Home Purchase Guide
Buying a home can seem like a frightening prospect. Whether it's your first home or your fifth, so much is at stake: your savings, your credit rating, and your financial freedom. It is difficult to find the courage to sign on the dotted line even if you want that home very, very badly.
How do you determine whether the purchase of a home makes sense?
What is the easiest way to examine the whole picture, from emotions to economics?
I want to share with you my Seven Steps For Success plan. If you read this plan, you will learn how to separate whims from true needs. You will discover how to prepare a game plan for your real estate venture, how to research effectively, choose wisely, finance appropriately, and survive the whole procedure with your smile in place.
SEVEN STEPS FOR SUCCESS
- Establish your needs and wants.
- Determine how much you can afford.
- Get pre-qualified or pre-approved by a lender.
- Find a good real estate agent to help you.
- Find a home that meets your needs.
- Make an offer to buy a home.
- Save as much as you can on your initial investment.
STEP 1: ESTABLISH YOUR NEEDS AND WANTS
Begin your search for a perfect home by making a careful assessment of the kind of home you need and want. We recommend that you write it down. Take time, right now, to be as specific as you can about your particular requirements. First, make a list of “necessities” in your home. Next, list the features that you “desire.”
STEP 2: DETERMINE HOW MUCH YOU CAN AFFORD
Set up a budget for yourself. Decide how much you can really afford to invest and be comfortable with, for your monthly house payment. Be realistic. Most lenders suggest that your payments be no more than 28 percent of your total monthly income. Don’t forget to include taxes and insurance if you plan to escrow.
STEP 3: GET PRE-QUALIFIED OR PRE-APPROVED BY A LENDER
You can save yourself time and heartache by meeting with a lender before you start your search for a home. A lender can let you know what specific loan programs would be best for you. He can also help you understand what it takes to qualify for the loan that you want. By taking a look at your financial situation and looking at your credit history, a lender can usually give you a good idea if you can qualify for the loan amount that you want. Many lenders call this ‘Pre-Qualifying A Buyer.’
To be absolutely certain that you can be approved for a loan, you may want to ask to be “pre-approved.” In the approval process, all of your documentation is completed and submitted to an underwriter. The pre-approval that you will receive is an actual loan commitment from a lender - your guarantee of loan approval.
It is important that you are 99.9% sure you will get the financing needed and your lender will be able to perform according to the time limits in a purchase contract. If not, you could end up in the middle of an escrow and find out otherwise. If this happens, you could lose your deposit, which could be as much as 3% of the purchase price. Ask for current references and check them. Ask references if there were any problems during escrow and did escrow close within 30 days?
STEP 4: FIND A GOOD REAL ESTATE AGENT TO HELP YOU
You can learn a lot about agents by just letting them talk to you about how they help their buyers. Within a few minutes, you will probably be able to determine if an agent’s style is in line with yours.
Ask as many questions as you can up front. Finding a good agent will save you huge amounts of time, effort, and frustration. Remember, a “buyer’s agent” is working for YOU!
STEP 5: FIND A HOME THAT MEETS YOUR NEEDS
To find a home that meets your needs, consider these tips for successful house hunting:
Keep an organized record of all your research data. Write down comments about the homes that you see. Keep track of your likes and dislikes.
Make sure that your agent is aware of your time schedule and your expectations. Do you like to look at one or two homes in a session? Four? Eight? Discuss all of this with your agent.
Tell your agent about any homes that perk your interest and those you'd like to know more about. Include those homes you discover as you explore the area yourself or those you see advertised in the newspaper.
If you want to spend time driving around looking at homes for yourself, ask your agent for a list of drive-by homes which you can consider first from the outside. Your agent can then make appointments to show you the interior of those that appeal to you.
Express your likes and dislikes to your agent after you see a home. Honest communication is essential. Some buyers are shy and hesitant to tell an agent what they really think of a house. They think the agent may take it personally. Remember, the homes don't belong to the agent! You must be straightforward about your likes and dislikes to enable the agent to do the best job for you.
STEP 6: MAKE AN OFFER TO BUY A HOME
Your real estate agent can help you make an offer to buy the home that you select. It is important that you decide prior to viewing homes whether your agent will represent you or the seller. Some agents work only for the seller. In this case the agent may not be able to advise you in making a fair offer.
By looking at homes selling in the area and the length of time it takes to sell, you should be able to get a good idea of value. Only a “buyer’s agent” can give you all the information necessary to make an intelligent offer in your best interests.
STEP 7: SAVE AS MUCH AS YOU CAN ON YOUR INITIAL INVESTMENT
There are only two major investments to consider when buying a home. These are the initial investment (including down payment and closing costs) and the monthly payment (including principle, interest, taxes, and insurance).
Here are some ways to save on your initial investment:
- Choose a low down payment loan. You do not necessarily have to put 20 percent, or even 10 percent, down. You can put 5 percent, or even 3 percent, down on some loans. Ask whether or not your loan includes “private mortgage insurance” or PMI.
- As part of your offer, ask the seller to pay some of your closing costs. Sellers are usually allowed to contribute to a buyer's closing costs. In many cases this is a negotiable item.
- Shop around for your home insurance. A little shopping can save you a significant amount of money.
- You can deduct money paid for discount points from your gross income before computing your tax, which would effectively reduce the cost to you. Always check with your CPA to find out specific guidelines in your area.
Keep your monthly payments low:
- Get a loan with no monthly mortgage insurance premiums. You may be able to reduce or eliminate them by paying a little more at closing. By putting 20 percent or more down, you may be able to eliminate them entirely.
- Choose an Adjustable Rate Mortgage. ARMs can be up to 3 percent lower than fixed rates.
Remember that interest payments on a primary residential mortgage are fully deductible in most circumstances. Your property taxes may also be deductible. Tax rates definitely favor homeowners.