Introduction to How Buying a House Works
On average, people move to new homes about every seven years. That means that every seven years, people just like you are driving around neighborhoods, checking out schools, walking through complete strangers’ homes, talking with bankers, and spending large amounts of money (i.e., keeping the economy rolling). The process is a long and sometimes difficult one, but also one that can bring with it a lot of excitement and joy if you find your dream home and can afford it.
In this booklet, we’re going to go through the steps involved in a search for the perfect home. Why do you need to be pre-approved by a bank? How do you negotiate the deal? And, how do you keep from getting a lemon?
The key to buying a house in any market is to do it intelligently. Do your research, don’t over-extend yourself, put as much money down as possible and buy something you really like. You can pay too much in any market. There are also too many variables that affect housing prices – most of them out of our control and many that can’t be anticipated.
Are You Financially Ready?
You’ve decided that you would like to become a homeowner. Now, the next step is to determine if you are financially ready to purchase a house.
There are a number of simple calculations that you can do to evaluate your current financial situation, how much house you can afford and the maximum home price that you should be considering.
It is important to know your net worth because you will need this information when you discuss a mortgage with your lender. Your net worth is the amount left over once you’ve subtracted all you owe from all that you own. This calculation will give you an idea of your current financial situation and also a view of how much you can afford to put as a down payment.
How Much Can You Afford?
Now that you have a clear picture of your current financial situation, it’s time to find out what you can afford in monthly housing costs. Lenders follow two simple affordability rules to determine how much you can pay.
- Your monthly housing costs shouldn’t be more than 32% of your gross household monthly income. Housing costs include monthly mortgage principal and interest, taxes and heating expenses — known as P.I.T.H. for short. If applicable, this sum also includes half of monthly condominium fees and the entire annual site lease (in the case of leasehold tenure).
Lenders add up these housing costs to determine what percentage they are of your gross monthly income. This figure is known as your Gross Debt Service (GDS) ratio. Remember, it must be 32% or less.
- Your entire monthly debt load shouldn’t be more than 40% of your gross monthly income. This includes housing costs and other debts, such as car loans and credit card payments. Lenders add up these debts to determine what percentage they are of your gross household monthly income. This figure is your Total Debt Service (TDS) ratio.
Will You Have Trouble Qualifying For a Mortgage?
Your calculations may show that you will have trouble meeting monthly debt payment and that you will likely have trouble getting approved for a mortgage. Here are some things you can do:
- Pay off some loans first
- Save for a larger down payment
- Revise your target house price
Get a Pre-approved Mortgage
Once you’ve made the necessary calculations and feel that you are ready to seek out a mortgage, it’s a good idea to select a lender to get pre-approved. This means that the lender will look at your finances to establish the amount of mortgage you can afford. At that time, the lender will give you a written confirmation or certificate for a fixed interest rate good for a specific period of time.
Need vs. Want
Armed with a realistic price range, you can now start the process of finding that perfect home. Here is also where you have to keep a level head and think about what you “need” versus what you “want” in a home. Hopefully you can get both, but be prepared to give a little on some things that you don’t really need.
Keep in mind that finding the perfect home isn’t always possible simply because it may not exist. Make a list of things you absolutely need, like three bedrooms, a backyard, a good school district, etc., as well as a list of the things you want, like hardwood floors, skylights, a “smart” house or a large foyer. (a checklist included in this booklet for you.) Then prioritize those things. If you find a house that comes close to having all of your NEEDS but doesn’t have everything you WANT, give it a second look.
By keeping these distinctions in mind, you’ll prevent yourself from prematurely ruling out certain houses without seeing them first. While this house has hardwood flooring, built-in book shelves, and a gas fireplace, it does not have the formal living room the buyer needs for entertaining.
Types of Homes
When thinking about what you need, don’t forget to think about other types of homes such as condos, duplexes, and so on. Depending on the stage of your life, a condo may actually be a better fit for you. Think about it — no lawn or snow maintenance, pool/clubhouse amenities, and often lower costs and better security.
For example, someone who is single and travels a lot for work probably doesn’t need as much space and doesn’t have the time to keep up a lawn or snow removal. In this case, a condo may be the perfect home. The same argument goes for retirees who may travel more or simply don’t want the upkeep involved with owning a single-family home.
