You've found the home of your dreams! Now all you have to do is BUY the darn thing!
This is final part of a three part series to help first time home buyers navigate through the process.
Mortgage Options and Costs
The cost of real estate financing is often greater than the original purchase price of a home (after including interest and closing costs). Because financing is so important, buyers should have as much information as possible regarding mortgage options and costs.
What Kind of Loan?
Thousands of loans are available from a variety of lenders but, in general, the mortgage you choose will be determined by at least several key factors:
- How much down? Loans with 5 percent down or less are available – in fact, loans from major lenders with no money down have appeared in recent years.
- If you place less than 20 percent down, lenders will want the mortgage guaranteed by an outside third party such as the Veterans Administration, the Federal Housing Administration or a private mortgage insurer (required by lenders to protect against a mortgage default). Millions of VA, FHA and PMI loans are generated each year.
- How’s your credit? The best rates and terms are only available to those with solid credit. To get the best loans, make a point of paying credit cards, installment payments, rent and mortgage bills in full and on time.
- Are you a first-time buyer? It might seem that “first-time buyer” means someone who has never owned property before, but under most state programs, the term refers to those who have not owned property within the past three years. State-backed first-timer programs often feature smaller downpayments and below-market interest rates. .
How Do You Get a Loan?
To obtain a loan you must complete a written loan application and provide supporting documentation. Specific documents include recent pay stubs, rental checks and tax returns for the past two or three years if you are self-employed. During the pre-qualification process, the loan officer will describe the type of paperwork required.
Where Do You Get a Loan?
Mortgage financing can be obtained from mortgage bankers, mortgage brokers, savings and loan associations, mutual savings banks, commercial banks, credit unions, and insurance companies.
Making an Offer
While much attention is paid to the offering price of a home, a proposal to buy includes both the price and terms. In some cases, terms can represent thousands of dollars in additional value for buyers ? or additional costs. Terms are extremely important and should be carefully reviewed
How Much?
You sometimes hear that the amount of your offer should be a certain percent below the seller’s asking price or an amount less than you’re really willing to pay. In practice, the offer depends on the basic laws of supply and demand: If many buyers are competing for homes, then sellers will likely get full-price offers and sometimes more. If demand is weak, then offers below the asking price may be in order.
How Do You Make an Offer?
The process of making offers varies around the country. In a typical situation, you will complete an offer sheet that the REALTOR® will present to the owner and the owner’s representative. The owner, in turn, may accept the offer, reject it or make a counter-offer.
Because counter-offers are common (any change in an offer can be considered a counter-offer), it’s important for buyers to remain in close contact with REALTORS® during the negotiation process so that any proposed changes can be quickly reviewed.
How Many Inspections?
A number of inspections are common in residential realty transactions. They include checks for termites, surveys to determine boundaries, appraisals to determine value for lenders, title reviews and structural inspections.
Structural inspections are particularly important. During these examinations, an inspector comes to the property to determine if there are material physical defects and whether expensive repairs and replacements are likely to be required in the next few years. Such inspections for a single-family home often require two or three hours, and buyers should attend. This is an opportunity to examine the property’s mechanics and structure, ask questions and learn far more about the property than is possible with an informal walk-through.
Home Ownership and Insurance
No sensible car owner would drive without insurance, so it figures that no homeowner should be without insurance, either.
The essential idea behind various forms of real estate insurance is to protect owners in the event of catastrophe. If something goes wrong, insurance can be the bargain of a lifetime.
What Kind and How Much?
There are various forms of insurance associated with home ownership, including these major types:
- Title Insurance: Purchased with a one-time fee at closing, title insurance protects owners in the event that the title to the property is found to be invalid. .
- Homeowners insurance: Provides fire, theft and liability coverage. Homeowners policies are required by lenders and often cover a surprising number of items, including in some cases such property as wedding rings, furniture and home office equipment.
- Flood insurance: Generally required in high-risk, flood-prone areas, this insurance is issued by the federal government and provides as much as $250,000 in coverage for a single-family home, plus $100,000 for contents.
- Home warranties: With new homes, buyers want assurance that if something goes wrong after completion, the builder will be there to make repairs. But what if the builder refuses to do the work or goes out of business? Home warranties bought from third parties by home builders are generally designed to provide several forms of protection: workmanship for the first year, mechanical problems such as plumbing and wiring for the first two years, and structural defects for up to 10 years. Home warranties for existing homes are typically one-year service agreements purchased by sellers. In the event of a covered defect or breakdown, the warranty firm will step in and make the repair or cover its cost. Insurance policies and warranties have limitations and individual programs have different levels of coverage, deductibles and costs. For details, speak with REALTORS®, insurance brokers and home builders.
Closing
The closing process, which in different parts of the country is also known as “settlement” or “escrow,” is increasingly computerized and automated. In many cases, buyers and sellers don’t need to attend a specific event; signed paperwork can be sent to the closing agent via overnight delivery.
In practice, closings bring together a variety of parties who are part of the transaction. For example, while the history of property ownership has been checked, it’s possible that the records contain errors, unrecorded claims or flaws in the review itself, thus title insurance is necessary. At closing, transfer taxes must be paid and other claims must also be settled (including closing costs, legal fees and adjustments). In most transactions, the closing agent also completes the paperwork needed to record the loan.
What to Expect
Settlement is a brief process where all of the necessary paperwork needed to complete the transaction is signed. Closing is typically held in an office setting, sometimes with both buyer and seller at the same table, sometimes with each party completing their papers separately.
Whatever the case, the result is that title to the property is transferred from seller to buyer. The buyer receives the keys and the seller receives payment for the home. From the amount credited to the seller, the closing agent subtracts money to pay off the existing mortgage and other transaction costs. Deeds, loan papers, and other documents are prepared, signed and filed with local property record offices.
What You Need to Do
One of the best parts of settlement is that buyers and sellers need to do very little.
Before closing, buyers typically have a final opportunity to walk through the property to assure that its condition has not changed materially since the sale agreement was signed.
At the closing itself, all papers have been prepared by closing agents, title companies, lenders and lawyers. This paperwork reflects the sale agreement and allows all parties to the transaction to verify their interests. For instance, buyers get the title to the property, lenders have their loans recorded in the public records, and state governments collect their transfer taxes.
You’ve done it. You’ve looked at properties, made an offer, obtained financing and gone to closing. The home is yours. Is there any more to the home buying process?
Yes! Read my next BONUS post about what steps you should take after taking ownership!
