how to buy a house
You will read all over the Internet, hear from friends, and see advertisements about how to buy a house. The concept is simple. You see a house, negotiate terms, get a loan, and then move in. That really is the process in a nutshell.
As a homeowner, investor, and Realtor, I think I can provide some insight into the process that you will find useful. I've purchased a condo, a house in a flood zone, and more standard single family homes. Regardless of the property, the process is generally the same. My approach may be different than some Realtors, but my goal is to get you the house you want, while also providing my advice on how to get your house paid off fast, getting you a great deal, and offering guidance on the long-term outlook of your house, which will affect your ability to sell or rent it when you move. Without further ado, let's get started. The Search Assuming you have decided you want to buy a house, you probably have also decided what type of property you want based off your needs. Do you need a big yard, or would a town home fit? Are you retiring and need a small condo? The search, in my mind, is the first step when deciding to buy a house. You've got to get a feel for what you want, sort of like test driving a car, or testing our a camera at Best Buy. You've got to get your hands on the house, in other words. Once you've identified homes that you like, a good next step is to go see it. Many Realtors don't work with clients that have not been pre-qualified, but I do. The problem with this I don't want someone getting pre-qualified and have their credit run before they check out a few houses to see if they're interested. A word of caution regarding affordability: the mortgage estimates next the price of homes on Zillow or any of the other sites are never accurate in terms of what your actual monthly payment will be. There's a lot to factor in your monthly payment, and we'll get that later in this guide. Move In Ready or Fixer Upper? It's certainly easier and simpler to buy a move in ready home, especially if you are in a time crunch. If the house has been well-maintained and it's priced to sell, then that is a solid option. But often times, sellers are opting to get as much for their house as they can, and as result, it forces people out of the neighborhoods they want to be in. So what can you do? You can buy a foreclosure, short sale, or fixer upper. There are numerous loan programs that allow you to get all of the repairs in your monthly payment. You can buy foreclosures from the Housing of Urban and Development (HUD), the Veterans Affairs (VA), and other agencies. Prices ebb and flow with these foreclosures, but if you look closely, you can find some incredible deals. I know because I have done this. I'm very familiar with the process of how to win these deals, get them financed properly with reputable contractors, and move in quickly. If you do it right, you can get a property fixed up for about 25%-35% off market value. By getting such a good discount, this enables you to save $100-$200 each month by eliminating Private Mortgage Insurance (PMI) or Mortgage Insurance Premiums (MIP). More on that later. The Mindset Whether or not you buy a move-in ready house or a fixxer upper, don't get hung up on the details of a house such as the color of the paint or the type of lighting the kitchen has. In the big picture, these are minor details. What I encourage buyers to consider is looking at the big picture: the location, the bones of the house, and the major repair items and the condition that those are in. Is plumbing, electrical, and HVAC recently updated? Was the roof just replaced? These are big-ticket items, and although they are not as fun to check out like the fancy kitchen or master bathroom suite, they are extremely important to your wallet. In addition to the financial angle, think about your lifestyle. Will this yard allow me to build my own garden? Does the yard get enough sunlight? If I wanted to build a deck, is there enough space? Does the yard offer enough privacy and if not, will I have space to plant trees and build a fence? These types variables are important because they're not changing. When buying a house, it's good to remember you're buying the house plus land (with the exception of condos and timeshares). Bank Pre-Approval Here comes the financing. For your sake, there's no sense in checking out homes, viewing incessantly online, and getting excited about houses that are not going to fit your price range. And when I say price range, you need to find out how much the bank is going to let you borrow. Do you have outstanding credit card debt that might be weighing you down from buying a house? Are you currently a homeowner but wanting to buy something bigger and need to rent your house out because you can't sell it for what you owe? These are all questions that need to be answered, and a competent, experienced lender will guide you through this. Home lending regulations change frequently, as you can imagine from the Great Recession. Down Payment The traditional 20% down payment is not required to buy a house. Is it a good idea? Yes, of