Achieving the American Dream of Home Ownership
While renting is a great option of housing, I believe there are some undeniable benefits of home ownership. Things such as debt pay-down, appreciation, tax deductions, as well as a few other less tangible benefits as well, are what make Home Ownership such a great investment for the future.
Not sure if buying is the right option for you? Most REALTORS won’t tell you this, but it might not be. Click here to check out the blog post I wrote on the topic.
Step One: Obtain Financing
The first step in any home purchase is to obtain financing, so you will need to speak with a mortgage lender, but before that, you should have a general idea of where you stand financially.
While it is true that there are some low and no down payment options, there are other variables as well. A good credit score is typically required (580+) and a debt-to-income ratio of no more than 48%. Lenders typically will want your monthly housing expenses (principle, interest, taxes, and insurance) to be 30% or less of your monthly gross income, but this can vary. Review your spending so you can know how much house you can afford before starting the process.
It is important to speak with an experienced lender, because some of these numbers can vary greatly. You may need a high down payment, you may need no down payment. They will also be able to determine if there are any first-time-buyer incentives that will apply to you. But let’s carry on.
You will also want a bit of money set aside for the purchase. Even if you can secure a loan with low or no down payment, there will still be closing costs that you will need to pay. Closing costs can add up to be 2-5% of the purchase price, although you can sometimes negotiate that the seller will pay some (or all) for you. Lenders will want to see a “cushion” as well, meaning that you will have some money left over after the transaction in case of emergencies.
You also don’t want to keep your cash stuffed under your mattress, you want to keep it in a bank account. Lenders often like to see a paper trail of money, rather than just large lump sums appearing out of the blue (Big brother wants to keep an eye on our money, too). The amount of time you have before buying might affect your decision on which account to use (checking, savings, CD, etc.) but typically one that earns interest to fight the cost of inflation is your best bet.
Again, you will usually need those things stated above, but it’s super important to speak with a lender. With different loan types, first-time-buyer incentives, and a professional REALTOR negotiating with Sellers on your behalf, it is possible to have extremely low or no out-of-pocket expenses at all. I have had buyers who actually put money in their pocket when they bought their house. Working with a professional lender and REALTOR is the best way to make sure your specific needs are addressed.
Unfortunately, everything up to this point is what delays most first time buyers from ever even trying to purchase their own home. Some people don’t realize they will be in a position to qualify for a mortgage as soon as they decide to start the process, while others will need to work to get to that financial setting. Don’t be discouraged, just start budgeting and before you know it you too will be able to start your journey as a homeowner. I can tell you it’s worth the wait.
SIDE NOTE #1: Financing is going to be the biggest differentiating factor between a first time purchase and someone who is purchasing their 5th property. This is why it’s crucial to work with an experienced lender- it’s usually more difficult for a first time buyer to work out financing than it is for someone who already owns. People who already own are usually able to use their previous property to help afford the next. Luckily, there are first time buyer incentives to help level the playing field. If you would like to speak with a lender, please give me a shout. I work with one who is an expert at getting first time buyers approved and I would be happy to put you two in touch.
Step Two: The Search Begins
Once you are approved for a loan, you are ready to start looking at houses. Your mortgage approval will take some stress off of your shoulders because you will already know what properties you are approved to purchase, and what price range you should be looking in. This takes all of the guesswork out of searching.
As a buyer, you will have the opportunity to be assisted by a REALTOR without having to pay for their service. Real Estate agent commissions are typically paid out of the proceeds received by the seller. If you end up purchasing a house listed For Sale By Owner (FSBO) then it is possible the seller will not want to pay for your REALTOR- but these properties are far less common, and almost all FSBOs are happy to pay for the buyers agent if it means they can get the house sold.
Be sure to work with a professional, experienced REALTOR who will have your best interest at mind. Let them know your needs and your wants- such as number of bedrooms, a fenced in yard, one level living, etc. Your REALTOR should be a resource throughout the entire search and always available to answer your questions or assist however they can. (I know a guy who can help 😉)
Once you identify a home that you love, sit down with your REALTOR and discuss the terms of an offer that you want to submit to the sellers. Your REALTOR will have the experience needed to help your write a strong offer that still keeps your best interests at the forefront. They will be able to walk you through all of the terms of the purchase agreement and offer you advice throughout it.
SIDE NOTE #2: Going back to Side Note #1, because it might be harder for a first time buyer to receive financing, the loan options you have might be stricter as well. You may need to use government backed lending, for example, such as a USDA loan. Different types of loans will have different rules associated with them. For example, if you are using a USDA loan (fairly common for first time buyers) you will not be able to purchase any manufactured home unless it is brand new, you cannot purchase a property with a broken window, and you need to be more cautious of the condition of the home. This is another reason why you should pick an experienced REALTOR who will be able to point these things out to you before you make an offer on such a property.
Step Three: Getting to the Closing Table
You may need to submit a few different offers before a seller agrees to accept yours rather than someone else’s, but once that happens, you will be “under contract” and in your due diligence period.
It will likely take around 30 days before you are able to close on the house, and there will be a lot going on in this timeframe.
Once you go under contract, you will be in your Due Diligence Period. Due Diligence is a time for you to have any inspections you please, and the appraisal (which the lender will require). Your REALTOR will help you determine what inspections you might want have performed, and schedule those inspections along with the appraisal.
Depending on what you find in the inspections, and if the appraisal comes back “good” or not, you may find yourself negotiating with the seller again. It is very common for inspection reports to show issues with a property, which buyers might want to ask the seller to correct. Your REALTOR will help you determine what repairs are worthy of being requested of the seller, and the best way to request them.
After you make it past any repair requests and the appraisal in the due diligence period, it should be smooth sailing to the closing table. These things should not take all of the 30 day closing period, so the remainder of that time will be for the lender and closing attorney to finish up their work and get everything finalized for the purchase.
Step Four: Settlement and Closing
After waiting ~30 days to close, congratulations! It is time for settlement, aka paperwork. This is also where you will need to brings funds for the down payment and closing costs.
As the buyer, you can expect to have a sore arm after leaving the attorneys office on closing day, since you will have a lot of papers to autograph! But don’t be alarmed, your attorney will walk you through all of it so you know exactly what you are putting your name on.
When you meet with the attorney to sign the papers, that is called settlement. At this point, the house is not yet yours, as none of the paperwork is binding until it is recorded.
Later that day (or the next day, depending on the time) the attorney will take the signed deed to the Register of Deeds and have it recorded.
This, my friend, is the closing, and this is when you take ownership of the house.
Congratulations! You are now a homeowner. Get your keys and go make it your own.
Thank you for taking the time to read this blog post. I hope it provided some insight and cleared up the process for you! If you are interested in starting the journey to home ownership, please give me a shout. I would be happy to assist in anyway that I can. Feel free to call or text me anytime at (828) 855-6514 or email me at Aaronrobbins157@gmail.com.