by Karlton Press in Blog,Buying. Tagged: budget • buying • contract • conventional • down payment • fha • first time homebuyer • home closing • listing alert • mortgages • offer • pre approval • shopping for homes • steering • usda • va • viewing homes
Woo Hoo, you’re finally ready to buy your first home! Real estate agents, the media, your friends and your parents have been telling you that you need to stop renting and settle down. You’ve been hearing scary stories about interest rates and rents rising – now is the time. So what do you do first? How long will it take to find your new home? When should you start shopping? What if you find a home too fast and still have time left on your lease? How much house do you need? How long will you plan on being in this house? All of these questions can make the home buying process confusing and stressful. Hopefully this will serve as a handy guide for how to proceed.
While the list above can seem daunting, the good news is that a few steps in the right direction can address several questions at once and hopefully make other questions irrelevant. So let’s start at the beginning.
Step One: Pre-approval – Hands down, this is the most valuable first step. If you are like most first-time buyers, you will be purchasing with a mortgage. If you will need a mortgage, we need to go through the steps of pre-approval before we really start shopping. There are several reasons for this. The first, most obvious is to be sure we are looking at the right houses. The last thing we want to do is fall in love with a $250,000 house only to find that you are only able to get a loan to cover a $175,000 house. No matter how nice the $175,000 house is, it won’t be like the $250,000. Don’t make your search more difficult by adding emotional roller coasters. The second reason to be pre-approved is to help you project and set a budget. Your lender should be able to help you estimate a realistic payment that includes your mortgage principal and interest, your taxes, HOA, and insurance. While the guidelines set by the government can allow you to be approved up to 38% of your take home pay, in my opinion, that is excessive. I am much more conservative, but tend to lean towards 25%-30% of your take home pay. This allows you to live through any hiccups life throws at you. The final reason to do a pre-approval early is that it can help you identify if you have credit issues that might need to be addressed to help your approval process or to earn a lower interest rate. We do not want to find out that you have problems after we’ve already found the house and your lease is almost up! Now that you are pre-approved we are almost ready to shop. Before we move on, however, I’m going to throw out a nasty word as Step One-A…the BUDGET!
Step One – A: BUDGET – (queue spooky music) Dun, dun, dunnnn. Actually, a budget is nothing to be afraid of. It is just a guideline to help you learn what you can afford to spend. If you have not already been doing so, I’m going to encourage you to go on a “rice and beans” budget. Really cut back on your spending to see how much you can add to your down payment. Or, if you carry a lot of personal debt, it might help your score to pay down debt. Your lender can advise you the most effective strategy. So, how much cash will you need to have on hand to purchase a home? There are two parts to be concerned about: your down payment and your closing costs.
Down Payment/Types of Loans: Depending on the type of loan you plan to use, you will need somewhere between 0%-5% of the purchase price as a minimum down payment. In most cases, the best mortgages over the life of the loan are Conventional loans. For a conventional loan, you will need at least 5% down. Until you reach the point where you have 20% equity, you will have to pay Private Mortgage Insurance or PMI. This is essentially “foreclosure insurance” for the bank and does nothing to help you. They just take a little extra from you in each payment to offset their losses in the event they need to foreclose on you in the future. If you do not have 5% down, the next mortgage your lender might consider will be an FHA loan with 3.5% down. FHA loans have a few extra fees that carry on for the life of the loan making them slightly more expensive over 30 years. FHA loans also require the property to be up to a certain standard. As such, not all properties will be able to pass an FHA appraisal and close. The third type of mortgage is for Veterans. The VA loan can allow you to purchase with 0% down. There is an up-front funding fee added into the mortgage which, in some cases, can make a VA mortgage less desirable than a Conventional loan if you have a down payment. If the property is rural, you might be able to use a USDA mortgage which also has 0% down. These loans typically have strings attached about how long you must be in the home and the interest rates are typically higher. Over the life of the loan, these typically are the most expensive loans. Your lender can help you explore your options for each type of mortgage to decide which is best for you. All the more reason to get that pre-approval started. See what I mean about how one step answers multiple questions? ALWAYS get pre-approved as your first step!