course. Is it incredibly difficult? Yes, it absolutely is. If you can put 20% or more down, then definitely considering do so. But if you can't, there are some loan programs that require 0% down (VA), 3.5%, and more. In Norfolk, there is a special program where the city actually gives you $40,000 towards a down payment! These programs vary and again, a trusted, local lender that is approved for some of these programs will be crucial to you getting the best loan type. Mortgage Terms Almost every lender will pre-approve you for a 30 year loan, but there are lots of different types of mortgage terms. Thirty years is a long time. I encourage people to consider 20 year and 15 year mortgages. If you're really courageous, you could consider a 10 year mortgage 40 Year Loans You may have not heard of this, but yes, you can get a 40 year fixed rate mortgage. I actually know a young married couple that got one of these loans because of the low monthly payments. It enabled them to buy an expensive home in an expensive neighborhood that fit their budget. The trade off? When they moved five years later and sold their house, they probably didn't have much equity in the house, but nonetheless, they enjoyed the big house, in-ground pool, and two garage. A 40 year fixed rate loan will carry the highest interest rate compared to 30, 20, 15, or 10 year mortgages. 30 Year Loans This is the most common loan term American homeowners get. The reason for this is the same as the 40 year loan, except it allows for more of each monthly payment to pay down the principal of the loan. The 30 year mortgage is any ways the "standard" mortgage most people get. As with most loans, you are able to pay it off earlier if you want. Additionally, a 30 year mortgage will have a lower interest rate than a 40 year mortgage. 20 Year Loans This mortgage is not that popular but should be. With slightly lower rates than a 30 year mortgage, the monthly payment on a 20 year mortgage is a great way for homeowners to build more equity fast while still benefiting from a reasonable monthly payment. On a $200,000 home at a 4% interest rate, a 20 year mortgage would be only $250 more each month compared to getting a $200,000 home at 4% on a 30 year loan. Knocking that additional principal off each month will quickly allow you to own your house outright, giving you the opportunity for a home equity loan, instant cash-flow if you rented your home, or just stress-free financial pressure knowing that you don't have to pay the bank a big check each month. 15 Year Loans These loans are terrific, if you can afford them. It's amazing how much more the monthly payment is compared to a 20 year loan, but if you can handle the payments, it's definitely worth it. The difference between a 20 year loan and a 15 year loan is about $250 more each month. That's a nice chunk of change for just a difference in five years. 10 Year Loans For obvious reasons, these are the least common mortgages purchased by Americans. A 10 year mortgage at 4% for a $200,000 home would be roughly $2300 each month (this includes your principal, taxes, and insurance). That's a high-price tag, but you'll own the house in 10 years. My Thoughts On Mortgage Terms There are various thoughts and opinions on what mortgage term to get. Some folks, like Dave Ramsey, recommend only getting a 15 year mortgage because of the obvious advantages. Other financial experts strongly recommend obtaining a 30 year mortgage, because over time, your payment will remain same, but your earning power should increase and your should appreciate, thus making your monthly payment very low. It's suggested that if you're interest rate for your property is low that you should use the extra money you'd pay down your house with and invest it in the stock market, where historical returns are higher than the average mortgage interest rate. I tend to think both opinions are right, but I heir on the side of paying off your house faster and instead of intentionally delaying it. The first reason is that the primary purpose of your house is that's it's a place to live, to call home, and establish roots. While it can be an investment, it should not necessarily be treated like one as you would with your stock portfolio. Taking bets on your house is putting you and your family at risk, and not something I recommend. On the other hand, getting a 15 year mortgage, despite its numerous advantages, also puts your family at risk. You do want to get the house you desire, in school system you desire, and in the location you want. Many times, it can be pricey, therefore requiring home buyers to get a 30 year loan. The risk of getting a 15 year mortgage puts you at risk because you are forcing yourself a high payment each month, and you don't have to. What if you run into a bind and can't make payments for a couple months? Will making that high payment each month jeopardize your other financial goals and/or make it difficult for you to do other purchases for your family? Will you be stressed out trying to make that higher payment each month? For this reason, I think getting a 20 year loan is favorable for home buyers. It is a nice