Buying a Home?
Buying a home can be stressful, even if it’s not your first home purchase. But rest assured; we can help. Follow this step-by-step guide to help gain an understanding of the key steps during the home buying process.
1. Know your Credit Score
Knowing your credit score is a great practice before applying for financing. There are three major credit reporting agencies in the U.S. (Experian, TransUnion and Equifax) and all three offer one free credit report per individual, per year. You should review your credit report and dispute any issues you find so they can be taken care of before seeking a lender.
Your credit report can determine the rate you’ll receive when you apply for financing. Generally speaking, a score of 720 or above will get you a good rate but it is not the only qualifying factor. These factors can vary by lender. If you are seeking an FHA loan (or a loan that is insured by the Federal Housing Administration, a credit score of 580 or above is generally the minimum score needed for approval.
2. Determine what you can afford
There are tons of factors which can determine how much you can spend on a home. It is important to note that what you can afford is not the same as the amount a lender may preapprove you for. To get started, determining what you can afford, you’ll want to establish your budget. It’s a good idea to know your annual income, monthly debts, regular on-going expenses, as well as how much you plan to put towards your down payment.
While not set in stone, most people tend to push the limits of their budget range when house shopping so it’s also a good idea to determine what’s most important to you in a new home:
- Home square footage
- Number of bedrooms and bathrooms
- School District
- House style and features
- Outdoor space and acreage
As a generally recommendation we suggest budgeting that your home expenses, including mortgage, taxes, and PMI insurance should not exceed 28% of your monthly income. There are numerous online calculators which can help you get a better sense of what you can afford like this one here. Remember, only you know your full financial picture. Be realistic and honest with yourself when determining your home buying budget.
3. Find a Real Estate Agent
It can be tempting to start looking for homes online before finding a real estate agent. There’s nothing wrong with shopping on your own, but it’s often in your best interest to start working with a real estate agent as soon as possible. Real estate agents have tools, resources, and connections within the industry to help you find what you’re looking for, sometimes faster than what you could on your own.
For example, sometimes newly listed homes will be available to tour to some local real estate agents and their clients even before they make it into public, internet listings. For this reason, we recommend teaming with an agent that is part of a reputable and large agency. A larger agency will have more resources and connections at its disposal. In the greater Williamsport, PA area, the home of Tap Into 360, we recommend Premier Real Estate Agency.
While it is possible to buy a home without a real estate agent, the fees associated with working with an agent are paid buy the seller of the home, so working with an agent is generally cost effective to the buyer.
Finally, your real estate agent will be able to help you navigate the rest of the steps in the home buying process. If you don’t already have a lender or settlement company, or closing agent, a real estate agent can make recommendations based on their own experience. They’ll also let you know what steps you should be working as you move through the home buying process. When it comes to time to making an offer, and agent will provide insight and recommendations on how to make an offer that is attractive to the seller that fits with market data.
4. Get Lender Pre-Approval
Once you have determined a real estate agent to work with, you’ll want to obtain a pre approval from your lender of choice. Your pre approval letter will often be sent along with any offers you make on a home. This shows sellers that you’re serious and not wasting their time. It is important to note that some real estate agents may require you to have a pre approval letter from a lender before they will tour a property with you.
The process of pre approval may be a tedious one depending on your financial situation. You will probably need to obtain bank statements, W2’s, pay stubs, tax returns, and identification documents. Your lender will let you know what specific documents are required. Lenders can range from banks, to credit unions, to mortgage specialty companies. In the Williamsport, PA area, we recommend Prime Lending. Prime Lending has an excellent track record of flexibility, as well has a history of providing great rates to clients.
5. Start the search
Your real estate agent will be able to help locate homes that fit into your search parameters. He or she will also be able to send you need listings that match your criteria as homes come to market. You can also search on your own. There are many websites which feature listings from the MLS database of homes. But homes may also be listed for sale by owner on zillow.com, in newspaper classifieds, or even on Facebook. Don’t be deterred by for sale by owner listings. Many (though not all) sellers will be willing to work with the buyer’s real estate agent. Your real estate agent will gladly call the private seller on your behalf to see if that’s an option.
When you find a home you’d like to see in person, contact your real estate agent immediately. Homes can flip from available to sale pending in a moment so it’s best to move quickly when you find something you think you may like.
As you tour a home or property it’s important to evaluate the condition as best as you can in the short window that you’ll have. If you ultimately decide to make an offer and it’s accepted, you’ll have an opportunity to schedule a formal home inspection, so don’t feel the need to get too in depth with fact finding. But simple checks like turning on lights and checking water pressure by turning on a faucet could help you spot problems early. As you tour a home, take in as much as you can. Take pictures of areas or rooms that weren’t pictured in the listing or of potential issues that you come across. If you are touring lots of properties, it’s easy for this tours to “run together” later as you think back, so it can be a good idea to take notes.
