Each and every person who purchases a home normally will have different experiences, hurdles to overcome, and ultimately have their own opinion on the home buying process, so beware of many opinions when talking with family, friends, and co-workers. Even though the majority of home buyers are different, the home buying process is usually the same. There is a general outline that should be followed when buying a home for the first time.
How Much Can You Afford
Whether a consumer is purchasing a car for the first time, a home for the first time, or a set of golf clubs for the first time, it’s important to know how much can be afforded! This is an extremely important part of the home buying process. Many first time buyers don’t realize or understand that it’s extremely important to know how much they can afford before looking at homes! It’s common to have first time home buyers contact real estate agents and get upset when they are educated on the importance of finding out how much home they can afford before getting out into the marketplace! It’s important that a first time home buyer understands what the costs of buying a home are but also why they are involved.
Set Your Expectations
When buying a home for the first time, an extremely important tip is to make sure expectations are set. By setting realistic expectations, the chance to be disappointed or let down is minimized. So, what type of expectations should be set before purchasing a home for the first time?
Once a buyer knows how much they can afford, it’s important to figure out what will their money get them. When buying a home for the first time, it’s important to do it with a purpose and a realistic goal in mind. How big of a home can be afforded? What style of home is desired? What are acceptable locations of the home? It’s important that first time buyers have a strong feeling on items like these but also a good idea on which items they are willing to be flexible with. It is a great idea to prioritize these items in order of importance.
Talk to the bank – Preparing to get a mortgage in advance of your actual purchase will be super important. Before you start looking at houses you should have a discussion with your lender. The lender will be able to give you an honest assessment of what your finances look like, how much you can afford to spend on a house, and what your rates will be. You want to know all of this – what it will really cost you – before you start looking at homes you can’t actually afford. Find out what your monthly payment will be at different amounts and determine what your personal limits are as well. Once you know the time is right to buy a home, make sure you get pre-approvedby a lender. Make sure you understand the difference between getting pre-approved and pre-qualified for a mortgage. Without a doubt you will want to get pre-approved as a pre-qualification letter is not worth much. A savvy REALTOR® representing a homeowner will pick up on this right away. If you are competing with other buyers and are not financially prepared, you could lose out on your dream home!
Know Your Home Inspector – Home inspections will vary depending on the type of property you are purchasing. A large historic home, for example, will require a more specialized inspection than a small condominium. However, the following are the basic elements that a home inspector will check. You can also use this list to help you evaluate properties you might purchase. About 10 percent of homes recently purchased weren’t inspected by a home inspector, according to Bill Loden, president of the American Society of Home Inspectors. Some buyers were trying to cut down on the costs of hiring an inspector to investigate a home – which usually averages about $450 — but defects uncovered later could potentially result in the loss of thousands of dollars. “It takes a trained eye to be able to see the problems that can exist in a home,” Loden said. “The inspection can also give the first-time buyer a bit of a schooling on the house and how to maintain it.” Buyers should also be prepared to ask questions about conditions that are common to specific areas, such as radon in Midwest; sewers in California; and active clay soils in Dallas that can lead to foundation issues, the CNBC article notes. The home may require additional inspection from a specialist to rule out potential problems.
Costs & Fees of Buying a Home – Buying a home is one of the most exciting times in any persons life, regardless if it is the first home or the tenth home they have purchased. Often times a buyer (particular first time buyers) doesn’t stop and think about what the costs and fees associated with buying a home are. It can be an eye opening experience for a buyer when they are given a breakdown of the costs and fees associated with buying a home.
- A good faith deposit or earnest money deposit will be needed when making an offer or having a purchase offer accepted. The purpose of this deposit is to show that the buyer is serious about purchasing the sellers home. This deposit is normally held in the listing brokers escrow account until closing. The amount a buyer deposits is subtracted from the total cost they will need at closing.
- Home Inspection (Optional): In most cases a home inspection is recommended. The cost of a home inspection normally varies based on the square footage of the subject property & other factors too.
- Pest Inspection (Optional): A certified pest inspector will examine both the exterior and interior of the subject property for destructive insects. Typical ones are termites, carpenter ants, and powder post beetles. A good pest inspector will provide a detailed report. If the presence of pests are found, normally the cost to treat the issue are covered by the seller.
- Chimney Inspection (Optional): A chimney inspector will examine both the exterior condition of the chimney as well as the interior (Liner). Issues that maybe found by an inspector are negotiatedbetween the buyer and seller of the subject property.
