BUYER’S ARTICLES – FOR THE SMART CONSUMER
Many first-time buyers are unfamiliar with the process when they start looking for a home. Realtors know that the best clients are those who have done their research before starting the process of shopping for a home, because it makes the process much smoother and there are generally very few surprises. Nothing is more critical for a buyer than being prepared for just about anything.
This holds true whether you are planning to by a small one-bedroom home or a pricey gated home in a beachfront community. Knowing how the buying process works is definitely advantageous to you as a buyer.
Here are three important questions to ask yourself before deciding to buy a home:
FIRST: Are You Financially Prepared?
Lenders make it simple for today’s home buyers to determine in advance just how much home they can afford to purchase comfortably. The first step in making this determination is to use a pre-qualification service through a major lender in order to estimate how much you can afford in light of your current income and large monthly payments. This process may be as simple as a calculation that tells you what amount you can finance based upon a monthly payment equal to 28% of your net monthly income, or it may factor in your car payments, student loan payments or other mortgage loan payments. The calculation depends on the lender, but generally the pre-qualification process does not involve anyone reviewing your credit report or other details about your specific situation.
Note that pre-qualification is not a promise to lend. For that, you will need to select a lender and request pre-approval of a maximum loan amount. Most lenders use the pre-approval process to determine the borrower’s creditworthiness and decide whether to extend financing and, if so, in what amount. Once a buyer is pre-approved for financing, he or she receives a pre-approval letter from the lender that states the maximum amount that can be borrowed and the conditions of the loan.
However, pre-approval is not the only thing you need to worry about. As anyone who has ever purchased a home will tell you, you will need to have about five percent of the home’s purchase price in hand on the day of closing. This money can and will be used to cover closing costs, such as attorney fees, property taxes, title insurance, documentation fees, and more. The total closing costs will vary depending on the home’s location and your lender. If you have made an agreement with the seller in advance, he or she may pay your closing costs for you.
The down payment is one more thing that you need to consider in terms of finances. Traditionally, buyers were expected to make a down payment of about 20% of the home’s purchase price in order to secure equity and demonstrate security to the lender. Fortunately, today’s buyers have access to many programs that provide down-payment assistance and even zero-down mortgages. Therefore, if you feel that you are unable to put 20% down, research such programs before determining which loan program you will use to purchase your home.
Canadian lenders are more rigid about down-payment requirements, because they are subject to laws that govern the maximum borrowing percentage. Therefore, Canadian buyers should plan to make a 25% down payment on the closing date.
Making a down payment is more than just handing the lender a check for 20% of the home’s selling price. As part of the mortgage approval process, you will need to clearly document where the money came from and how you came to have it. A gift is allowable for down payments, but only if it is from a close relative or another person with whom you can prove having a very close relationship. You can use funds from your checking and savings accounts as long as they have been there for several months prior to lender verification. You can also liquidate assets such as homes, vehicles and investments in order to generate the necessary down-payment cash. Some employer-sponsored retirement accounts will permit you to borrow or cash out funds for the down payment on a home. In generally, it is not acceptable to borrow funds in order to make a down payment.
SECOND: What Do You Want?
This open-ended question is a prompt to get potential buyers thinking about the list of must-haves for their home-buying process. Realtors, friends and family alike will probably prompt you to make lists and to constantly revise them in the hopes that before too long you will determine what you can and cannot live without, as well as what you do not want to have in your next home.
A good example is the kitchen. Do you frequently entertain, or do you have a large family? If you answered yes, then a modern, well-equipped and large kitchen will probably be on your list of must-haves. But you may be willing to update a less-than-perfect kitchen as long as the size is right. Therefore, the size of the kitchen is what will be on your list. As you make your list, scrutinize every entry and try to be as specific as possible.
THIRD: Where Are You Looking?
Many potential buyers begin searching for their new home on the internet. Many realtors now include home listings on their website, and there are also sites that include all of the homes listed on the multiple listing service (MLS). Look online, but only to narrow down the specific type and style of home for which you are looking.
Once you have a good idea of the type of home that you want to purchase, contact your realtor to see what information he or she has about the homes in which you are interested. Your realtor may have already shown some of the homes and therefore be able to provide you with information that will be useful in determining whether or not a specific home will work for you.
Drive past the homes that you are considering and make a list of those that interest you. Then make an appointment with your realtor to see as many of those homes as possible, so that you can get a true sense of how the homes compare to one another and how they stack up against your list of must-haves.
By asking yourself the three simple questions above, you are well on your way to a successful home-buying experience. Remember that your realtor is your best ally in the home-buying process, and never hesitate to ask questions or request assistance in understanding the process. Every homeowner was once a first-time buyer. You, too, will get through the process of buying a home unscathed. Learn as much as possible about the local market, know what you are looking for, and know exactly how much you want to spend. Once you have made those major decisions, you can relax and have a great time looking for the home of your dreams.