Since the beginning of the year, we’ve covered several topics that span the financial planning spectrum.
This month, we’d like to take a slightly different tack and discuss the ins and outs of buying a home. For many, it will be the biggest purchase ever made, one that is an enormous investment with plenty of long-term potential.
But, the process can come with a great deal of unanticipated stress that can diminish the joy of searching for your own place and viewing homes.
Some of you are actively in the market and hope to become first-time homeowners. Others are looking to trade up, while some are contemplating the possibility of downsizing and may be in the process of listing your house.
For first-time homebuyers, the process can be daunting. For those who may soon downsize, it has been many years since you purchased, and the process has changed.
So, we have put together a checklist of items you may want to consider when making a purchase. It’s not all inclusive, but understanding the basics, arming yourself with the right information, and putting a plan in place will ease stress and enable you to successfully land the home that’s right for you.
Let’s get started.
- Do you have a down payment? Putting at least 20% down is ideal. It avoids the need to purchase mortgage insurance and communicates to the seller that your finances are strong. If you don’t have 20%, there are programs for first-time buyers that allow you to put down as little as 3 – 5%, but expect to pay mortgage insurance. If savings is an issue, start today! Bonuses, tax refunds and automatic drafts can be socked away. And family gifts can go toward your down payment.If you are downsizing and have owned your home for many years, you may have plenty of equity. In fact, you might be able to buy your new home with cash. This may or may not be the route you should take, but we’d be happy to offer our thoughts on whether an all-cash offer is the most appropriate avenue.
- Time to budget. If you are a first-time buyer, how much can you reasonably afford each month for your house payment? Many first-time buyers forget to factor in property insurance, homeowners insurance and private mortgage insurance if required. If you are living with mom and dad, keep in mind the added cost for utilities. Further, you may be paying fees for a homeowners association, so please keep those added costs in mind as well. For those looking to downsize and head into retirement, you may be balancing a different income stream with a new monthly payment (even if principal and interest aren’t part of the mix). In either case, we can look at the numbers and offer our thoughts. But please understand when we say we’re just looking at the finances. We can’t put a price on the intangibles — a new community or living closer to family: your grandchildren or your kids.
- Secure the services of an experienced real estate agent. A good agent is worth his or her weight in gold. Typically, the seller pays the commission, so it behooves you to enlist the help of an experienced professional. He or she will explain how the commission works. An experienced agent knows the ins and outs of the market, how to best handle the many details you are sure to encounter, and how to negotiate with the seller. If you have owned your home for many years, you may not know new listings hit the Internet hourly. Gone are the days when you got into your agent’s car and received a list of homes to be seen that day. A good agent will empower you by setting you up to receive new listings via email based on your specific criteria. And don’t be afraid to be proactive by researching websites that accurately reflect what’s available. If you spot something of interest, your agent can set an appointment. Finally, some buyers don’t realize they can enlist the help of an agent when looking at a new home. But bring him or her along on your first visit to the models. In fact, some builders require an agent to accompany you on the initial visit.
- Pre-qualified vs. pre-approved. At a minimum, get pre-qualified. It only takes a moment and it tells the seller your credit is solid and your income is adequate to handle the mortgage payments. In some areas, today’s market is extremely hot, and multiple offers aren’t uncommon. If this is the case, your agent may recommend you get pre-approved with a lender before submitting an offer. The pre-approval process is much more detailed, and will require tax returns, W-2s, recent bank statements, paystubs, and more. But once you are pre-approved, it enhances your position with the seller, as it communicates that you are financially solid, almost eliminating the odds your financials will sink the deal. Either way, your lender will require extensive financial information. Having the information readily available will ease the process.
- Location, location, location. What part of town do you want to live in? Whether you have kids or not, the school district is important and can bolster values down the road, since families buy in desirable school districts. What about your daily commute? Can you handle 45 minutes or an hour in traffic each day? What are the amenities you require in terms of parks, recreation, restaurants, shopping and so on? Much goes into targeting an ideal neighborhood.
- Don’t sweat the small stuff. You love the neighborhood, the floor plan looks great and the schools are top-notch — but you don’t like xyz. Remember, paint can be changed, lights can be replaced and the powder room vanity can be updated. Besides, the personal touches you add will make the home feel like it’s yours.
- The myth of the dream house. Be prepared to make compromises. One home will have just the right layout but the kitchen will be too dark. Another will back onto a park or have a beautiful view of the city, but the yard won’t be big enough. What do you want in a home? What’s most important? What projects can you undertake? Prioritize!
- Don’t damage your credit reports. This is really important. You’ve signed a contract but haven’t closed on the house. Don’t quit your job! And stay away from purchases that require new debt, like an auto loan! In either case, you may completely ruin your debt-to-income ratio, and your loan will fall through. Roughly translated: You won’t get the house.
- Get a thorough home inspection. In very hot markets, some buyers are willing to waive a home inspection to entice a seller who has received multiple offers. While inspections have limitations, you are rolling the dice if you forgo a comprehensive review. Attend the inspection and ask questions. One more thing: minor cosmetic issues that could surface may or may not be worth bringing to the seller’s attention in a very tight market. Do you really want to lose a house over a small issue? Again, an experienced agent can guide you.
Bottom line — Buying a home is a significant undertaking, but one that can be wonderfully rewarding. Preparation and research are well worth the time for what may be your biggest investment and a place you will call home for many years.
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