This time of year, many people are just beginning to think of their upcoming home purchase. If you're reading this blog, chances are you that you are one of those people. Maybe you've had the desire to buy a home for some time, but haven't acted on that desire. Most often this happens when you aren't sure where to begin. Rest easy, I'm here to help.
Whether you've never bought a home before, or you're a homeowner that doesn't remember the process, here's a step-by-step guide to help you prepare for the home buying process.
Preparing for a Home Purchase
The first step is to take a look at your credit report. There are several free credit websites out there. In most states, you're allowed to review your credit reports for free once per year on
www.annualcreditreport.com. You can also purchase credit scores and credit monitoring from this site or one of the 3 credit reporting bureaus: Experian, Trans Union, and Equifax. Be sure that you use a reputable source to avoid phising and identity theft.
Your median credit score (the middle value score of all 3) should be at least 620. You also shouldn't have any late payments on credit accounts within the last year, and ideally, for the last 2 years. You also shouldn't have any open collection accounts. If this is what you're seeing, you are in good shape! If not, you may have some work to do. Set reminders on your calendars or cell phone for payment due dates to help you pay on time, or just make a payment with each pay check. Pay extra attention to credit card due dates, since they are not always on the same date every month.
Do not go disputing every negative item on your credit report! Depending which loan type you use to finance your home, this could cause some problems. Some loan types cannot be closed with an open dispute showing on the credit. If you have true inaccuracies, by all means, dispute these and provide the necessary evidence so that they can be removed. However, it may be more effective to contact the creditor directly with your evidence. They may be more cooperative this way. If there are a lot of items on your report that are truly your accounts, you do have options. You can work with a credit repair company, non-profit, or negotiate settlements with the creditors.
Savings and Cash-on-Hand
Next, look at your savings account balance. You'll need at least 3% of the price of the home you're looking to purchase for closing costs, in addition to your down payment. This would be $3,000 for every $100,000 of home price. This figure should be calculated using the entire purchase price, not the amount financed after your down payment. Some loans do allow you to finance most of the closing costs, however, this will increase your monthly payment. Not all closing costs can be financed, either. Earnest money, option fees, and inspector costs cannot be rolled in to a loan. Appraisals often must be paid for up front as well. This varies, but if you aren't sure, plan for it. It's better to have an extra few hundred in your pocket than not.
For a break-down of the typical costs that come with the purchase of an existing home in North Texas, click
here. Closing costs on a foreclosure or new construction home will vary, so consult a Realtor for more information if you're looking at this type of purchase.
When my husband and I were planning to move, we created a spreadsheet and entered every purchase on our bank and credit card statements from the past 3 months. We categorized them to differentiate between essential expenses- food, housing, utilities, cars, etc. and discretionary spending- clothing, dining out, entertainment, etc. We were able to reduce our spending by about $300 per month and put that money all in savings. Every time we were tempted to head to a restaurant or make an unnecessary purchase, we'd call each other and talk about the neighborhood we wanted to live in. We had been dreaming of living there for years. It really helped, and in a year's time, we had our closing costs in full. Our down payment came from the equity gained from the sale of the home we lived in at the time. Friends have come up with this money in their own ways, so find what works for you. Some borrow from a 401k (many allow you to borrow for a down payment and home buying expenses), some sold valuables like boats and furniture. Others took on 2nd jobs or did things like babysitting for extra funds to put into savings. Get creative! It often takes a little more than your typical savings habits to quickly save enough to buy a home.
Contrary to popular belief, 20% down payments are not the minimum. While 20% does reduce the amount you'll be financing, show financial security, and eliminate mortgage insurance (more on this later), you can finance a home with far less in most cases. Mandatory down payment requirements will vary with the loan type being used to finance the purchase, from $0 on up to 20% of the purchase price. If you have 10% in the bank and everything else is ready to go now, you're still in good shape. If home values are appreciating, taking the time to save that additional 10% not have as much of an impact on your purchasing power.
For example, if you're looking at a $250,000 home in an area where prices are going up an average of 5% per year, and you have 10% in the bank ($25,000), it may make more sense to go ahead and buy the home. If you did, you would be financing $225,000. If it took you 2 years to save up the additional $25,000, that same home's price would be $275,000, so you still wouldn't have 20%. If you did, you would still be financing $220,000. That's only $5,000 less than you would have financed if you had purchased 2 years prior. If you had purchased earlier, you also would now have an additional $25,000 in equity just from the home's appreciation, on top of the equity earned from paying down your mortgage during that timeframe. Not to mention the money spent on rent that did not go toward building your equity at all. Waiting doesn't always make sense. However, mortgage insurance rates are a factor to consider. Most lenders will require mortgage insurance for any purchase or refinance loan that exceeds 80% of the value of the home. This insurance protects the lender in the event that you default on the loan. Sadly, you as a buyer won't benefit from it, but it is required. Consult a mortgage professional for actual payment calculations with and without mortgage insurance on scenarios like this to make a well informed decision.
