Thinking of Buying?

We've put together some tips that we think you'll find helpful

The following tips should help orient you through the home buying process

 

Click on any item in the list below to jump to that topic/section.

Preparing to Buy

Shopping for a Home

Buying a Home

Conclusion

Thanks for bearing with me.  That was a lot of reading.  Think of it as training for the home buying process. There are an infinite number of variables involved in the home buying process, but you are now armed with some knowledge to help you with this journey.

A few final words of advice: Be prepared.  Do your research. Listen to your agent. Read the paperwork that you are signing. Don't be afraid to ask questions.  The home buying process can be daunting, but with the right mindset and preparation, it doesn't have to be painful.

 

Preparing to Buy

Thinking about buying? There's lots to do before you start making offers.  Follow these tips for smooth sailing. We recommend reading the article completely so you know what you are in for, before you begin the whole process.

 

Start Saving

Here are the main costs to consider when saving for a home:

  • Down payment: Your down payment requirement will depend on the type of mortgage you choose and the lender. Some conventional loans aimed at first-time home buyers with excellent credit allow as little as 3% down. But even a small down payment can be challenging to save. For example, a 3% down payment on a $300,000 home is $9,000. Use a down payment calculator to decide a goal, and then set up automatic transfers from checking to savings to get started.

  • Closing costs: These are the fees and expenses you pay to finalize your mortgage, and they typically range from 2% to 5% of the loan amount. These can sometimes be rolled into your mortgage, but they are expenses nonetheless--and then you have to pay interest on those costs over the term of the mortgage. If you can afford it, consider these a separate expense to be paid.

  • Move-in expenses: You'll need some cash after the home purchase. Set some money aside for immediate home repairs, upgrades and furnishings.

    Source

 

Be Mindful of Your Credit

Now is not the time to make any big purchases.  For example, no motorcycles, cars, boats, or other large purchases that would require a loan. Keep paying all your bills on time (trying to keep your balance to a minimum) and don't quit your job. Do not get any new credit cards or close existing cards. If your credit needs some work, that's okay.  Because you've started early, there is time.  A mortgage lender may be able to assist you in boosting your credit score.  Speaking of credit scores, it might be a good idea to find out what yours is and see if it needs any help.  A lender can help you do that.  More on that below.  Ideally your credit score should be at least 640--it can be lower for FHA loans (minimum 500, but with restrictions) and VA loans (minimum 620). Source Although it will vary from lender to lender, generally speaking conventional loans will want at least 700, whereas 760+ is likely to get you the best rate. You can learn more about how your credit score affects your mortgage rate here.

 

Decide how you want to take title of the home

While you should always consult a lawyer for qualified legal advice, here is some general information that will get you acquainted with your options. Title refers to a document that lists the legal owner of a piece of property. The basic types of real estate title are joint tenancy, tenancy in common, tenants by entirety, sole ownership, and community property. You can learn about these as well as the pros and cons of each here. 

 

Explore mortgage options

OK now things are getting a little more exciting.  You can always punch in some numbers into a mortgage calculator to get a rough idea, but to truly know what you can qualify for, it's time to consult a mortgage lender.  Before you even look at a home, you ask? Yes, definitely.  First of all, it's clearly valuable to know what you can truly afford. Secondly, it's a common practice that agents will require a pre-qualification with your offer. They want to make sure that this isn't a pie-in-the-sky offer; that the prospective buyer has talked to a lender and can legitimately qualify for the loan.

So where do you go?  For such a large purchase, it makes sense to shop around a little bit.  While I'm sure you've likely seen ads on TV, internet, etc. from large mortgage companies, you may consider starting closer to home.  Are you a member of a credit union? Have you been banking at the same place for many years? Do you have an investment portfolio with a financial advisor or company?  These lenders know you and will often give a competitive rate.  Start here. Once you get a loan estimate, you can take that and shop around to other vendors.  Different lenders have different options (No Closing Costs! Guaranteed Lowest Rates!), but you want to compare apples to apples.  A loan estimate will allow you to do so.  Be aware, "no cost loans" sometimes don't charge you anything out of pocket, but add a large fee on top of your mortgage.  There is seldom a free lunch. 

Are you selling one property and buying another? You may want to consider a 1031 exchange for tax reasons.  As always, you will want to consult a legal expert as well as an accountant for the best advice for you.

If you want to be ahead of the game, you can start to assemble the documents you will need for this process.  Your mileage may vary, but here is a good place to start:

  • W-2s and your two most recent payroll stubs. Or, if you are self-employed, 2 years of tax returns, a year to date profit and loss report as well as any 1099s from all sources of income.
  • Document rental income, if any.
  • 2-3 months of most recent bank statements
  • 2-3 months of investment account statements, if any.
  • A copy of the most recent statements from of all monthly debts: car loans, student loans, credit cards and other mortgages you may have.

Finally, consider getting pre-approved instead of just pre-qualified. It's a little more in-depth, but makes your potential offer that much more enticing. In my experience as a real estate agent, sometimes pre-qualifications aren't worth more than the paper they are printed on.  Pre-approval is the gold standard. In a competitive market, an offer with pre-approval will mean more than one with just pre-qualification.  Since it's free and you have time, why not do it and give yourself an edge over the competition?

