Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected].
Question from Mitch in TN: Hey Brian. I’m 32 and single. My income is about $100,000 with bonuses. I’ve been living a mostly carefree life with some travel, plenty of entertainment, and rent an apartment with the amenities that I enjoy. But as you probably guess at my age, almost all of my old buddies have gotten married and have young kids. The two single guys that I hang out with the most don’t seem to be maturing in life. Lately, I’ve been thinking that’s the same path I’m going down although my career and finances are in better shape than my buddies’ are. I’m at a fork in the road where I need to decide to keep spending my money any which way that I want or start settling down a little. I don’t have any marriage plans in the future or I might be writing to a marriage columnist. So, my logic says buying a home is what I should be considering. How do I know if I’m ready to buy a home?
Answer: Hi Mitch. I’m glad you didn’t ask for marriage advice because I have exactly zero suggestions on that subject. I’m also not qualified to comment on your lifestyle. But, I can probably help you take a closer look at whether you are in the right place to begin your home search. Buying a home can be an exciting and emotional process. The first step is being able to commit enough time and determination to work through the process - even when it gets a little tough.
The two main goals are determining what will fit your lifestyle and wallet going forward. You probably want to consider both a condo in the city or a home in the suburbs. You could consider a single-family home in the city but that’s usually the most expensive proposition for a first timer buyer. Based on interest rates and home-price trends, now is a relatively good time for homebuyers to be in the market. But there isn’t much need to hurry because interest rates are expected to stay very low and home prices have moderated for the time being.
You could try timing the market according to the season. What’s normally the hot spring season has been pushed into the normally slower summer season. There is pent up demand from the coronavirus this spring that could make this a busier summer. Mitch, with time on your side, you can consider the off-season, such as late fall or during the holidays when fewer people are looking. But the best place to begin is by fully understanding your financial readiness. Getting started, you need more than a down payment; you also need enough cash to cover the closing costs. Closing costs can range from 2 percent to 4 percent of the purchase price. You also need to forecast your budget to include property taxes, homeowners insurance, homeowner association fees, and private mortgage insurance if putting down less than 20%. Other new expenses to plan for are ongoing maintenance and unexpected repairs that are bound to pop up. How much maintenance and repairs cost involves the age of the house and how well it has been maintained over the years. It’s also common to want to make improvements and upgrades to a first home.
Mitch, once you decide that buying a home is the right decision for you, here are the steps (in sequence) that typically define the home buying process:
Check your credit score because this is a primary metric that lenders use to decide if they will lend to you and at what interest rate. Lenders also use other factors such as how long you’ve been with the same employer but your credit score has the most impact on your interest rate and therefore your how large of a mortgage you will qualify for.
Save your down payment and closing costs. You can avoid private mortgage insurance with a 20% down payment but realistically, many first time buyers start with a down payment between 3.5% and 5%. The combination of your credit score and down payment both affect your interest rate.
Shop for a mortgage. A lot of people contact a real estate agent first but most agents will ask you to talk to a mortgage provider about prequalifying before going further into the buying process. A mortgage officer or broker will help you understand how much you can afford and what you might do to lower your interest rate so that you can afford more. A mortgage broker or officer can also walk you through different loan options to decide what loan type or program is best for you. As a rule of thumb, talk to at least three lenders.
Meet with real estate agents. Have a conversation with several about your needs and expectations before choosing one. Along with deep knowledge about the neighborhoods you are interested in, an agent should have a strong network of other professionals like home inspectors, contractors, and title companies. A tie-breaker can be how well the two of you communicate.
Start looking at available listings. You should already be looking at online listings and virtual tours of homes to give you an idea of what you want. But there is no substitute for walking through several homes in person. Be sure to get to know the neighborhood and its amenities.
Make an offer and negotiate the final price and conditions of your home purchase. When your offer is accepted, you’ll sign a purchase agreement that includes the price of the home and the estimated closing date. This is when you put down earnest money and fully commit to the purchase. Typically, the earnest money is 1% or 2% of the purchase price (it also applies to the down payment). There are many reasons why the earnest money is not refundable. Make sure you understand all of those reasons.
Schedule the home inspection. This is the responsibility of you or your agent. Not accepting the results of the inspection can be a reason your earnest money is refunded. The inspection can also lead to several other scenarios that include asking the seller for repairs, negotiating a different purchase cost, or another remedy for defects in the house.
Finalize your financing and get the appraisal. Although you’ve been preapproved, the financing isn’t final until the lender agrees to finance the specific house you are purchasing. The lender (with help from your agent) will schedule an appraisal of the house. The appraisal determines the maximum loan the lender will give you on a specific house. Also important when finalizing your loan is to keep your finances in order. This is not the time to take out a loan for new living room furniture or new kitchen appliances.
Do a final walkthrough. You want to walk through the house about 24 or 48 hours before closing the deal and handing over your money. Ideally, the house will be vacant and ready for you to move in. This is your last chance to make sure you are getting everything you thought you were getting and the house is in the condition you expected it to be. This is your last chance to address any outstanding issues before the house becomes your responsibility.
Close on your home and move in. This is the day you’ve been looking forward to. Three business days before your closing date, the lender will provide you with a closing disclosure that exactly outlines all of your loan details, such as the monthly payment, loan type and term, interest rate, annual percentage rate, loan fees, and exactly how much money you need to close. This is also the time when you wire your closing costs and down payment - depending on the escrow company’s process.
Mitch, as I began with, buying a home can be an exciting and emotional process. If you’re ready, it is also a big new chapter in your life - almost as big as marriage.
Please add your comment about what you think a first time buyer should know.
Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].
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