You are a young, single professional, and lately the idea of becoming a homeowner has been consuming your thoughts. On the train ride to work, you fantasize about living in that beautiful new condo hi-rise in your favorite neighborhood; or that exposed brick loft with the large east facing balcony. And why not? A home can be a valuable asset, not to mention the positive impact on communities and the various tax advantages that come with ownership. With favorable mortgage rates, now seems like a good time to make that move. Below are tips to assist in your home search.
1. Pre-Approval for Mortgage Loan
Getting “pre-approved” for a mortgage is the first step in your housing journey. Whether you are interested in a house, condo, or townhome, a mortgage will need to be secured in order to buy the property. A mortgage is a loan used by purchasers to buy real estate. The type of mortgage you will be able to obtain will depend on several factors such as: income, credit score, and the amount of your down payment. A pre-approval consists of a written statement from a lender stating that you as a potential buyer have met that lender’s basic requirements in order to qualify for a specific loan amount. Pre-approval means that before you step one foot into that beautiful new hi-rise, you know exactly how much you can afford. It will also allow you to present yourself as a serious buyer when making an offer on your new home. Pre-approvals are usually good for 60 to 90 days. If you are unable to find a property that suits your needs and secure your mortgage within that time frame, you will have to reapply.
2. Mortgage Lenders
If you are unsure which lender you should use, word of mouth is always a good place to start. Ask friends, family, and co-workers if they can recommend a lender. You can also explore mortgage options with your current banking institution or credit union. Online research can also assist you in finding a lender that is right for you. With the recent mortgage meltdown, it is critical that you take active steps to ensure your lender is reputable and has a good track record. And last but not least, ask your Realtor, which brings me to my next point of discussion.
3. Get a Realtor
As a former Realtor in the Chicago and greater Chicago metropolitan area, I highly recommend that you use a licensed Realtor to assist you in your housing search. An experienced Realtor is certain to give you an advantage. A Realtor will have “live” access to property listings that the general public does not have access to. Also, a Realtor will be able to explain to you in detail how to make an offer and will assist you in drafting your offer. Keep in mind that a Realtor will not replace an attorney and you should always seek legal advice from legal counsel. However, a Realtor will advocate for you. Her fee will come out of the proceeds of the sale which is usually paid by the seller’s agent, unless the parties have made other arrangements. Working with a Realtor who is a member of NAR (National Association of Realtors) will help to ensure your home purchase goes smoothly. Again, ask family and friends if they can make a recommendation based on experience. Attend a few open houses and talk with the Realtor on site. This is a great opportunity to conduct a “live interview” with a potential Realtor. Does she seem knowledgeable? Is he patient in answering my questions? Do I feel this is someone I can work with?
4. Reality Check: Needs vs. Wants
Now that you have obtained your pre-approval and chosen your Realtor, it is time to start looking at properties! You should be very forthcoming in letting your Realtor know what amenities, features, and neighborhoods you are interested in. This will help your Realtor tailor the housing search and avoid wasting time. First homes are usually “starter” homes. Therefore, it is important to identify needs versus wants to be realistic in your expectations. No home is going to have everything on your wish list. And if it does, which is doubtful, it most likely will not be within your budget. Understand that as a first time home buyer, you will need to compromise on a few things. For example, you may find a home that has the perfect garage space, but the backyard is smaller than you would like. Or, the kitchen may have the granite counter tops and stainless steel appliances you love, but the home is missing the master bath you were hoping for. Again, identifying needs versus wants will be key in determining which home is right for you, and may also determine whether your housing search lasts a few weeks or several months.
5. Get an Attorney
As previously mentioned, a Realtor does not replace an attorney. Some states require an attorney for real estate closings, others do not. However, when dealing with contracts, contingencies, and inspections, it is in your best interest to consult with an attorney. Again, a good place to start is a recommendation from family and friends that have gone through the home buying process.
6. Offer-Contract-Contingencies-Earnest Money
Once you have found a home that you like, the next step is to make an “offer.” You should include any contingencies. An offer by a potential buyer to purchase a property will become the purchase contract, if accepted by the seller. Buyers that choose to make offers on their own run the risk of losing out on opportunities as well as leaving money on the table because they did not have an understanding of: (a) the terms and conditions of the offer; or (b) inherent contingencies of the offer, such as the return of “earnest” money should financing fall through; or (c) if the home fails inspection. Earnest money is money given to the seller at the time the offer is made as a show of good faith. The contract will be submitted to the seller, signed by you, along with earnest money which should equal a small percentage of the offered purchase price; for example $2,000. Submitting earnest money is a show of good faith. If the seller receives more than one offer for his property, one including earnest money, and one without, the seller is most likely to accept the offer presented with earnest money as that offer will be taken more seriously. However, be prepared for some negotiation as sellers can reject an offer and counter with a higher price and/or additional requests. Once the seller accepts your offer, a binding or enforceable contract for purchase has been created. Which brings us back to the importance of including certain contingencies in your offer. A contingency is a situation or circumstance that if not met, may nullify or cancel the original contract, or may require the original contract to be amended. The contract should include a contingency for financing. If for any reason you are unable to secure a mortgage, there should be an “out” in the contract. Again, an experienced Realtor will be able to assist in drafting the offer and any contingencies accordingly, but always consult with legal counsel before entering into any contracts.
One major contingency that should always be included is the inspection. A home inspection performed by an experienced, licensed professional will determine the soundness and quality of the property. An inspector will examine the electricity, plumbing, heating and air, etc. to determine if there are any issues with the home. If a property does not pass inspection, the contract should state a return of earnest money and nullification of the contract, or a good faith effort on the part of the seller to make repairs, or in the alternative, a “credit” upon purchase.
You made your offer. The seller has accepted. All contingencies have been satisfied. The next step is the “closing.” The closing is the process whereby ownership or title is transferred from seller to buyer and funds are distributed for the purchase of the property. Closing dates are usually set by the contract and take place at a designated title company. Both buyer and seller, their respective attorneys, and title company representatives will be present. Be prepared, closings can take anywhere from an hour to several hours as you will be signing a litany of forms both finalizing your mortgage and evidencing title transfer. But if proper steps and due diligence have been taken from start to finish, this process, although lengthy, should go smoothly.
The decision to buy a home is one of the most important financial decisions you will make over the course of your lifetime. It is an investment, both financial and emotional, that can provide you with dividends that can impact your life for years to come. For the first time home buyer, it can be an exciting yet nerve racking experience. But with a little leg work, research, and patience, it can be a rewarding endeavor. Be prepared. Ask questions. Get information. Soon you will have the satisfaction of knowing that you have realized one of the most basic elements of the American dream – home ownership.