If you've never bought a house before, much of the jargon and terminology could prove daunting. After all, who would give "discount points" or "5-1 adjustables" the slightest thought unless they absolutely had to? I put together this short primer on the basics of buying a home as a series of questions and answers that try to address the 5 most common issues with which every first time homebuyer must grapple.
1. Can I make an offer that's well below the asking price?
If you're in the market right now for a home, chances are most of the properties that you're going to come across are significantly overpriced. If you have your eye on a home that has a hefty price tag, don't rule out making a low-ball offer. You may be surprised by the seller's response. In fact, you can go as low as 25% to 35% below the asking price and you shouldn't worry about insulting the homeowner.
Before you make an offer, find out how much comparable houses in the neighborhood have sold for. To get this information, you'll need a comparative market analysis (CMA). Then, if you decide to make an offer that's significantly below the asking price, you can show the CMA report to the seller to explain to him why he should accept your offer.
2. Do I really need to use a real-estate broker?
A good agent can be very helpful, because he has access to a large database of listings in your neighborhood of choice. Agents can also recommend schools, local contractors and mortgage brokers. And they can often help steer you through the homebuying process, while smoothing out bumps in the negotiations. They can be invaluable if you are moving to a town or part of the country you are unfamiliar with or have little time for house-hunting. Like a regular broker, they are a font of listings.
3. How do I figure out which type of mortgage makes sense?
At the most basic level, mortgages come in two categories: fixed-rate and adjustable. In both cases, "rate" refers to the rate of interest you pay the bank for the privilege of borrowing its cash. Figuring out which kind of loan makes sense for you depends entirely on your circumstances and temperament.
4. How does a bank decide if I get a loan or not?
There are many factors that go into the bank's decision, from how long you've been at your job to how many credit cards you carry. The most important thing lenders look at, however, is your ability to meet your obligation to them, which is a function of your income and debt levels.
To gauge your ability to pay, lenders look at a pair of numbers called the "housing ratio" and the "total-obligation ratio."
They're not as daunting as they sound. The first is just the percentage of your gross monthly income that you'll need to spend on housing expenses after you buy the new home. It includes your mortgage payment, taxes, insurance and maintenance. Lenders will want to see a ratio of 36% or lower. The total-obligation ratio, meanwhile, is the portion of your income that goes to covering both your housing expenses and any other obligations, such as credit cards, car loans and child support. There, your lender will want to see a ratio of 42% or lower. Both of these ratios are often negotiable upward.
5. How much cash am I going to have to produce upfront?
Ideally, you would have enough cash for a 20% down payment, closing costs equal to about 3% to 5% of the purchase price, and enough left over to cover two or three months of monthly housing expenses. That gives you a big chunk of equity in your house upfront and makes the lender happy — something that usually translates into a better deal.
Assuming you've been preapproved for a mortgage, these days it can take anywhere from five to 10 business days to get a loan commitment from the bank, depending on how complicated your application is or how flooded your lender is at the time you apply.
Once the lender says it will give you the money, you'll probably still have some hoops to jump through. Most commitment letters come with certain conditions that you'll have to meet, like providing more financial information or submitting to a final inspection of your property.
You won't actually get your hands on the money until you close the deal, usually a week after you get final approval from the bank. Don't dawdle. Loan commitments expire about 45 days after you receive them, and the rates and terms you agreed to may have to be renegotiated with the bank. All in all, you should count on it taking four to six weeks from the time you apply until the home is yours.
7. How do I know the house won't fall apart?
You won't know for sure until you move in, but the best way to protect yourself is to hire an experienced home inspector to check the house's structure and systems, including the roof, heating, plumbing, electrical and air-conditioning systems.
The cost of a home inspection ranges between $250 and $500. If you can, have the home inspected after you agree on a price, but before you sign the contract and put down a deposit. If you are in a rush to go to contract to lock in the deal, make sure your contract states that the terms of the purchase are conditioned on the approval of a professional home inspector.
Just because you need to hire a pro, doesn't mean you can't do some checking around yourself before you make an offer. