the home before officially applying for a mortgage. In most cases, if you plan to get a mortgage, you need a loan pre-approval in hand before you can start looking at houses — most realtors won't entertain shoppers who don't have one. Bull calls it getting your "financing ducks in a row." While you may already have an idea of what you can afford, you'll need to find out how the bank sees you. A mortgage broker will assess your income, assets, and credit to determine your maximum loan amount.
During pre-approval, the lender will also do a hard inquiry of your credit, which will show up on your credit report. Once you're pre-approved, you'll receive a conditional letter stating the amount you've been approved for. It's worth noting that you don't have to go with the lender that offered you pre-approval. You can use your pre-approval to shop around for lenders who will offer you better rates. "The rate is important, but so is the service and making sure you get to the closing table," says Bull.
Now you can find out how much house you can realistically afford given your loan amount. Don't forget to factor in taxes, homeowners insurance, closing costs, private mortgage insurance (PMI), and homeowner's association fees, if you expect to have them.
Though your real estate agent should be your top resource, "do your homework," Bull says. Find out which neighborhoods you want to be in and check out a few open houses. The more you see, the more informed your decision will be when you finally pick "the one." You'll need to stay on your toes while you're shopping. New homes come on the market every day, so it's imperative to stay on top of listings, whether that means signing up for online alerts or checking in with your realtor daily. Bull also suggests making it a priority to see homes the day they hit the market, or the first available showing, and always be ready to sign an offer. You may even want to keep your lender "waiting in the wings," she says, so that you can get an updated pre-approval letter quickly.
Once you've found the home of your dreams, it's time to make an offer. The seller may flat out reject your offer, counter your offer, or accept it. If they counter, you may accept their counter, or you can counter their counter offer. Your real estate agent will want to know your top budget beforehand and will negotiate on your behalf. Bull said the most desirable offers come from cash buyers who don't have any contingencies, because those deals can close within a week. But most people do have financing contingencies, meaning they're required to work with the bank to secure a loan, which can extend the closing process to up to 45 days. Once your offer is accepted by the seller, a contract for sale and deposit paid to the listing agent will bind the offer.
At the signing of the purchase and sale agreement, the buyer will also need to provide an additional deposit — typically 5% of the down payment price (minus the deposit already put down). The purchase and sale agreement also lays out several dates for when things will take place, including the inspection and appraisal, and the financing deadline, which will require the remainder of the down payment. As the buyer, it's your attorney's job to make sure the transaction is successful. They will review the terms of the purchase and sale agreement and get back to the seller's attorney about re-negotiating any of the terms. The purchase and sale agreement will state the final price and all other terms of the offer. The sale is only final if all terms are met. The attorney will also do a title search on the property to ensure there are no liens from the previous owner, like defaulting on their mortgage, for example.
Typically a purchase and sale will include an inspection contingency. An inspector will make sure the buyer is purchasing the property in the condition stated in the offer. It's paid for by the buyer and usually costs anywhere between $300 and $600, depending on the size of the home. If problems turn up, the buyer can re-negotiate with the seller to pay for any repairs or lower the price, or even back out of the deal completely without losing the deposit.
The lender should be keeping tabs on interest rates because they fluctuate daily. It's usually locked right after the purchase and sale agreement, but if the rates drop significantly, it can be relocked. You can choose either a fixed-rate mortgage or an adjustable-rate mortgage (ARM). The key difference between the two is that with a fixed-rate, you will lock in one mortgage rate for the life of the loan, either 15 or 30 years. Your monthly mortgage payment will remain the same until you pay back the loan, unless you refinance. With an ARM, your monthly mortgage payments will be the same for a set period of time — usually anywhere from three to 10 years — and then change annually thereafter based on the current market rate. This will typically give you a lower initial interest rate, but won't guarantee predictable payments for the life of the loan. Your lender will be able to help you choose the loan that's best for your situation.
If you're taking out a home loan to finance the purchase, the bank will want to ensure the price is an "appropriate deal," says Bull, so they'll send a third party appraiser to analyze the property and pull neighborhood comps to determine the property's value. If the bank doesn't think the property is worth what the offer states, they may re-negotiate with the seller. If the seller doesn't budge, then the buyer may have to come up with the difference in cash.
If the property is being financed, you will need to purchase homeowner's insurance before closing. This is not required if you're buying a condo or townhouse where the homeowner's insurance is covered in the association fee.
Once the mortgage is obtained, the lawyers will set a date for a final walkthrough and a closing. The final walkthrough usually takes place a day before the closing and it's a time when the buyers can physically confirm that the house is in the condition as agreed to in the contract, says Chedid.
On the day of the closing (also known as the settlement) you will sign a lot of paperwork — more than 20 documents — and the final funds will be distributed, Chedid says. It's a process that could take up to two hours. "Once all the papers are signed, the buyer is now a homeowner," Chedid says.
This brief overview should help put you on the path toward filling in any gaps in your home buying knowledge. Remember that the more you educate yourself about the process beforehand, the less stressful it will be, and the more likely you will be to get the house you want for a price you can afford.
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