Back to Top

 

Shopping For a Home

Now the fun begins, right?  Who am I kidding? You most likely have already been searching for homes online already.  No sweat.  I would do the same.  Anyway, all your ducks are in a row.  You've saved money and you've decided on a lender. Let's get down to business.

 

Choose a real estate agent

Just like lenders, it makes sense to do a little shopping around for the right real estate agent. Rather than rely strictly on-line reviews, it makes sense to pick an agent that will work well with you. Believe it or not, the home buying process is a very emotional experience and is often stressful.  You want to find someone whom you will get along with through this process.  Of course you should check their reviews (Zillow, Realtor.com and the agent's website are great places to start), but also meet with agents to get a sense of their personality.  Is this a high pressure agent? A low-key one? Both can be great, depending on what your needs are and what your personality is.  A referral from a friend or colleague is also a great place to start. 

Also be sure and take a look at each agent's marketing materials.  Do they seem organized, attractive and well polished? Your agent might be a great person, but ultimately you are hiring them to advertise and promote your home.  If the sample marketing materials that they show you are lack luster...maybe you want to keep looking.

 

Be mindful of your budget

Let's say your lender tells you that you qualify for a $750,000 home.  That doesn't necessarily mean every home that's $750,000 (or even $740,000) is automatically in your price range.  Here are other costs you will need to take into consideration:

  • Home Owners Association Dues - Depending on the style of home (detached home, condo or townhome) you may have to pay a fee each month to the home owners association (HOA).  Each association is different, but typically a HOA will perform common area maintenance (landscaping the common areas, fence repair and the like), but can also include access to a pool, spa, clubhouse, tennis courts, etc.  Sometimes they include property insurance (although usually just the exterior), roof maintenance, trash services and pest control. I've seen HOA fees as high as $700+/month.  This reduces your buying power, so you will have to pay attention to HOA fees.

  • Mello Roos - Many developments in California also have an additional monthly fee: Mello Roos.  This is essentially a tax on infrastructure. When developers put in a new subdivision, they may have to build schools, parks, police, fire and child care facilities. Well you know who has to pay that in the end, right?  You, the homeowner. So be sure to look and see if there are any Mello Roos fees associated with the property.  Like HOA fees, they need to be included in your calculations.

  • Property Tax - Property taxes vary, but generally speaking, here in Southern California, you can use 1% of the sales price as a baseline. For example, if the home costs $750,000 to purchase x 1% = $7,500 a year or $625/month.  Your lender likely calculated this in your qualification, but it is something you should be aware of.

  • Home Insurance - Most lenders, if not all, will require you to get home insurance. They want to protect their investment and so will require you to purchase homeowners insurance.  Of course, the cost of insurance will vary depending on home much coverage you need (a policy for a $500,000 home is going to cost less than one for $1.2 million).  Further, that insurance typically covers just the exterior of the home.  If you want insurance for your belongings (personal property), that is going to increase your cost.

  • Life Happens Buffer - While this is just a suggestion and is certainly not mandatory, you may consider buying below what you can afford just simply because it's nice not to be house poor.  If you are maxed out to pay for your mortgage, that doesn't leave you much to enjoy besides your home.  Go on a vacation.  Buy yourself something nice. Pay for extracurricular activities for your kids.  What happens when the fridge breaks and you need a new one?  What about a car accident? Or losing your job?  If you have a little extra left over each month you can put money away for these things.  Consider having a small portion of your income automatically transferred to savings each month, so you never see it.  At the end of the year, if you have money leftover, you can decide if you want to spend or save it.

 

Go and preview several homes in different neighborhoods

A lot of homes look nice online.  We real estate agents always want to make the home look it's best, so we have photos that do just that.  The view with a powerline? Maybe we take a photo that aims a little lower, so you can't see it. The huge-looking backyard? Maybe it was taken from a specific angle to make it look bigger.  In short, there is simply no substitution for seeing a home in person.  3D Virtual tours are a close second. Although I love technology, sometimes the old fashioned way is best.

One thing that I've noticed over the years is people looking for a home don't always know what they want at first.  By previewing several homes, you may stumble across things that you didn't know are important to you.  Perhaps a large yard is key. Or you want your bedroom downstairs and not up.  There can be any number of examples, but the best way to find out, in my experience, is simply looking at several homes.  You will quickly get a sense of what it is you like and don't like.  This will help you and your agent hone in on the right property.

If you live nearby, perhaps you are already acquainted with the neighborhood you want to live in.  I will say, however, that in years of looking at homes in different neighborhoods, I am still discovering small niches that I didn't even knew existed before.  One thing the internet struggles to give you is a sense of the neighborhood.  That is best done by walking (or driving) the streets, checking out the local parks and chatting up neighbors. You can also ask your agent for neighborhood info such as population, average age, income, and value, crime rates and more.