balance between the 30 and 15 year loan, and gives you the benefits of both. With the monthly payment similar to a 30 year loan, but by knocking off 10 years instantly, a 20 mortgage is an excellent way to buy the house you want while still maintaining a relatively low monthly payment. And as always, you can make extra payments each month to pay off your house even faster. Another option So what if you want most of benefits of a 15 year mortgage without the risks? Make extra payments each month, or whenever you can. You can almost always make extra payments on a 30 year loan, thus reducing the term, while still receiving the benefit of a lower monthly payment. This approach requires a more disciplined approach, but is a popular method many homeowners use to pay off their house fast. There is a lot to know about financing a house such as interest-free loans, private mortgage insurance, renovation loans, and more. Although I'm not a licensed loan officer, I have a network of several reputable loan officers in Hampton Roads that can assist you. Use the contact form to for more information or call me at 757-897-3538. The Offer Once you've decided what mortgage term you want to use, you know what price range for your new house is. The next step will be to find the perfect house, and submit an offer. The goal is for you to GET the house. It may be the only one in the neighborhood you desire, and you love it. But, you want to get a solid price, and not be house poor. You have to protect yourself. Submitting an offer is more than just calling up the homeowner and offering a price. For them to take you seriously, you'll need to submit the offer and include your bank pre-approval letter for the purchase price, and an Earnest Money Deposit (EMD). An EMD is generally 1/2% to 1% of the purchase price of the house. So for a $200,000 home, a $1000 Earnest Money Deposit is sufficient. You'll need to have this money in your bank, because if your offer is accepted, it will be cashed and go towards your overall down payment. The idea behind the EMD is sort of like when you are renting. The seller wants to know you're serious, and they aren't going to just accept an offer from someone who has no skin in the game. Putting down a deposit shows the seller that you are serious and want to buy their house. Should the contract fall through, you'll generally be able to get your earnest money deposit back, so don't be too concerned about losing the money. Again, the goal is to win the house. This requires putting forth an attractive offer. If you suspect there are multiple offers, then submitting above asking price may be necessary. If you suspect the market is down and there is not much interest, then submitting lower than asking price would be prudent. This is one area where a great agent will come into play, not only for his/her expertise in guiding you about what to offer, but in also dealing with the seller's real estate agent. Many sellers enlist agents that are aggressive, deceitful, and just plain difficult to deal with. This approach is not one that I employ, and these agents are doing their clients, themselves, and the market in general a disservice. Nonetheless, the reality is that seller's agents will be tough. And when you're dealing the house of your dreams, having an agent represent with objectivity is crucial to getting a good deal. A good agent will help relieve and remove you from the emotional side of the transaction, and help you view the offer objectively. As a homeowner, I can tell you that is critical. When crafting your offer, you can ask for more than just the house for a certain price. You can ask for them to leave all of the appliances, for closing costs assistance, for a buyer's allowance, and much more. A buyers allowance is particularly interesting because let's take for example the flooring in the house you want to buy. Everything about the house may be perfect, except the carpet. You want a different type, and replacing the carpet will cost an estimated $5,000. You can offer for a buyer's allowance to replace the carpet. The way this works is essentially on the day you "close," or actually buy the house and become the new homeowner, you will receive a $5,000 check to go replace the carpet. Pretty cool, huh? You can use this approach to most anything regarding the house. Writing the offer will also include details such as when you want to move in, how long of a time period you need to get a home inspection, and more. Again, the stronger the offer (which means many things), the better chance the seller will accept your offer. The Home Inspection Once your offer has been accepted, it's time for a home inspection. This home inspection allows you have a licensed home inspector examine the entire house -- from the crawl space to the roof, and provide you a detailed and written report of his/her findings. These inspections generally take 2-3 hours, and the home inspectors charge by the size of the house. Their fee is normally somewhere between $350-$600. This is money you will owe immediately upon the completion of the inspect, either by check, cash, or credit card. It's suggested that the