Most homeowners can clearly recall that moment it became clear that they could, and would, buy a home. Ditching the landlord is a dream of many and when you can see that dream – grasp it – it’s intoxicating.
It’s easy to jump right into the process and let the cards fall where they may, but it’s not wise. There’s a system to buying a home, and those that are successful follow the steps.
Before you jump online to look at homes for sale, start with the basics: the 3 basic things you need to buy a home.
You’ll need a mortgage
Unless you are among the 23 percent of homebuyers who will pay cash for a home, you’ll need to borrow the money to pay for it.
The loan you’ll use is called a “mortgage,” a word which traces its origins appropriately to the Old French “death pledge.” Ok, so 30 years may not put you on death’s door, but it will feel as if you’ve been repaying this loan forever.
But, look what you get in return. The freedom to have a pet, or two. The luxury of painting your living room any color you want and the liberation of knowing that a landlord will never be calling you to schedule an inspection of his or her property.
Shopping for a mortgage is something that shouldn’t be entered into lightly. There is a lot more to consider, for instance, than the interest rate. Always compare interest rate AND lender costs. You can get a lower rate by paying more lender costs, and the lenders call the costs by different names so it can be tricky to try to compare apples to apples. If you are shopping lenders make sure you get the rate AND costs quoted, and then feel free to reach out to me to help you compare them side by side. It can be tricky to understand what are “lender costs” and what are other closing costs on the estimated costs sheet, but I would be glad to help you decipher the cost sheet.
You’ll need cash (almost always)
While I have helped a number of people get into a home for absolutely no money out of pocket (including closing costs), in most cases you’ll need cash for a down payment on the home you finally choose. If you’re using a Veterans Administration or U.S. Department of Agriculture loan you may not have to pay anything in down payment funds.
FHA lenders, on the other hand, base the amount required, at least partially, on your credit score and it could range from 3.5 to 10 percent.
Then, there are the Fannie Mae and Freddie Mac programs which require from 3 to 20 percent down. But, that’s not all the cash you’ll need.
While not the big chunk that the down payment represents, the earnest money deposit will need to be paid when the seller accepts your offer to purchase (or shortly after). The amount of this deposit varies, but it’s typically 1 percent of the purchase price rounded up to the next $500 in our area. At closing, it will be credited toward what you owe.
Speaking of closing, there is a three-word phrase that few people warn first-time homebuyers about: “cash to close.” You may have heard of this chunk of money referred to as “closing costs.”
This amount includes all the fees and expenses that are related to actually making the loan and the closing process. They might include transfer fees and taxes, attorney and notary fees, title fees and more.
While closing costs vary, expect to pay around $3,500 – $5,000 after all debits and credits are applied, unless the seller has agreed to pay all or a part of your closing costs.
This money, along with your down payment, is due at closing so most homebuyers wire the funds to the title company or bring a cashier’s check to closing.
The lender will let you know the total amount of cash you’ll need to close in advance of the actual closing and I check the Buyer’s Settlement Statement line by line for all of my clients to ensure there are no errors. And while I’d like to say I have never found an error, that would not be true. =)
You’ll need a real estate agent
Sure, this sounds like a no-brainer, but you’d be surprised how cavalierly many first-time homebuyers treat this part of the process.
In fact, studies by the National Association of Realtors finds a significant percentage of real estate consumers enlist the help of the first real estate agent they speak with.
Crazy, isn’t it? Americans spend hours on review sites such as Yelp.com in an effort to protect their dining dollars.
They read reviews at Amazon.com to ensure they’re buying the right dog leash for Fluffy. Yet they spend little, if any, time reviewing the qualifications of someone they’ll entrust to help them make what may just be the largest investment of their lifetime.
Don’t be like these people. Real estate agents are not all alike. Read their reviews and learn about past client’s experiences, their negotiating successes, their availability and exactly what they’ll do to help you find a home. Feel free to check out our reviews at www.LloydsReviews.com . We have over 120 Five Star reviews and we look forward to adding yours!
Now, the fun part begins – looking at homes for sale.