Additionally, if you have school age children, you will likely want to pay attention to what schools are associated with a particular home.  School districts don't always follow the same boundaries as cities.  For example, although the home is in one city, the school district may be in a neighboring one.  Perhaps that is a good thing, perhaps it isn't--but it is something you should pay attention to.  Further, there are often several school districts in one city, and one may be much better than the other.   In short, if schools are important to you, pay attention to each home's particular district as even homes across the street from each other can belong in different districts. You can find out what school district a home is in as well as reports on each of those schools by using this handy tool.

 

Be prepared to move quickly

You've been preparing for so long, that it may be a surprise that when you get down to buying the home, you may want to move quickly.  This is where doing all the work getting pre-qualified in advance pays off.  As an agent, I personally am always reluctant to push someone into making an offer until they are ready.  However, once you have identified the dream property, if you find it, you should be prepared to move quickly.  Time and again, although I warn clients ahead of time, they are often surprised that the home that they love and wanted to spend the weekend thinking about, is gone by Monday. They usually have to "get burned" before they believe me or understand. If you know what you want, and you have finally found it, don't be afraid to make an offer the same day. If you get cold feet, or upon investigation discover something about that home that you don't like, you can almost always back out of the deal.  What you can't do is buy the home once someone else has.

Back to Top

 

Buying a Home

Hooray! You've found a home you like and you are ready to move forward.  Congrats.  This is a very exciting stage of the process.  You are not done yet though, not by a long shot.  Let's take a look at some key components.

 

Write a cover letter

I am simply astonished of the power of a good cover letter.  You would think that money makes all the difference.  That a higher offer will always win out. I am here to tell you that it is simply not true.  I am reluctant to tell you this as I have competed with several agents/offers and have often won just because I had my clients write a cover letter and the other party did not.  It is not a secret, but still, many agents overlook this simple step.  I recently helped buyers get their offer accepted even though they offered $5,000 less than their competitor--and the agent told me it was because of the letter! 

A cover letter is simply a letter written by you and given to the sellers when you present your offer.  You can't write the cover letter ahead of time, as you need to include personal details about the home. Ask your agent for tips on what to include in the letter and/or an example from a past client.  

 

Contract review\consultation

Your agent should always be your go-to resource throughout the home buying process.  Sometimes though, you may want a second opinion on the matter--even if it is only to confirm your agent's input.  We here at Home Sale Resource Centers are here for you.  We look at contracts on a daily basis and have learned from mistakes, loopholes and contracts-gone awry.  If you like, we are happy to look over your contract for purchase, counter offer, etc and provide any feedback we may have.  No charge.  We want to help you--and a sound contract helps everyone.  

 

Get ready for a lot of paperwork

So your offer was accepted? Probably because of your great cover letter. 😄 Now it's time to get down to business.  And the business of real estate generates lots of paperwork.  Inspections, disclosures, termite reports, title reports, HOA documents, etc.  The first 14 days are typically crammed with tons of paperwork.  Paperwork to be read and signed.  Many people don't want to read and simply sign off at the bottom.  Not you.  You have been preparing for this and know to expect a lot of reading.  You want to make sure the largest purchase of your life is money well spent. Skipping to the end and just signing the documents is a bad idea.  Yes it is a lot, but you can do it.  After the first 2-3 weeks, things will cool off and you will feel better knowing you've done your due diligence and you will be confident moving forward. The last few weeks there are typically far fewer documents to review and sign.

 

Inspections, Loans & Insurance

Timelines vary from contract to contract and state to state.  You will want to discuss them with your agent to find out what they are in your case.  Typically however, a contract has a few contingency windows that you should be aware of. For example, the first 17 days (in a standard California purchase agreement) allows you to perform your physical investigations into a property. You will want to get a professional, licensed home inspector to take a look at the home and let you know if there is anything wrong with the property. They in turn, may recommend specialists, if needed, to examine other issues that require further investigations.

You will also need to keep in close contact with the lender.  Now that gears are in motion they may need your latest pay stubs or other additional documentation.  They aren't trying to make your life difficult.  It's a simple matter of making sure it's money well spent.  If someone asked you for $500,000 (or more), you'd ask questions, right?  Well, the lender definitely will. Be prepared and send over all requested documents as quickly as possible.  The lender may take a while to process the loan, but it will only take longer if you drop the ball on getting them the required paperwork in a timely fashion.

Finally, you will likely need to do some research on insurance.  Does the home belong to a home owners association?  What kind of insurance do they have? Does it cover the outside, inside, roof, fire damage, etc? Whatever gaps in the HOA coverage (assuming there is one) are going to be on your shoulders.  The lender will want it, but frankly so should you. Maybe bundling your home insurance with auto will save you some money.  Whatever the case, be ready to shop around and protect your investment.

 

Back to Top

About the Author.  Peter Bolane is a REALTOR® and is passionate about helping buyers navigate the world of real estate.  He is on the NSDCAR Board of Directors and has received several accolades including 2019 REALTOR® of the year and 2015 REALTOR® of excellence.  He lives in Carlsbad, California with his wife and two children.