home buyer be present at the inspection, as the home inspector will be able to walk you through the house, show you any problems, and answer any questions. Your agent will be there as well, but as the future homeowner, it's always a great idea for you to be there as well A good home inspector will tell you what's wrong with the house, and what's good with the house. Sometimes referred to as deal breakers, most are not. It is their job to essentially find something wrong with the house, but your goal is to make sure there's nothing major wrong the house. Minor things like a bad light bulb, broken blinds, or a tear in a kitchen floor is not critical to the "health" of the home. The home inspection is a testy time period. As a buyer, you love the house. You don't want it to be a bust. Then you have to go back to searching for another home. You want the inspection to well, but again, it's important to be objective. This is where a good home inspector and real estate agent helps offset your emotion with reality. So, after the home inspection and you get your report (which only takes 1 day), you will review the report with your agent. Once you've reviewed the report, it's time to determine what repairs you want to be fixed. Maybe the AC was not cooling properly, the roof had some bad shingles, and several outlets were not functioning properly. You will want those items repaired. It's time to negotiate these repairs. If you're offering a good price for the home, then it's reasonable to expect the seller to fix crucial repairs to the home. In fact, depending on the repairs, it may be required in order for it pass an appraisal (more on that later). You and your agent will submit the requested repairs to the seller. The seller will then have a few days to accept, counter, or reject your requests. If they accept the repairs, then they will quickly get those items done so the deal can keep moving forward. If they counter, they'll submit in writing back the items that they will fix and the items that they won't. Then you have to decide if you'll accept or reject it. If they just simply reject your original requests, then you have to decide if you want to buy the house. Some sellers are very particular and not willing to fix repairs, despite their counsel advising them to do so. Think about it from the seller's perspective: you're asking to them to fix items in their house, one that they have owned for several years. It's their home, and they think it's already worth for more than what they're selling it for. It's an emotional trasnaction not just for you but for them. This where their family memories were made. It's where their kids first learned to read, to ride a bike, and more. It is the handing over of a house from one person to another. With that being said, your focus and goal is to be protected, despite their seller's emotional attachment to their house. If you can get past the home inspection period, which is the most common reason why deals fall through, then it's time to move onto the appraisal. You're getting close to finally being able to call this house yours, but there's still several hurdles to overcome. The Appraisal The appraisal is often one of the last things performed during the home buying transaction, and honestly, it seems backwards. But nonetheless, it is what it is. The appraisal is when a licensed real estate appraiser comes to your house and determines the value of the property. They look at recent sales of comparable homes in the surrounding area and determine a value. Once they go through the house and perform their report, they will provide a lengthy written report for you. The process is similar to a home inspection and costs about the same price. The difference is that the bank orders your appraisal from an approved list of appraisers, whereas with a home inspection you get to choose. Why, you might ask? Because if your friend is an appraiser, they might say it's worth whatever value you want it to be, thus creating an unfair advantage to the seller and the bank. The purpose of the appraisal is mainly for the bank. If the bank is going to lend you $200,000 for a house, they want to know that the house is worth $200,000 or more. It not be prudent to loan someone $200,000 for a house that's only worth $150,000. The appraisal is another testy period for both the seller and buyer. What if you agreed to buy the house at $200,000 and the appraiser says it's only worth $195,000? The bank will only lend $195,000, so who comes up with the difference in price, and how? The difference has to be made up with cash when you close, or the seller will have to drop the price to $195,000. Once you're this deep in the transaction, the last thing either party wants to do is have it fall through, so everyone has to come to an agreement and make it work. Another area of contention is when the appraiser finds problems with the house. The bank is not going to let you borrow money if the appraiser says there are problems with the house, regardless if the buyer is willing to accept the house in certain conditions. If the appraiser discovers issues, such as foggy windows or paint peeling, then