Are ready to take some basic steps BEFORE house shopping? Buying a house is not only a major decision, but a major life change and a major investment. Likely one of the largest investments you will make in your lifetime. So I encourage you to do your due diligence prior to stepping out into the market place. You should take these basic steps BEFORE house shopping and it is important that you know what they are and take the appropriate steps BEFORE you get started looking for a house. Let’s break them down into bite size pieces so you can sort through the beginning process with ease and understanding.
1. First of all, you want to be mindful that “verbal contracts” or promises are not legally binding in Real Estate. I know I’m jumping ahead to the contract phase, but you will want to be sure to write down everything you want, or don’t want, in your Contract to ensure satisfaction. Therefore, begin right now, right from the start, write down your needs, wants and desires. You want to start taking notes and writing things down that you want to include as you go through the process. So keep a pen and a note pad close by at all times, so you don’t forget in the process. Some notes will be details for your Realtor®, some for your lending institution, some for your attorney and some to reference as you keep note of your criteria for a new home.
For example, you may be driving to work and see a style of home you like, or a color of shutters you prefer, or a desired area you want to live in, or the fact that you don’t want a steep driveway, etc. Or you may think about how many bedrooms or bathrooms you need, or a basement, or a garage. Or maybe you’re thinking you won’t want to shop for appliances and want them to be included. These types of details will help your Realtor® to know exactly what you are looking for and what the deal breakers are. Be sure to get your notes started right from the beginning. This will keep you focused and help you along the way.
2. One of the most important things you will want to do in the basic steps before house shopping is to build your team. Your team are those individuals that will help you to find a home, finance a home and ensure each step is handled with integrity and within the law. There are many steps to picking your team, but that’s a whole other blog!
3. Now, as you drive the kids to school or on your way to work, you might be noticing the $500,000 homes in that upscale area you love. But is that in your budget? The way to find out is to meet with the first person on your team, a mortgage broker, banking institution, credit union or other lender BEFORE you begin to search for a home. This is to determine how much money you may be able to get pre-qualified for, so you can keep your housing search within those means. This “pre-qualification” is a basic estimate as to approximately how much money a bank may consider lending you toward the purchase of a home. This will become your initial “Proof of Funds” for a Real Estate transaction, but is not guaranteed funds.
Please note that this is just an estimate to base your price range upon. This number is considered by your lending institution before actually digging in to your credit score, financial status, debt ratio and other financial challenges that may pop up in the process. So this number is in no way binding. But it gives you a starting point as to what price point you should be looking in.
4. Now, lending institutions will be taking into consideration several other factors than just the amount of money you make and the debt you have. So you too need to consider these items as well.
a. purchase price
b. mortgage amount (lenders typically lend up to around 80% of the purchase price, unless FHA or USDA)
c. property taxes
d. school taxes
e. city and/or county taxes
f. insurance (home insurance, liability insurance, title insurance, flood insurance (if in flood zone))
g. closing costs
So the consideration for how much home you can afford may be much lower than you anticipate. And your debt to income ratio may not be in tact with the lending institutions requirements, so there may be some time lapse in acquiring a home due to the need to pay down some debt prior to taking on such significant debt. Just a few things to consider before moving forward with your basic steps before house shopping.
5. Should you qualify for an FHA, VA or USDA loan or if you reside in a flood zone, there are often additional insurance fees involved. This insurance is paid throughout the term of your loan to ensure these lesser deposit entities or flood insurance companies can recoop their losses, should you default on this type of loan or incur a flood.
6. Once you have obtained your prequalification letter, aka Proof of Funds, your next step is to the second person on your team, a local Realtor® to help you through the entire Real Estate transaction process. But just to name a few without detailed explanation, I would recomend they be:
a. a licensed Realtor
b. a member of an association in good standing
c. access to the Multiple Listing Service (MLS)
d. well connected in the community
e. familiar with the local market
g. ethical and moral with integrity
h. have negotiating skills and
i. must obviously feel like he/she is a good fit for you.
Yes, personality is a factor, as you will be working with this person for months, not only through the seeking process, but the Closing process as well. You are going to want to enjoy their company, both in person and on the telephone.