If you really want to get specific (although it will shorten your list of potential properties) you can even think about the style of home you want. Once you know what you want and/or need, it’s time to determine where it needs to be.
The Great House Hunt
Once you’ve made the decision to use me as your agent, we are ready to start house hunting. I will search the Multiple Listing Service (MLS) and give you a printout of houses that meet the criteria for your ideal home. Don’t forget to do some looking around of your own just in case I miss something. This is where the communication between us is important. I need to have a really good idea of what you want in order to make our search as efficient as possible.
After we comb through the MLS printouts, appointments are made to see the homes that you think may best meet your needs. When we visit homes, the homeowners are typically absent. This gives us the opportunity to discuss the home freely and inspect things a little more thoroughly than you would if the proud homeowner is right there the entire time.
How Long Should It Take to Find What You Want?
In seller’s markets, often I show only one home. After all, how many homes does one family need? A few buyers will look for years, but buyers who do that aren’t motivated. A motivated buyer will find a home within two weeks. Most of my buyers find a home within two days. Good real estate agents will listen to your wants and needs and arrange to show only those homes that fit your particular parameters.
How Many Homes Will You See?
The average number of homes that I show to a buyer in one day is seven. Any more than that, and the brain is on overload. Therefore, don’t expect to see 20 or 30 homes; although it’s physically possible to do so, you probably will not remember specific details about any of them.
How to Rate Inventory
- – Bring a digital camera and begin each series of photos with a close-up of the house number to identify where each group of home photos start and end.
- – Use the checklist I have provided for your and take copious notes of unusual features, colors and design elements.
- – Pay attention to the home’s surroundings. What is next door? Do 2-story homes tower over your single story?
- – Do you like the location? Is it near a park or a power plant?
- – Immediately after leaving, rate each home on a scale of 1 to 10, with 10 being the highest.
View Top Choices a Second Time
After touring homes for a few days, you will probably instinctively know which one or two homes you would like to buy.
Ask to see them again. Second viewings are very important.
You will see them with different eyes and notice elements that were overlooked the first go-around. See them at different times of the day. At this point, the listing agents will be contacted to find out more about the sellers’ motivation and to double-check that an offer hasn’t come in, making sure these homes are still available to purchase.
Making the Selection
I’ll let you in on a little secret. I generally know which home a buyer is going to choose, and most other agents operate the same way. It’s an intuition. But I make it a practice not to steer buyers, and I insist that buyers choose the home without interference from any of me. It’s not my choice to make. Real estate agents are required, however, to point out defects and should help buyers feel confident that the home selected meets the buyer’s search parameters.
Making an Offer
When you’ve found the house and are ready to make an offer, there are several steps you need to take and contracts that need to be drawn up. Here is where your real estate attorney and agent really comes in handy.
The first thing that happens is your official offer. When you make the offer, you have to keep in mind that it could easily become a legally binding contract if the seller accepts it.
Because of this, you need to make sure the offer includes all of the contingencies, concessions, and other details you need it to cover.
Here are some examples of things that should be included your offer:
- Your offered purchase price and the amount of earnest money (deposit) you are putting down
- Home inspection contingencies: Since the inspection may take place after the offer is accepted, you need to state that the entire deal is contingent upon an acceptable inspection report. If the house is on a well and septic system rather than city water and sewer, these should also be inspected.
- Financing contingencies: You can also include a contingency for getting the mortgage you want (i.e., maximum interest rates, expected terms, etc.)
- Items included in the purchase: This list can include things like major appliances lighting fixtures, shrubbery, basically anything that isn’t nailed down and some things that are!
- Title contingencies: Your attorney will do a title search to make sure the property does not have any other legal claims against it and that the seller holds a clear title to it.
- Timeline: A deadline for responding so you know when to consider the offer rejected CounteroffersThis back and forth dickering can go on a couple of times until you come to an agreement, or someone else steps in and offers the asking price!Just remember that until you have a signed contract, anyone else can step in and make another offer.
- Your agreement may not be only about the money, either; there may be other terms and demands that you have to deal with.
- After your initial offer, the seller may counter with a price just slightly below their asking price.
