Interested in buying a home or beginning in real estate investment?
At some point in our lives we all have these thoughts:
- Can I afford a home?
- Can I take care of the home once I buy it?
- What about rental properties, flipped properties and commercial buildings?
- I wonder how they do it.
Well, I am going to walk you through the process of buying a basic starter home. One that can give you a firm foundation into gaining equity and eventually trading up to a larger home as family and needs grow.
Searching for answers to these questions seems to depend on who you know and trust. I have had a range of young graduates to seasoned, successful business people tell me they have virtually no idea about real estate.
Truth is everyone, rich or poor must start here.
1. Assess Your Financial Condition. Determine how much of your income you currently spend on housing, utilities, etc. If you are living at home (as many are today after the recent recession) you may not be paying much. But, assuming you are working and have steady income ask yourself how much you can afford. Underwriters (those who evaluate creditworthiness for lending institutions) look for your total housing expense to not exceed 28-30% of your gross income. Hence, if you make $50,000 annually, then using this ratio you can afford a house payment at the high end of $1,250.00 per month. Once you settle in your mind that you have steady income and want to pursue buying a home, begin by having a conversation with a good reputable lender. They will peel the skin off the apple and soon you will know if your internal assessment matches real life experience of getting a loan to buy that first home.
2. Figure out your down payment. While this can be scary don’t be overly concerned to begin with. Surprisingly, there are a multitude of programs and loans that can minimize the need for a large down payment. Don’t get me wrong, cash is king when it comes to negotiations but not always. We will talk about that a bit later.
3. Find a lender. Once you have been through the initial evaluation and have received a “pre-approval letter” from your lender you can start looking. The lender will have discussed the down payment requirements and have helped you to determine the amount and source of the down payment.
4. Start your search online right here. Or contact me. Sign up for an account to save searches and get notified as soon as houses that meet your qualifications hit the market. When you’re ready, we’ll look inside and see if the home meets your needs. As you begin to see various homes within your budget, I will work to keep you focused on your top three choices. Important Note: The first rule of real estate buying is to never fall in love with a property! You will understand why as we move forward in our evaluation of the home buying process.
5. Finding the Home. So, after one tour of one or more homes or, an exhausting two month extravaganza of tours, more internet searches, querying the multiple listing services and 3:00 AM and constant evaluation you find the home you want. It is perfect, maybe, or, it was the best we could get for the money. Or, as you have gone through an overwhelming speed tour of homes that have become a blur in the cranium you settle on making and offer. This is where it gets interesting.
6. Making the Offer. This is where having a professional, experienced, and caring real estate broker comes in handy. Too often folks are eager and want to make a full price offer or perhaps have in their mind “everyone negotiates” and makes a low ball offer destined to insult the seller. The broker can provide insights and counsel on the market conditions, strategy and construction of an offer that is competitive and hopefully wins the heart of the seller. The truth is, the offer a successful buyer makes depends on a lot of variables and most buyers can benefit from the wisdom of a seasoned broker. For now, let’s assume you have submitted the best offer and the seller is eager to work with you and sell you their beloved home. Now what?
7. The Purchase and Sale Agreement. The contract or agreement is signed by all parties and submitted to the lender and the Title or Trust company. Your hard earned earnest money (usually 1%-2% of the purchase price) is submitted to the Title Company who holds it in trust as a neutral third party. They derive all of their actions or decisions from the agreement. The agreement is controlled by both the buyer and the seller. Nothing changes without the consent of the parties guided by the agreement. This is true unless one or more parties to the agreement act in “bad faith,” which does happen from time to time.
8. The Financing. Once the agreement is signed all timelines for financing, inspections and contingencies begin. The lender, usually the one who gave you the pre-approval letter will begin preliminary underwriting. They may have already asked you for tax returns, W-2 wage statements, investment accounts, credit reports and other information relevant to your ability to repay the loan. If they didn’t before, they will once the agreement is in their hands. They run your credit initially and near the end of the process, so understand that buying a car, refinancing student loans and a lot of other seemingly innocuous adjustments can adversely impact your final approval.
9. The Inspection. One of the most important aspects of buying a home is knowing what condition the property is in. More important defects require repair or a decision to walk away from the purchase. The inspection truly gives the buyer an understanding of the condition of the home and lets them know that there are certain items that must be taken care of. I usually counsel my clients to ask for repairs when there are “life-safety” concerns such as dangerous electrical or plumbing situations that can cause injury. Interestingly, inspectors tend to write their reports in terms that can be frightening to the uninitiated. I caution clients to understand that the inspector writes from a perspective of providing a wide spectrum of issues as well as minimizing liability. The inspection can easily allow a buyer to walk away from a sale however, it is often a better negotiating tool than a simple escape clause
10. The Appraisal. Once you are done with and have accepted the inspection the lender will order the appraisal. The lender, rightfully wants to ensure that the property is sufficient collateral for the loan and that the value is truly present. Sometimes the appraisal comes in over the agreed upon price and sometimes it comes in low. If it comes in low the entire sale can unravel. The seller can lower the price to meet appraisal, the buyer (you) can decide to walk and get your earnest money back, or seek a second appraisal. In some cases the initial low appraisal can be appealed by the real estate brokers finding additional or overlooked comparable properties. The appeal decision is solely that of the appraiser and can depend on a lot of variables.
Things to Note
1. Final Underwriting. Once the appraisal comes in at or above value the lender moves toward final underwriting. This is the final step before loan documents are produced and sent to the title company for closing and recording. BE CAREFUL! Hopefully you have been responsive and provided all requested documents and letters requested by the lender up to this point. Amazingly, the underwriter may come up with new questions or conditions that might derail the purchase or drive you completely nuts. It is best to be responsive and do not over react to the new requests.
2. Loan Documents. Once you have run the gauntlet of loan underwriting, inspections, apprai.sal and final underwriting the lender produces final paperwork. Much of what is produced are documents necessary to show ownership and interest for the buyer (and the lender in the event you are unable or unwilling to pay the obligations associated with the loan). Most buyers have trouble with this however, when economic conditions change in a family the unfortunate situation may be foreclosure, short sales or deed-in-lieu of foreclosure.
3. Signing and Recording. Once all documents are at title you and the seller will sign and the transaction will close. In most cases the transaction is recorded in the county Clerk’s office to show the world that you are the owner of your new home. Once the transaction is recorded you can take possession of the home.
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