Guide to Buying and Financing a Home

Guide to Buying and Financing a Home

Buying a home is one of the biggest milestones in your life and one that must be taken seriously. Purchasing a home is often one of the first steps towards true independence. Whether you are looking to buy a starter home, transition to a larger or smaller home, or you want to choose a different type of home, it is best to review the process.

Budgeting for a Home

One of the first things you will need to do, before you even begin house-hunting, is to determine how much you can afford to pay for your home. Since this can be a long term investment you should consider the amount per month you can comfortably afford to pay. This will give you a general range of home prices that you should consider.

You will need to accumulate a down payment. The down payment goes towards the cost of the home and will reduce the amount you will need to finance. Remember that there are some costs of home ownership that you need to keep in mind when you plan your budget, such as property tax and homeowners insurance. Property taxes and insurance may be included in your mortgage payment. If not, you will need to pay them separately. You can research the estimated taxes in your area online. It may be beneficial to use an online mortgage payment calculator to help determine your monthly payments based upon various factors.

There will be monthly utility expenses which include waste removal services (trash), water, electricity and other costs. You will also need to keep in mind the cost of maintaining your home. Plan to keep an emergency fund to handle any problems that may arise with appliances, air conditioning, etc. Keep in mind that while you may be a two-income household right now, in the future you may have only one income, so budget accordingly.

Down Payment

The down payment is the money that you pay when you purchase a home. It is subtracted from the amount of money owed and is not included in the financed portion of your mortgage. A typical down payment for a conventional loan is about 20% of the purchase price of the home. This may vary depending on the incentives available and the type of financing used. VA and FHA loans require a much smaller down payment. The more money you can put down on your home, the less you will have to finance. When determining the amount of down payment you can afford, be sure to leave yourself enough money to cover at least three to six months of living expenses for emergencies. One of the biggest mistakes new home buyers make is to deplete their entire savings account to purchase a home only to encounter unexpected expenses later. You may need to wait until you have a sufficient down payment before you can purchase a home.

Consider Loan Options

You will need to obtain a loan to finance your home, which can be done through a bank, a mortgage company or a credit union. Additional resources include government assisted loan options and Veteran’s Affairs. Information about VA loans for eligible veterans can be found here, at www.benefits.va.gov/homeloans. Check the current interest rate. The interest rate you get will depend largely on several factors including your credit history, income, length of employment, and the amount of the down payment. If you are purchasing a home with another individual, that person’s information will also be considered.

There are several popular mortgage loan options that are typically available. These include:

  • ARM (Adjustable Rate Mortgage)
  • 15 Year Fixed
  • 30 Year Fixed

An adjustable rate mortgage provides a low interest rate and smaller monthly payments at the beginning of the loan, with an adjustment in the interest rate as time progresses. However, because the interest rate will fluctuate over time, the ARM is not the most stable choice for many people, as the monthly payment can become unaffordable. A standard home mortgage is 30 year fixed. This provides a set interest rate and set payments over the life of the loan. Should the interest rate significantly decrease later, you may opt to refinance your home. Those who want to accelerate loan repayment may prefer to take out a 15 year fixed mortgage. This will allow you to pay the loan in full in 15 years rather than 30, also with a set interest rate and set payments over the life of the loan. Other loan terms are often available through your lender.

The loan process begins with the application. The processing can take several weeks or more, depending on the company. It is often best to get pre-approved for a home loan. This helps in a couple of ways. First, the pre-approval process allows you to find out the exact amount of money you will be allowed to finance and what you need for a down payment, so you can look for homes within your price range. The pre-approval process also speeds up the sale. Homeowners who are selling sometimes prefer pre-qualified buyers because they know that the loan has already been approved. Therefore, the sales process will be simpler and faster.

Mortgage loans can be complex. If you have any questions or concerns, you should speak with a real estate attorney, financial advisor or mortgage expert before making any decisions regarding your loan.

House Hunting

Shopping for a home takes patience and time. Now that you understand the financial commitment, you are able to begin looking for your ideal home. A good place to begin is to make a list of features you want in a home, such as the number of bedrooms and bathrooms, large kitchen, swimming pool, etc. Divide the list into three columns – must have, nice to have, and optional. Next, rank the options into their importance. This list will help you review and evaluate homes as you begin searching.