Choosing a Loan Officer
It really doesn't matter whether you choose the Realtor or the loan officer first, and typically, you'll begin working with each around the same time. I put the lender first, because the Realtor will want you to be pre-approved before showing you homes. No, this isn't due to laziness or not wanting to waste time. Pre-approval defines your budget, verifies that you can realistically purchase the homes you're looking at, and ensures that you're ready to act as soon as you find the right one. Nothing is worse than finding the right house before you're ready, spending a couple of days waiting on the pre-approval, and then finding out another buyer swooped in and put a contract on *your* future house. Ouch. I never want that to happen to my buyers!
So, once you have the minimum credit score and funds, you're ready to begin working with a mortgage lender. There are millions out there, so ask for recommendations from friends, family, and your Realtor (if you've chosen one). Realtors are great resources because we're seeing who is getting deals closed and on time, and who isn't. True, we'll often recommend those that send us clients, but we'll never recommend someone that does a bad job. Lenders and Realtors work hand-in-hand on each sale, so we always want a good team of professionals to get the job done right and on time. The same goes for Realtor referrals from lenders, too, I'm sure. If you get the lender first and ask for Realtors, they're not going to suggest someone that doesn't know what they're doing.
Some questions to ask your potential lenders would include their fees, what types of loans they offer, and do they have a good line of communication with their underwriting department and buyer's agents? Ask if they have a track record of closing on time. Don't be afraid! Listen for how well they explain things to you and how responsive they are to your questions. If they're not willing to answer questions now to earn your business, what might they be like when you're in contract and have a deadline and a problem pops up? Choose carefully. You can shop around. Even if multiple lenders check your credit, if it's for the same purpose in a short period of time, it will be seen as 1 inquiry. Don't be afraid to let them know you're shopping around, either. If you find one that seems to be very informative and great, but has higher fees, maybe they would match or at least reduce their fees in order to earn your business.
As you begin working with a lender, keep focusing on your credit. Don't open any new lines of credit or make any large purchases until after closing. Your credit will be checked in the beginning of the process and again just before closing. A new account could change your debt to income ratios enough to hurt the sale. So, when you're shopping for appliances and furniture, hold back on the finance offers. Continue making all of your payments on time. If you're searching for jobs, it may not be the best time to buy a home. Promotions are ok, but if you're thinking of changing jobs, consult your lender before you write up any resignation letters.
Another important rule- do not deposit large amounts of cash without consulting your mortgage lender. Ask your lender what amount they consider large, if you receive cash on a regular basis or expect some to come in. If the lender knows about it, they can help you determine the best way to document the funds in a way that won't raise a flag in underwriting. Loan underwriters will want to know where your money is coming from to ensure that you're a low risk borrower. Also, if you are receiving a down payment or closing cost gift of funds from a relative or other source, such as a non-profit, be sure to discuss documentation with your lender in advance.
The next step is to get pre-approved for a loan. This will take a few days, as apposed to a few minutes for a pre-qualification, but it is a crucial step. Nowadays it is pretty much a requirement to submit a pre-approval letter with a purchase offer. Pre-qualification doesn't carry as much weight as a pre-approval. The difference is a big deal to a well informed seller, especially if they have multiple offers on the property. For a pre-approval, the lender has gone a few steps further than just looking at your credit and asking you questions. They've actually received income documentation and asset information from you and most likely have verified this information already. They have ensured that you are able to purchase and are willing to put that in writing. Once you are pre-approved, you're just about ready to begin home shopping.
Choosing Your Realtor
Similar to the loan officer, begin by asking friends and family for their recommendations. Your loan officer can recommend someone great as well. Even if you've bought and sold homes before, it makes sense to work with a Realtor that is knowledgeable about current forms, laws, and etiquette in your local market. Take some time to interview your top candidates, and choose one that feels right to you. Have a conversation. You'll be spending some time with that agent and trusting them with sensitive information, so make sure you're comfortable with them and their personality. Find out how they work, what they do for clients, and just get to know them.
