STUDENT TALK Homebuying 101
Buying a home usually marks a crucial life milestone. You have enough in savings to make this decision without breaking the bank. You’re ready to settle down permanently and maybe start a family, even if that just means finding love and adopting a handful of fur babies. However, the homebuying process can be lengthy and complex, especially if it’s your first time and all that homebuying jargon is unfamiliar. Let’s try to get a foundational understanding of the process through the following basic steps.
1. Check Your Financial Security
It’s better to start thinking about homebuying when you’re in a financially secure place in your life. You should make sure you have enough saved up for a minimum down payment, which is the initial amount you must pay to the mortgage loan lender to qualify for the loan. Depending on the product you choose and some qualifications, you may get away with just a 3% down payment. Got excellent credit? There are some options out there with "no money down." In most cases though, it may take closer to 20% to get the home, the rate, and the price you want. Of course, you can also use gift funds for a downpayment but that’s a whole other discussion.
Other costs you should keep in mind:
the full mortgage payment, which is usually split up into principal, interest, taxes, and insurance (keep in mind that private mortgage insurance protects the lender, not the borrower and is totally separate from homeowners insurance which protects your property)
homeowner’s association fees (covered in more detail below)
land lease costs, if the property you want to buy is on leased land
closing costs, which are costs in addition to the buying price that result from sealing a real estate agreement.
And even with no money down, you usually have to give some sort of good faith deposit with an offer
2. Make a Home Wish List
Make a list of what you want in your dream home. What kind of housing structure do you want to live in? What neighborhoods are you considering? How far are you willing to commute? If you want to start a family, look into local schools. Want to get a feel for the neighborhood beyond who mows their lawn and where the bus stops are? The Niche app provides information through filters on diversity, family- or young professional-friendly, cost of living and outdoor activities, just to name a few. Make sure the property is outfitted with the amenities that you want and has the space you need. To help you address all these concerns, it’s definitely worth it to have a real estate agent assist you throughout the home buying process.
It also helps to start shopping for the kind of home you want. Sites like Zillow or Realtor.com can help you find homes in your ideal area and save the ones that meet your criteria. Then, you can show them as examples of what you are looking for when you meet a realtor. Even if the houses have already sold, you'll be painting a clear picture of what you want.
3. Know the Mortgage Loan Logistics
Get preapproval, not prequalification for a mortgage loan. It may be obvious, but this is the loan you’ll be paying for the next 30 years (or less) before that home you love is really your own. Preapproval will help you understand how much lenders are willing to loan you based on your debt-to-income ratio, credit score, and current income. And it isn't prequalification, which just runs some numbers to see if you can make the payment, but doesn't actually verify the information you're providing. Sellers will be more likely to consider your offer once they know you’ve been preapproved for a loan. It’s also good practice to shop around for different lenders to see how the fees and interest rates will change between different financial institutions and entities. Also, keep in mind that there is more than one type of mortgage loan. Keep in mind too, your realtor may have access to a lender as an option. They usually collect the data, then shop your loan around to different lenders for the best option.
Another key detail to keep in mind is knowing what goes into the interest rate and what goes into the APR (annual percentage rate). The interest rate is your annual cost for borrowing the loan. The APR is that amounht, plus the other fees you will have to pay as a result of taking out the loan, such as mortgage insurance and closing costs. The following may all be considered (if your lender is charging them) as part of the APR:
- Points - both discount and origination points.
- Pre-paid interest (the interest owed from the date of the closing through the end of that month.
- Adminstrative fees
- Loan Processing fees
- Underwriting fees
- Doc prep fees
- Private Mortgage Insurance (PMI)
- Escrow/Settlement Fee
But as far as the above bulleted points go, lenders vary, so having this information included in the APY allows a more accurate reflection of the total cost of your mortgage loan.
One helpful resource for this could be your local bank or credit union. If you’ve been a long-time member of a financial institution, you would probably trust them to be your lender or to refer you to reliable lenders in the area. MIT Federal Credit Union offers some home loan options for their members.
4. Making an Offer
Once you’ve decided on your dream home, it’s time to make an offer to the seller. Your agent can help you by communicating with the seller’s agent. Be prepared for the seller to send back a counteroffer and keep negotiating until you come to an offer you’re satisfied with. Once an agreement is made, you’ll make a good-faith deposit and the seller will take the house off the market under the pretense that you will purchase the property. This would be a good time to bring in a professional to have the home inspected to prevent any surprises. Sometimes, if you’ve bid below the ask and the seller chooses, they could accept your offer with a right to continue showing the property. If they get an offer higher than yours, they agree to come back to you and see if you are willing to come up. In today's hot real estate market, you an even add an escalation clause to an offer. That means you make an initial offer, but let the seller know that if they get someone offering higher, you will automatically increase your offer to $XXX above that higher offer, up to a maximum amount. Offers these days are quite complex, so it's best to work with your realtor when figuring out the best way to get you that house.
Another thing to keep in mind during this step is knowing if there are any homeowner’s association (HOA) fees associated with the property. An HOA’s role is to enforce certain rules related to properties in a particular residential subdivision. They will typically charge you a monthly fee to help with maintenance and other expenses of the community. For example, you could be charged $20/month to have your lawn mowed and driveway plowed, or you could be charged $600/month to have access to the community pool and tennis courts. And that fee isn't optional. It would also be good to know if the property you plan to buy is in-line with the HOA’s standards. This can help you avoid incurring additional costs for home maintenance you didn’t expect. Also, check the condo documents to see if there are any special assessments in place. This usually means there was work needing to be done on the shared property that wasn’t covered by the collected condo fees. Finally, homeowner associations also dictate rules about pets, fencing, how your deck or patio can be used, guidelines about planting, outdoor activities, and more. It is essential to read through those docs, which are most commonly part of a condominium project, but can also be a part of purchasing a home in a “gated community.”
5. Closing the Offer
If you decide this home is the one for you, it’s time to sign all the paperwork to make it legit. Congrats, you now own a home! Don’t forget to keep in mind additional costs that may come up, such as home maintenance, repairs, utility bills, and new furnishings and appliances. Once you’re a homeowner, consider setting a budget solely dedicated to your home. That way, things like replacing a furnace, or some flooring, calling in a plumber when the pipes freeze, or adding air conditioning won’t result in other bills not getting paid. It’s all a balancing act, and if you’ve bought a new home, you’ve just added a very large weight to one side of the scale! But it’s all part of the plan.
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