It’s sometimes a good idea to review the seller’s disclosure before you tour a property. A seller’s disclosure is a questionnaire that has been answered by the seller about the state of the property. It will highlight all known issues with the structure or any other systems within the home including electrical, plumbing, heating and sewer. The disclosure will also reference recent repairs. It’s important to understand that this document is filled by the homeowner to the best of his or her knowledge. Many issues can be unknown or hidden, but it’s helpful to know more about the history of the property when you tour it, and the disclosure can give you ideas of things to look for when you tour that you otherwise may not have checked. When you call you real estate agent to schedule a tour of a home, let them know you’d like a copy of the seller’s disclosure, they will be able send this document to you.
6. Make an offer
There are many factors to consider when making an offer. There are no defined rules which work for every single situation. Some factor include the neighborhood, how long the home as been on the market, whether or not you require an inspection, or whether or not you have any contingencies with your offer. Your agent will help you guide you through this process to help you make the best decision for a starting offer.
As you consider your starting point, you should ask your agent for a comparative market analysis or CMA. This is a search that will return similar homes in the same area that have recently sold. This helps determine what the going rate of similar real estate in the area may be. This can help ensure your offer is inline with the market.
Your offer is more than just a dollar amount you’re willing to pay for the home or property. It will include your proposed closing date, your pre approval letter if you will be borrowing, any repairs you’d like made, and whether or not you have any contingencies such a home inspection or if you need to sell your existing home first. Some contingencies will be required by the lender, such as a home appraisal. More on that in step 8.
Don’t be discouraged if your offer isn’t accepted, especially when other offers may be in play. It’s important to move quickly, and depending on market demand, it may be in your best interest to lead with your best price. In some instances, the seller may counter offer your offer with a higher price. This is a very normal part of the home buying process. Again, your real estate agent will help guide you through this process.
Your offer will also be accompanied by a good faith deposit or earnest money. Generally, this is a check for 1% to 3% of the purchase price that will be held in escrow until the closing date where the amount will be applied to the purchase. It’s also money that you would forfeit if you choose to back out of an accepted offer for any reason other than an unmet contingency. Your good faith deposit let’s the seller that you are serious and a higher deposit can make your offer more attractive than another. Just note, once your offer is accepted it becomes a legally binding contract between you and the seller.
7. Schedule an inspection
While inspections are not required in the state of Pennsylvania, we highly recommend that all buyers have a home inspection performed by a licensed inspector. Inspections may cost several hundred dollars, but may uncover underlying issues with the home that could save you thousands down the road. Any issues discovered can be brought back into negotiation. For example, your inspector may find that a fireplace chimeny hasn’t been cleaned in several years. You could respond in a few ways.
1. You may opt to move forward with the contract as previously stated with the assumption that you’ll have those maintenance tasks performed when you take possesion of the home.
2. Because passing a home inspection was a contingency on your offer, you could come back to negotiations and add a new contingency to your offer that requires the home owner to pay for maintenance to be performed before closing.
3. You could reduce your agreed price by the amount it will cost you to have the chimney cleaned.
In the case of both (2) and (3), the seller has the option to accept your new contingency, or deny it. If it’s denied, you can back out of the contract (because your home inspection contingency was not met) and your good faith deposit would be returned to you.
When it comes to choosing the home inspections to have performed, you’ll have a lot of options. We generally recommend a full home inspection, water test, and radon test, and wood destroying insect test. If the property has a septic system it may also be good idea to have that system checked as well.
8. Continue with Financing
Your pre approval does not guarantee your financing, so once things check out with your inspections, it’s time to move ahead with financing. It is not set in stone that you must finance your home with the same lender that provided you with a pre approval. However, they will already have some of the necessary information to get things rolling if you do decide to do use them for the loan application.
Your lender will be able to guide you through this process but there are two main things that you’ll need to complete:
The Loan Applicaion Process
This can be a tedious process. You may be required to provide pay stubs, tax records, bank statements, identification and more. Again, you lender will let you know what information is required.
Your lender will hire an appraiser to assess the value of the property. This protects the lender. They want to know that the property is worth your contracted price in the event you should default on the loan. If the appraisal comes back equal to or high, then you’re good to go. If the appraisal comes back below your contract price, the lender may not give you the full value loan you are requesting. Your sales agreement should include a condition allowing you to back out of the agreement for a low appraised value. Work with your real estate agent to determine the best course of action. The market may allow you to renegotiate a new sales price with the seller.
9. Homeowner’s Insurance
A homeowner’s insurance policy is required before you go to closing. You, may already have an insurance agent for auto insurance. Sometimes insurance providers offer multi-policy discounts so it may be a good idea to start there. Your insurance agent will be able to setup your new policy to start on the closing date of your property. If you plan to escrow your insurance along with your monthly mortgage payment, be sure to have your lending agent’s information ready when you setup the policy.
10. Close on the property
When everything is lined up and ready to go, it’s time to close. Many buyers will opt to have a final walkthrough of the property within 24 hours of closing. This allows you to ensure the property condition has not changed from when you first made your offer.
The closing process can take up to a few hours. You’ll need to bring a check to cover your closing costs. Your lender will let you know what you need to bring to the table. Often, a certified check is required.
When closing is complete, the property is now yours! It’s time to setup utilites like electric, cable, and trash service and move in!