A Realtor is not just a real estate agent, and not every real estate agent is a Realtor. Realtor is a trademarked title earned only by a licensed real estate agent that is a member of the National Association of Realtors, and has taken an oath to conduct their business according to the Realtor code of ethics. View the code
here. Many large brokerage firms require their agents to be Realtors. Smaller, independent firms may not be as strict. Each firm offers their own training, in addition to the minimum education required to take the state licensing exam. If you're interviewing an agent that is not a Realtor, it might be a great question to ask why. Perhaps they haven't joined yet, perhaps they're saving money (Realtors pay annual dues to the national, state, and even local associations that can be close to $1,000 per year or more.), or they were asked to leave the association for ethics violations. That last one should be cause for concern.
Be wary of cash back incentives and gimmicky marketing tactics. While a few extra bucks at closing may sound appealing, you have to wonder why the agent is willing to give away part of their paycheck. Some may be new to the business and trying to build up their client base, others may not be selling a whole lot. Real estate agents are almost always paid 100% in commissions, there is no salary from the brokerage. In fact, we pay our brokerages, too! So think about it this way. If they're willing to give up their own pay to get business, are they going to protect your financial interests? Incentives when you are buying and selling, or if you're a repeat client are common and less concerning than a stranger's postcard in the mailbox with a coupon for a cash rebate. Don't be afraid to ask about an agent's sales numbers! Have they sold 2 homes within the last year or 12? Might this matter to you? Especially in a challenging market, that experience could be the difference between you getting your dream home or settling for something that just isn't right. An agent that doesn't sell very many homes may have a little more motivation to get you to buy fast, instead of the patience to work with you until you've found the right fit. While on the flip side, that top producer you see on billboards everywhere may not have the time to give you the full service and guidance that you deserve.
Financial guru Dave Ramsey recommends to choose a Realtor with a "teacher's heart," and I agree. I've had clients tell me that past Realtors sent them stacks of documents and said "sign here" without ever explaining much. Yikes! Real estate contracts are legal, binding documents. Failing to uphold your duties, as defined by the contract, could cause you to find yourself in court- facing some real and expensive consequences. Therefore, your agent should be able to explain the contract to you, prior to signing, so that you fully understand what you're agreeing to do. And for goodness sake, please don't try it on your own! For these same reasons, real estate agents must go through several hundred hours of training and maintain state licenses. If you do not fully understand the contract forms you're signing, you could be putting yourself at risk. Besides, as a buyer, you don't pay for the agent, so why not have an expert on your side?
Ask prospective Realtors about their schedules as well. When will you most likely be available to tour homes? For many home shoppers, the answer is in the evenings and on weekends. Will they be available to show during these times or do they stick to a strict 9-5 schedule? Do they have another job? You'd be surprised how many agents sell homes part time around a full time job. New agents often do this while they're starting out and building up a client base, others will take a temporary job during slow seasons to supplement their income. Also ask about their client load. An agent working with 25 clients at any given time might be impressive, but will that agent have time for you? It would be unreasonable to assume that your agent is available every day, all day, but if they can't show you a home without a week's notice, you might want to move on. If you're looking into a team of agents, you may be working with a buyer's specialist or one of the team's members. Ask if you'll always be working with the same person or if it will be whoever is on call.
Ask about their back-ups. If they will be on vacation, or have significant family demands coming up, they should have a co-worker that will be able to show you a home or answer questions in their absence. Many Realtors work non-traditional schedules around their family obligations. They recognize their clients' needs, but also must be available during business hours when title companies and banks are open. Don't be afraid to ask for your agent's time. We're used to it, and we chose this profession. For me, the flexibility to be at a school function during the day is one of the major perks of the job, so I'm happy to trade off some evening or weekend time.
One more thing- ask for the broker's contact information. If they hesitate, you need to ask why. In Texas, when you enter into a representation agreement with a real estate agent, you are also technically entering into it with their broker. You are truly represented by both, even though your agent likely will do everything. Clients don't typically have to contact the broker, but have their number just in case. Unforeseen things happen. If your Realtor falls ill or is injured and unable to work while you have a contract pending and deadlines to meet, the broker will step in and either help you themselves or appoint another agent to take over until your agent returns. Your contractual obligations do not go away if the agent is unavailable.