7. Please note that, as a Buyer, you are typically not responsible for paying your Realtor in a purchase transaction. A Buyer’s Realtor is considered the “Selling Agent” in a real estate transaction, as is helping to get the house sold. So the responsibility to get the house sold should lie, and usually does lie, with the Seller. The Seller is responsible to pay out whatever percentage of the purchase price they agree to with the Seller’s Realtor, also known as the Listing Agent. Typically, in New York State, that amount is 6%, which is usually split evenly between the Listing Agent (3%) and the Selling Agent (3%). However, some Seller’s Realtors will agree to discount that percentage to as low as 5%, bringing the split to 2.5% and 2.5%. And sometimes, the split is not even, as could be a 3% and 2% split. It just depends on what the parties agree to.
8. However, there are a couple of instances where you may need to contribute toward Realtor commision in this regard as well. For example, let’s say you sign an Exclusive Buyers Agency Agreement agreeing that your Realtor will be paid a 3% commission on the purchase price. Then, you find a property where the listing agent is only offering a 2.5% commission on the purchase price. In this instance, you will be responsible to pay the Realtor the additional 0.5%. (ie Purchase price $300,000 x .005 = $1500 would be your responsibility to pay)
Another instance would be if a Seller of a For Sale By Owner or Corporate Owned is not offering to pay Realtor commissions. In that instance, you would be responsibile for paying the entire 3%. (ie Purchase price $300,000 x .03 = $9000 would be your responsibility to pay) So you want to certainly keep these things in mind going forward. But know that your lending institution will be taking those factors into consideration as well, as those amounts are not paid out until the Closing and need to be factored in to the totals at Closing.
9. You are also going to want to add a third person to your team, retaining the services of a reputable Attorney to represent your interests in any legal transaction. Especially when it concerns such a high stake investment. The Contract is very detailed and your attorney will help to ensure you are getting a fair deal.
Between your Lender, your Realtor and your Attorney, these individuals will assist in making sure that all the documents are in place and the transaction runs as smoothly as possible and in your best interest.
10. Along with setting your team in place, you should set up a ‘sinking fund’ for large purchases. A sinking fund is moneys set aside for a particular purchase, typically a large purchase. You may have set up a sinking fund for a conventional loan down payment ($20%+). Or maybe for the purchase of appliances or furnishings for once you buy a house, so you don’t have to charge that large sum of money right after you buy your house. These are intelligent buyer funds, set up by those who wish to get ahead of the game and not fall into significant debt outside of and in addition to the purchase of the house.
Well, another amount you will need to come up with before Contracting a new home is your Earnest Money Deposit (EMD). An EMD tells a Seller that you are a serious, committed home buyer. You will need to have on hand before you take these basic steps to house shopping, as is required along with any Real Estate Contract. In New York, the EMD amount can run up to 10%, but is typically 1%-2% of the purchase price agreed upon. (ie Purchase Price $300,000 x .01 = $3,000). However, many Seller’s will consent to less, as long as they consider the offer as reasonable and suggests a Buyer’s commitment to the sale. In my area, the typical EMD is $1,000 for an owner occupied, single-family residence in Upstate New York.
Some smaller funds you will want to save and additional members of your team will be for inspections. You will want to have an inspector go through the house to determine if there are any safety hazards or such before you agree to a purchase. And inspectors prices can range significantly. Some of those you may want to price out are Home Inspector (typically between $150 to $450, depending on area), Structural Inspection ($100-$350), Septic Inspection ($350-%500), Well Inspection ($100-$300), Radon Inspection ($150-$250), Mold Inspection ($100-$300), Pest Inspection ($100-$300). You start with a typical home inspection, but if he/she finds cause for concern in any of these other areas, you may need additional inspections. You’ll want them done, because, for example, an inspection of a Septic System is WAY cheaper than to find out later that you have to replace the Septic System all the way to the leech field ($10,000-$15,000).
Now that you’ve taken these basic steps BEFORE house shopping, it’s time to GO SHOPPING! Call your Realtor and tell them everything is in order and you are sending them your criteria list and your proof of funds. You can peruse on-line yourself, while your Realtor peruses the MLS. Agree on some homes to view and then, go ahead and schedule a few days for house tours. YOU’RE READY!