- Radon Test (Optional): Radon is a natural gas that has been linked to causing cancer (if high “levels” are present) that permeates a home from the ground. The Environmental Protection Agency (EPA) standard in the United States is 4.0 picocuries(pCi/L). Anything that exceeds this should be considered dangerous.
- Well Water Test (Optional): Properties that use a well for it’s water supply can be tested. A well water test can determine flow rate, test for nitrates or bacteria, and more.
- Septic Inspection (Optional): If the subject property is hooked up to a septic tank, it is in most cases, recommended to have it inspected. The cost normally is covered by the seller (or at least should be requested of the seller).
- Lead Inspection (Optional): If buying a home built prior to 1978, the buyer has the option to perform a lead inspection, at their expense. In all likelihood, most homes built prior to 1978 will test positive to lead paint to one extent or another. Whether the lead is present in the window sills, covered behind multiple coats of latex paint, or elsewhere, it can be extremely costly to remove lead. It’s rare that a buyer will perform a lead inspection.
- Application Fee: This fee will vary from lender to lender. The fee is charged simply for doing business with the potential buyer. The mortgage application fee is non-refundable.
- Appraisal Fee: This fee is due when you apply for the mortgage. An experienced real estate agent should inform the loan officer to hold onto the check for the appraisal until AFTER the inspection contingency(ies) are removed, if the buyer meets with the loan officer prior to the inspection. This ensures that the buyers money isn’t being spent on an appraisal for a home that the buyer may end up not purchasing due to inspection findings.
- Credit Report: Lenders will charge for pulling a credit report on borrower(s). This is called a tri-merge or fact data report. This is normally not a large amount of money.
- A down payment is often what buyers think is the total of all costs to buying a home. This is a very common misconception and clarification is needed on this regularly. The down payment for a home will vary depending on the type of financing that is best for the buyer (FHA, Conventional, VA) and also the buyers qualifications. The minimum amount required for a down payment for a FHA (Federal Housing Authority) mortgage is 3.5% of the purchase price. The minimum for a conventional mortgage is 5% and a VA mortgagee is allowed to finance 100% of the home, so $0 is the minimum.
- Closing Costs –
- Recording Fee: This fee is generally paid to the local county clerks office for entering the sale into the public records.
- Flood Certification Fee: This fee determines if the subject property is in a designated flood zone (a flood insurance policy can cost upwards of $1,000 per year).
- Mortgage Tax Fee: In NYS, when a buyer obtains a mortgage, state and local government enforce a mortgage recording tax to document the transaction.
- Interim Interest: This interest is due at closing to cover interest due that will not be collected with the first mortgage payment. The interest is collected from the closing date to the last day of the month.
- “Points”: This is an upfront fee paid to a lender when a buyer gets a loan. Each “point” equals one percent of the buyers total loan amount. The more “points” a buyer pays, the lower the rate.
- Underwriting Fee: This fee is for the review and assessment of the buyers mortgage application and documents.
- Bank Attorney Fee: The buyer is required to pay the banks attorney, in addition to their own.
- Title Insurance Lender Policy Fee: This fee protects the lender against problems with title of the subject property. This policy protects the property but not the buyers interest in the property.
- Title Insurance Owner Policy Fee (Optional): This insurance protects the buyer against problems with the title of the subject property.
- MIP/PMI Fee: Private mortgage insurance (PMI) or mortgage insurance premium (MIP) are charged to protect the lender in the case that a buyer “defaults” on their mortgage.
- Prepaid Items
- Real Estate Taxes: Most mortgage products require a buyer to “escrow” an entire years worth of taxes at closing. There are situations and products that allow a buyer to pay taxes annually, bi-annually, or quarterly.
- Homeowners Insurance: Most lenders require a buyer to purchase homeowners insurance prior to closing and provide the “binder” to them. This insurance protects the buyer against fire, natural disaster, and other scenarios.
Get Educated on the Local Real Estate Market
When purchasing a home for the first time, it’s important a buyer understands the local real estate market. There are many ways this can be accomplished. The internet has completely changed the way the real estate industry works in 2014! There is so much information available on the internet that can certainly help a buyer understand the local real estate market. The internet is great for providing a wealth of information, however, it’s also important a buyer understands that not everything that is on the internet is true. Really it isn’t! There are many third-party real estate websites on the internet that provide some very inaccurate information. A perfect example of inaccurate real estate information are the “Zestimates” that Zillow provides to consumers. The inaccurate information provided by these third-party real estate websites is not only specific to the Webster, NY real estate market. For local market updates ask Faith at homeslansing.com