Make it Official
Once you've chosen your Realtor, enter in to a contractual representation agreement. Some people are really afraid to do this, either because they know someone who has had a bad experience, or they're just afraid to be bound to one person. If you've asked the above questions, you should have a pretty darn good idea of who your agent is. By having the agent represent you, they are agreeing to work for you, and you are agreeing to work exclusively with that agent. Representing you is different from just showing you a few houses. Sure, an agent can show you homes without representing you. They can even prepare and submit an offer for you. But they're not working
for you in that scenario. Seeing one or two houses can be a great way to interview an agent and get a feel for how they work. However, in Texas, without representing you as a buyer, an agent showing a house (listed by someone else) is considered a sub-agent of the seller. The listing agent is representing the seller's best interests. In either of these cases, they can give you factual information about the property, but cannot disclose any private financial information about the seller. Their job is to get the seller top dollar for the property. They are not obligated to keep your financial information confidential, either. If the agent knows that you're able to pay more for a house, not only are they likely to tell the seller that information, but they are actually obligated to do so.
By representing you as a buyer, the agent is looking out for you and your needs. Their job is now to proactively search for homes that meet your needs and wants, share information with you, and get you the house you want, at the best price the market will allow. Lately in DFW, it's been a seller's market, so the best price scenario has taken a back seat to getting you the house that meets your needs. Regardless of the market conditions, a buyer's agent is required to keep your financial information confidential. There are times when it does make sense to discuss things with the other party prior to making an offer, like if there is a unique situation, but this should be done only with your knowledge and consent, and it should never be done in a way that harms your bargaining power. To properly serve you, the agent really needs to represent you. In turn, you need to remain loyal to your agent. If you go to open houses on the weekend without your agent, and tell the listing agents all about your budget, you're only hurting yourself. The same thing applies if you're calling the numbers on the signs in front of houses for sale. If you have an agent, use them! Chances are, if they didn't tell you about this house you're driving by, it either didn't meet the needs you discussed, is in contract, etc. or that you're looking beyond the parameters that you discussed with your agent. Talk to them! The agent can get the information for you and discuss whether your search criteria needs to be adjusted. Communication is important, and you're not inconveniencing your agent if you ask. It's their job!
Thinking About Your Future Home
While you're waiting for a pre-approval letter and interviewing agents, start making 2 lists. I always tell my buyers to make one list of their must haves- those essential elements that a home has to have for you to consider living there- minimum number of bedrooms, etc.; and then a list of their wants- cosmetic features, luxuries, etc. I suggest that they carry this list along when touring homes and treat it as a checklist. A home that is pretty and has all of your wants can seem so attractive, making it easy to overlook the fact that it doesn't have enough bedrooms or misses another key item on the must-have list. I've been there. When we were shopping for a 4 bedroom house for our family of 4, plus mother-in-law that was moving in with us. One day we wandered in to an open house and absolutely fell in love with a pretty 3 bedroom home. The décor was just our style, and the kitchen was beyond perfect! We almost bought it. Almost. But would have been in big trouble when we moved in and did not have the space we needed at the time. Instead, we found a 4 bedroom that wasn't as pretty, but had the space and layout we wanted, and then we styled it our way.
Also think about your timeframe and narrow down your ideal location. Browse some real estate websites (I recommend realtor.com for the most accurate listing information) and really get an idea of what you're hoping to find. Realtors are pretty good at helping you narrow down your options, but if you begin with a 20 square mile area with broad criteria, you may begin your search overwhelmed with too many options. Spend time in the areas you're considering to get a feel for the activity during the day, evenings, and weekends. Look at schools, and consider your commute. No matter how good a Realtor is, they can't tell you what you want. Only you can determine your acceptable commute time and ideal home.
Finding the Right Home
Enlist technology while you're searching. Take pictures or video of each home, make notes, or record your thoughts, starting and ending with a photo of the front of the home or the address. After touring several homes, they will begin to blend together in your mind. There are some good apps, but I've found just photos and video to be effective. Note what you like and what you don't like, as well as observations about the street and neighborhood. Your Realtor can always take you back for a 2nd look, so don't stress over it too much. Narrow down your options by eliminating those that don't work for you.
Keep your lists handy and refer to them often during showings. Did the home have all of your must-haves? How many items on your wish list did it have? It can be tempting to see nothing but the "pretty" when shopping, and too easy to ignore the practical.
If you really like one, move quickly, especially if it is a seller's market. Your Realtor will help you structure an offer that is competitive in the current market and meets your financial needs. This is where advice from family and friends can be detrimental. For example, I've heard people say "my father-in-law says to never offer full price" in markets where multiple offers are common. If the market has a surplus of inventory, this advice is fine. If inventory is low and the number of buyers shopping exceeds the number of listings for sale, you may need to put everything on the table to get the house you want. Trust the experts here. While those giving you advice probably mean well, they're most likely not buying and selling homes every month, so they won't have the most up-to-date information on the market.
Written by Maggie Hernandez with Group Watson- Keller Williams Realty
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