the seller must fix them soon and have the appraiser go back to inspect it. In the purchase agreement, it is common for the seller promise to fix repairs up to 1%, so you know going into the offer, that this included in the deal. As a seller, this can be very frustrating, because if you've already paid for repairs from the home inspection, now you've got to shell out more money. Sellers are factoring this in when they negoiate the repairs you requested during the home inspection period. In a perfect world, the appraiser will come out and tell you the house is worth several thousand dollars more than the purchase price, and that everything is fine. That is what you want -- instant equity. There ways to buy houses and get 15-25% instant equity. Contact me for how to do that. Title Insurance Title insurance is the opposite of the way we look at insurance for cars, houses, and other items. Title insurance protects you from the past -- liens, encumbrances, or defects to the title. For example, if you were buying a used car, you'd want to ensure you would be getting the title when you forked over the cash for the car, right? The same thing applies, here, too. You want to make sure you're able to get a clear title, free of past judgement, when you buy the house. And it's not just you -- the lender does, too. I had a situation where a client's closing was held up for more than one week because the seller had a past due storm water bill of more than $500. Imagine how frustrating that was. The seller had pay the balance to the city, get the receipt, and prove it to the company issuing the title insurance. Who issues the title insurance? There are specific title companies that provide this. In many cases, real estate attorneys also own title companies, and they are really good to work with. Before a title insurance policy will be issued, they want to make sure the title is free of defects and judgments, so they perform their own title search. The review courthouse documents, utility records, and more. Your buying an expensive piece of property -- getting a clear title is not only necessary, but also very important. A good real estate attorney what I recommend, and if you need one, just contact me and I can refer you to my network of real estate attorney's that provide title insurance. Flood Insurance Flood insurance is a separate policy from your homeowner's insurance. And around here, it's quite common in several neighborhoods in Norfolk and Portsmouth. Let me be clear: houses that require flood insurance can be very risky business. With that being said, they can be a piece of cake, so navigating that can be extremely tricky. I know, because I own a house that's in a flood zone, has a basement, and it never floods on my street. But it floods in my backyard sometimes when it downpours. Flood insurance rates can range anywhere from a few hundred dollars per year to several thousand dollars. A house that requires flood insurance can significantly reduce the price of the home you want to buy. I've seen many times where people fall in love with a house only to find out requires a $2500 flood insurance policy. That policy then pushes their monthly payment too high, and therefore they cannot buy. Most people get their flood rate through the Federal Emergency Management Agency (FEMA), but you can also obtain private flood insurance. Flood insurance quotes can be very complex. Every neighborhood in Norfolk is different with regards to flooding. Some areas flood worse than others. Some homes that are listed in a flood zone barely flood at all. There things to can to mitigate your flood risks and reduce your annual premium. One of those things to do is to get an elevation certificate. This involves hiring a local survey company to do this. The cost is generally $400-$500, and they provide you a written certificate. You can then send this to your insurance provider, and they may lower your premium. The surveyor's will determine how high off the ground your house is, and if it's high enough of the ground, you will see significant savings in your annual premium. Everything about a house that involves flood insurance instantly becomes complicated, from the rates to the maintenance to mitigation of it. With that being said, there are wonderful neighborhoods near the water in Norfolk and Portsmouth that require flood insurance and homeowners don't bat an eye. It's the cost of doing business, so to speak. These are well-established neighborhoods, and the rate is just factored into the monthly payment of the house. I am well-versed in houses in this area, and I have a network of local insurance companies that are excellent that can help you get the best flood insurance rate for your house. The Final Walk-Through This is one of the last steps before you get the keys to your new house. Either the day of closing, or the day before, you and your agent should walk-through the house you are about to buy. This is a last step to ensure the house is in good working order. It may have been two or three weeks since you last saw the house at the home inspection, and perhaps there was a thunderstorm and a branch fell on the roof