Whether you are new to home-buying or have already owned a home, the process is the same. While you do not want to purchase a home you do not like, you do need to be able to consider compromises. Few people find a home that is exactly as they desire. There will always be both pros and cons to the home, which need to be weighed when making choices. Create a folder or online checklist to log homes that you have viewed and how much you liked them. It is helpful to note what you like and don’t like about the homes you’ve seen, so that you can start to further narrow down the choices of homes you want to see next.

Choose a Real Estate Agent

It can be fun to browse the Internet and other resources to look at homes. However, you may tire of this activity quickly because you will find that you are spending countless hours looking at homes that are not right for you. Working with a real estate agent can be quite helpful. Your agent will review your needs and search for homes that meet your specific criteria, so that you only see homes that you can afford and have features you require. Your agent will set up appointments to view homes and assist you every step of the way through the process, including price negotiations.

If you are concerned about how to pay your real estate agent, you should speak with the agent to ease your mind and set expectations for both of you. The fee, or “commission”, real estate agents receive is typically 6% of the sales price, split between the buyer’s agent and the seller’s agent. The commission is negotiable, and the terms you are seeking can be included in the contract when putting an offer on a home for purchase. It is typical for the seller to pay the total commission out of the proceeds from the sale of the home, but this too can be negotiated. This will be one detail that will need to be thought about in advance, and agreed to as part of negotiating the purchase of a home.

A buyer’s agent is a real estate professional who represents only the buyer. You should find an agent who is reputable and has experience working in your area. You can find more information about the agent online and should check to make sure that the agent is properly registered and licensed in your state. You can search “verify realtor license in (your state)”. The search results should include a governmental entity, such as the Department of Real Estate for your state. Their website should allow you to search for your agent’s name to verify that their license is active and valid. You should also be able to see if there have been any complaints. Once you have selected a real estate agent, you will be able to quickly begin to start viewing homes.

Making an Offer and Signing a Contract

Once you find the home of your choice, it is time to take care of the business part of the transaction. The home buyer will, through their real estate agent, make an offer on the home by submitting a contract. You may want to have a qualified real estate attorney review the contract before you sign it. Contracts consist of a number of clauses and each one must be fully understood. Before making an offer, your agent should research the appraisal of the home’s value and review what similar homes in the neighborhood have sold for recently. The homeowner will review the offer and may accept it, decline it, or come back with a counter offer. Some transactions may go through several price negotiations. Once the buyer accepts the offer, they will sign the contract, and your loan officer will begin the process of preparing the loan and real estate documents for final signing at the “closing” (meeting to sign the final documents to complete the sale).

Closing

The closing is the official signing of the papers that completes the home sale transaction. You should complete a walk-through of the property to ensure that it is in the same condition as when you last viewed it. Closing costs typically range from about 2% to 5% of the sale price on average. During closing, you and the seller will sit down and sign the necessary documents with either a representative of the lender, the title company or escrow agent, whoever is handling the final documents. The buyer and seller typically meet with the closing professional separately. Your real estate agent may attend the closing and it is beneficial to have your attorney attend as well, if you have one. Before signing the final paperwork, you should read each paragraph fully and make sure that it meets your needs.

It is important that you are prepared for closing. Your real estate agent will advise you of what you need to bring to the meeting. Each closing is different, dependent upon the lender, type of loan, terms of the sales contract, etc., and may also differ by state. At closing you may need your photo ID, proof of homeowner’s insurance, the home inspection certificate, and the loan paperwork, along with any other information as noted by your agent. You should be instructed prior to the meeting as to what is required. Once the closing is finalized, you will be provided the keys to the home!

DISCLAIMER: This guide is provided only for informational purposes and is not intended to be a substitute for legal or other professional advice. This guide does not contain nor is it intended to provide legal or other professional advice for any specific situation and readers should not take action or refrain from taking action, based only on the information provided in this guide. Goldberg & Osborne has attempted to provide accurate and current information in this guide, but cannot and does not guarantee that the information is accurate, complete, or up to date. This guide may contain links and/or search terms that will lead to external websites as a convenience to the reader, but Goldberg & Osborne is not responsible for the content or operation of any website other than its own website. The presence of a link or a search term does not imply and is not an endorsement by Goldberg & Osborne of the website provider or the information contained on any linked website or on any website contained in search results from a search term provided in the guide.