Closing Costs – All home purchases will have closing costs associated. Many of these are fixed costs set by Florida like recording deeds and mortgages. Others are somewhat negotiable like lender fees. Commissions are typically paid by the seller, so the good news is that I get to work for you and they pay me! Preferred Real Estate Brokers, like most brokerages, does charge a small $250 brokerage commission as the only cost you have for working with me. The total closing costs tend to range between 2.5%-3% of the purchase price. This needs to be paid by you unless you can negotiate the seller paid concession. Most sellers don’t mind as long as your purchase price is high enough to offset the cost out of their pocket. In other words, we might offer 3% more than we would normally and then ask for the 3% back to cover your closing costs. The danger here is that the home must appraise at the higher price. If you can pay for your own costs, it typically is better as you are not financing those costs over the life of the mortgage and your offer just looks cleaner. Asking for costs can be a flag for some sellers as it appears that you don’t have enough money to buy. In a tight market, we want to minimize any potential negatives in your offer.
Step Two – Shopping for Homes – Now that we know a realistic price point, it is time to shop for homes. Here it is vital that you communicate to me what you hope for in your new home. Be sure to differentiate between “must haves” and preferences. I will research the best options for you, and you can do your own research as well. A great tool for that is my Listing Alert tool which allows you to have listings emailed to you that fit your criteria. Between online reviewing of listings and by driving by the outside to evaluate neighborhoods, you have a new hobby. If your expectations are realistic and your criteria is targeted, we can find a short list of homes almost right away. If you are looking for the proverbial needle in the haystack, the search can take much longer. Driving past the exterior and through neighborhoods can’t be stressed too much. I can help you find homes that have features you seek, but I am legally forbidden from “steering” you into or out of certain neighborhoods – even if you set the criteria. Only you can decide if you feel welcome in a neighborhood, so you need to do that legwork before we head out to view homes.
Step Three – Viewing Homes – Let’s recap. At this point, you are already pre-approved and we are shopping within your preferred price range. You have evaluated homes online, and have driven through the neighborhoods and past the exterior of the homes you would like to see. We know that everything up to this point checks out. Now, you will send me a short list of 4-6 homes. (notice that I didn’t say 25) We keep this list short and prioritized to maximize our time together. If you’ve already done your legwork, we will be looking at homes that have already survived a few filters. Now we are just going to evaluate if the home is as good as the listing photos, check for any damage or other negatives, check the flow of the floorplan, and to decide which feels most like your new home. When we view a home, our first goal is to decide if you like it at all – at any price. If not, let’s just move on down the list. If you do like it, now we decide a likely price range. I will have researched the homes to give you a realistic price range the home should appraise for. That does not always mean the seller will accept it, but it is a start. Statistically, homes with a mortgage in Greater Orlando tend to sell within 95% of the current asking price. The acceptable days on market also is a factor in the sale price. This varies by price point and even by neighborhood. Now that you’ve found a home you like and heard my opinion of value, you will set a price at which you would consider offering on the home. Now, we continue through our list. Most of my buyers who do all the legwork detailed above go out with me one day and find three homes they like. This does not need to be a long drawn out process. If we don’t find something after all this work, then we need to regroup. Very likely you will need to consider how to alter your expectations to find an acceptable home. Perhaps this means looking in a different location or dropping a certain home feature. If your criteria is inflexible, then we will just have to monitor the market to be sure to catch new listings that work. In today’s low inventory market, well-priced homes often find buyers in a matter of days. You need to be on top of the market. The Listing Alert linked above will really help you identify new listings quickly.
Step Four and on – Offer and Contract to Close – This post is long enough at this point, so this next part is a whole new series. I’ve covered much of the offer process in past blog posts, but will revisit again soon. For now, know that most loans are currently taking 4-5 weeks to close. From the time you are under contract to purchase a home until you get the keys at the closing table, many things need to happen over that 4-5 weeks. Escrow deposit, loan application, inspection, appraisal, loan underwriting, walk-through inspection, closing: is the typical pattern.
Hopefully this has proven helpful in helping you get ready to purchase your new home. Give me a call, text or email at your convenience to schedule a Buyer’s Consultation to go into more detail and so we can decide if we want to work with each other. Then, we can find your new home!