It is a very infrequent occurrence that an initial offer is accepted. You can almost always expect some sort of counter to your offer and negotiations. It may be strictly related to price or it may be the fact that you want the porch swing and washer and dryer included in the deal. Be prepared for some haggling.
It’s extremely important that you keep your financial state of affairs in mind and not let your heart make you house poor. (House poor is when you’ve overspent your budget on the mortgage and now can’t afford to buy new drapes for the house or take your spouse out to dinner!)
Another helpful tidbit of information has to do with why the sellers are selling and how long the house has been on the market. Are they building a house and trying to meet a construction deadline? Have they already moved into another home and are now carrying two mortgages? Has the house been on and off the market for a year or more? All of these things can strengthen your negotiations in the deal.
Finally, be realistic in your offer for the house. Don’t make a lowball offer on a house you really want. If your research has shown that the price is realistic, then offering a really low price is only going to annoy the sellers and potentially upset your chances of getting the house — particularly if there are others folks making offers, too.
Closing the Deal
Assuming the inspection turns out well, the financing is going through to your satisfaction, and all other contingencies are met, you’re now in the home stretch. Your attorney will do due diligence, which includes a title search to determine if the seller does indeed hold the title to the property and there are no other legal claims against it. This along with the home inspection will complete the due diligence package.
If everything is clear, then you’re ready to sign what may seem like the largest stack of documents you’ve ever seen! It is at the closing that the title to the property will be transferred to your name, your homeowners’ insurance (which you have to have already secured) begins coverage of the property and you are officially committed to your mortgage. It is, unfortunately, also time for you to plunk down your cash for the down payment and closing costs. You should be able to get a copy of the settlement statement that includes the amount of cash you’ll need at closing from your lender a day or two prior to the closing. Knowing these costs is important since you’ll need to pay your down payment (and usually your closing costs).
Major Points of Inspection
Here is a list of some of the major areas inspectors will cover:
- Foundation: With either a basement or a crawl space, is it simply damp or are there outright water problems? Are there any cracks in the walls or floor that might indicate structural problems?
- Construction: Does the house have good quality construction? Is the flashing properly installed to protect wood, are there any rotting problems with the wood, is the roof in good shape or will it need replacing soon, etc.
- Plumbing: Has the plumbing been properly installed? Is it in good shape? Is there any evidence of leaks?
- Heating and cooling systems: Are the units in good shape? Will they need replacing soon? Are they rated for the amount of square footage they are heating?
- Electrical: Do there appear to be any electrical problems or code violations?
- Interior: Are the floors level? Do windows and doors function properly? Do the appliances in the kitchen function properly? Is there any evidence of leaks or mildew in the bathrooms?
The bottom line is, don’t skip the inspection and make sure the inspector you hire is experienced and certified to do the job.
Move into Your New Home
So you’re ready to start life in your new home — congratulations! Now all you have to do is get yourself, your family, and your belongings there intact. You can save time and energy by hiring a moving company, or save money by doing it yourself — it all depends on how much stuff you have, how far you’re moving, and how much you can afford to spend.
Hiring a moving company
The key to choosing the right mover is trust. To find a company you can have confidence in, look for one that:
- Has been in the business for a number of years
- Has a clean record with the Better Business Bureau®
- Can provide several references to satisfied customers
- Meets the standards of your state’s professional association for moving companies, if there is one
- Label each box you pack, and keep a list of its contents to make unpacking easier.
- Set aside a box of items you’ll need immediately after you arrive, such as cleaning supplies, kitchen utensils, dinnerware, bath items, tools, and a telephone.
- Have kids pack a box of their favorite things to unload right away at the new house.
Your move may not require professional help, but pulling it off successfully does require a professional approach. You wouldn’t want your moving company taking shortcuts, so why should you? Preparations should start well before moving day and keep these tips in mind:
- Get the right moving supplies, and plenty of them. High-quality boxes, padding, and other packing materials are a good investment.
- Take a room-by-room inventory of everything you will take with you, and get rid of the rest either in a garage sale or by donating it to charity.
Making yourself at home in your new surroundings is about more than unpacking. Try to explore the neighborhood and get acquainted with neighbors right away. Ask about stores, playgrounds, and places of worship, so you don’t have to put your life on hold while you familiarize yourself with the area.