and caused damage? Or there is a cracked window from a neighborhood playing baseball? Either way, you still do not own the house, and the seller needs to fix the issue. Walk-through's don't need to last more than 30 minutes to an hour max. If everything is fine with the house, you should be getting the keys to it within 24 hours, and you should have plenty of time to get aquainted with your new home. The Day of Closing -- When You Actually Become the Homeowner This is important. You're going to sign the papers and become the proud owner of that amazing house you saw several months ago. This is an exciting day, but don't celebrate too soon. Wait until the keys are in your hand. At closing, you'll be required to bring your down payment and closing costs money to the real estate attorney or title company, which is where you actually sign the papers and get the keys. Some attorneys require you to send your money through a wire transfer, while others require a certified fund from your bank. Either way, you'll need to set aside time the day of closing to get your money from your bank. This takes time, so it's important to plan the day out. If at all possible, taking the half a day or a full off work is simplest thing to do. The signing of the papers will take roughly 1 hour, but making the trip to the bank and doing the walk-through on the same could eat up 3 or 4 hours. At this point, this where most real estate agents say goodbye to you. They give you a few of their business cards and encourage you to tell your friends about them. They hand you the keys to your new place, and wish you well in your new home. But not me. My job continues, which leads me to your move in day. Move In Day Once you've closed on your house, you may be feeling the financial pinch of juggling all of the upfront expenses required to get your dream house. And while it's worth it, it doesn't take away from the fact that your bank is a little bit smaller than it was a few months ago. And to top things off, you have to move! As exciting as finally settling into your new house will be, you have to get all of your belongings there first -- you know, that beloved couch, the dining room furniture, the tools in your garage. The actual process of moving can be daunting, and dangerous, if you're if you're having to deal with multiple stair situations. With me, you don't have to worry. We move you. Yes, we provide professional movers at no cost to you. It's just one of the items in my home buying program. I don't say goodbye to you at closing. Instead, I tell you to let me know when you need the movers lined up, and I help you schedule it. That way you can focus on the fun parts of the move, and not dread the rigorous, physically-exhausting part. The Fun Part Although it might take a few weeks, once you've settled in and are finally able to relax in your house, I make a visit to see how things are going. I always love to see how my clients turn a house into their home, and begin establishing roots in their community. Having a place to call home is so critical in life. And enjoying your home never hurts, too, which is why when I pay you a visit, I come bearing gifts for the whole family. Now, I'm not going to give away the whole surprise, but based off the several months of working with folks, I get to know them, learn about their interests, and develop a feel for what their hobbies are. Each house warming gift is different because each client is different, but if a family expressed interest in riding bikes in their neighborhood, then I'll give a set of bikes for the entire family. Or if my client is super-practical and I know will need a surprise him or her with a brand new lawnmower. My Closing This step-by-step guide is just that: a resource on what to expect when buying a house, the costs involved along the way, and insight into how the process actually work. And while I provided some advice, there is simply just not enough space to include everything. Every transaction is unique, and presents its own challenges. Whether it's a complex condo purchase, a government-owned foreclosure, or single family house down the street, you need an experienced, results-driven Realtor to get you your new home. As your Realtor, it's my goal that you have an enjoyable experience and get the house you want -- when you want it. As I mentioned in the beginning of this, the actual concept of buying a house is simple, but the actual logistics can be very time-consuming, difficult, and downright complex. It's my goal to shield you from as much as possible, and to help you buy your dream home without interrupting your daily lifestyle and the responsibilities you have on a regular basis. And when you do get that house, I want to make sure I protect you with a home warranty, give you a stress-free and sweat-free move, and help you celebrate your new home with the best housewarming gifts in the industry. Are you ready to buy your dream home? Are you ready to start the search now? If so, just call me at 757-897-3538 or email me at [email protected]. I can't excited to start this journey with you. |
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