BUYING A HOME
There is a process to buying a home and, all too often, things can be overlooked. That’s why it is important you have some kind of plan as you begin your search. A fundamental way to approach a home purchase is to break it down into time categories, or periods of the transaction process. You essentially have pre-purchase, the escrow period and a post-closing time frame. As each time period approaches, and ends, there is a greater intensity around buying a home. Your must establish your guidelines and do your best to stick with them.
Pre-purchase is that point in buying a home where you begin to decide upon important issues like your minimum square footage, bedrooms and bathroom(s), the size of the garage and how big of a lot you’ll need. What you can afford to pay each month will have a large influence on the locations you can select. Be aware of this fact. Proximity to your work location is essential. For example, people tend to become very excited during the process and they could love a home so much that they might rationalize adding another 15 miles each way to their daily commute. What they might fail to understand in that moment, is that the added 30 miles roundtrip could add and hour or more to their daily commute. It doesn’t take long when driving that far, to realize a mistake may have been made in their home buying process.
After a home has been selected and the negotiating process is over, the buyer and seller enter an escrow period. An escrow company is hired to see that all of the administrative tasks required in buying a home are executed prior to the close of a transaction. There is interaction with real estate agents, inspection companies, an appraiser, a title insurance company, lenders, termite companies, insurance agents and many other parties required to close the transaction.
The post-closing period starts a mad rush after buying a home. Packing should have been nearly completed just before the closing and the buyers and sellers typically have just days to leave the property after the transaction has been completed. By planning for these rush days in advance, like mover or rental truck coordination, buyers and sellers can minimize their post closing stress. Your real estate agent should provide you with check lists about what you can do during the process to minimize the pressure you may feel. The more planning you do, generally speaking, the less stress you’ll have while buying a home.
THE HOME BUYING PROCESS–FINANCING
There are many opinions about the home buying process and how it should be approached. There is clearly a lot to the process and we will touch on many of the important items. Underlying any of the many steps in the home buying process, however, is a need to do proper research and to understand the local market and the value of the property you are considering. You do need to start with some basics:
How much do you have for a down payment and closing costs?
How much can you afford for monthly payments?
What are your minimum requirements for a home?
Are schools and shopping essential considerations?
Is proximity to a medical facility essential?
The above items represent things you may have to deal with on a daily basis and so your proximity to services and your ability to afford them will have a big, and long-term affect on where you live and your lifestyle.
Down Payment and Closing Costs
The answer to question one is fairly easy. You have what you have in cash in the bank, or in liquid financial resources, such as stocks that can be turned into cash for a down payment. Knowing your available funds for a down payment and closing costs are important when buying a home, because it will tell what type of financing you need to consider.
Monthly payments are determined by the amount of the loan, the interest rate, the term of the loan (in number of years) and the payment structure. Some payment schedules include principal and some are interest only. Still others include the annual property tax and insurance payments in the payment. Financing is a key consideration in any transaction, so look out for yourself and review your options carefully. First time buyers should seriously consider an “impounds account”. This loan payment feature lets you make monthly payments towards your insurance premium and property taxes. This method will help you avoid the surprise of a big tax or insurance premium bill since you can spread the cost over twelve months a year. There are numerous loan package options:
Fixed rate- meaning that the interest is fixed for the term of the loan
Adjustable rate- meaning the loan is generally fixed for a certain period of time (often 3,5,7 years) and then begins to adjust to then current mortgage rates in incremental steps.
Alt-A- which typically means that rates will be higher because the borrowers credit score is lower than requirements for “best rate” status.
Sub-Prime-, which generally means that the borrower is even higher risk due to some past issues with credit. While credit is still good enough to qualify for a particular loan, there are often higher rates and higher loan fees associated with these loans due to a higher perceived risk of that loan and borrow.
Interest Only- this usually only lasts a few years before you have to begin paying down the loan.
These are just a few of the options available. There are also varying times in terms of length of the loan period. 15 or 30-year loan terms are the most popular today, but there are even 40 year loans available. Your loan choices should be determined by your individual goals and how long you intend to stay in your home.
Financing options are designed to get you into a home, not necessarily keep you in it. Remember, all of the service providers who participate in a transaction, do not get paid until a transaction closes escrow. So, they all want to see you qualify for your loan. Buyers beware! Not all loans are good loans. They can be very costly and carry pre-payment penalties with them so you need to fully understand your loan program and the costs of loan origination. Here are some Basic Rules of Thumb:
The less you have for a down payment, the higher the loan-to-value ratio (LTV) on the home you are considering. LTV equals the loan amount, divided by the purchase price. Some people are able to qualify for a 100% LTV. Meaning, their credit is sufficient for the lender to loan the full purchase price of the property. You should be aware that as your LTV goes up, you interest rate typically goes up as well. Higher interest means higher monthly payments.
If your LTV exceeds 80%, lenders require that you carry Private Mortgage Insurance (PMI). PMI is a “hedge”, or a kind of insurance policy against default and foreclosure of a property. This generally adds another ½ % to the loan amount to be applied against the loan. On a loan of $300,000, that would add another $1,500 in interest per year (approximately) or $125 per month. Sometimes, a buyer simply has to deal with this issue to get started with home ownership. (Note: In many cases, homes appreciate in value and as they do, the LTV goes down. So, a buyer that initially started with a 90% LTV, may have an 80% LTV within a few years. This is not because that paid the principal down a great deal, but because the property value went up. The buyer can appeal to a lender to remove the PMI premium if an appraisal reveals a significantly higher market value and an LTV of less than 80%. In the case mentioned above, the buyer would be saving $1,500. Per year in payments.)
As a final note on financing a transaction, try to originate a loan that will help with your primary goal of getting into your home. However, you should also try to consider the longer term and find the loan that will also help you manage the affordability of your payments over many years.
Handling the financing in the home buying process is one of many things with which you’ll be faced. Once you find out how much you can afford, you can begin to concentrate your efforts on finding the home of your choice. In most every county in the United States, you will find areas of affordability. There are some exceptions to this in areas that are more affluent or that have hyper-inflated to a very higher degree. The important thing is that you need to understand were your can afford to buy a home. Some regions publish price information by zip code. Or, you can consult HomeSmartReports to understand affordable value ranges. Still another choice is to consult a professional real estate agent.
Any of these resources is a step in the right direction in understanding home values in areas you can afford. The home search process can be tedious. It will be even more tedious if you continue to look for homes that are priced outside of your range of affordability. Once you have determined where you can afford your home buying pursuit, you should then determine what your minimum requirements are to satisfy your needs. That is, how many bedrooms and bathrooms and the size of the home. Again, you need to manage your own expectations and buy the home that suits your tastes, as well as your budget.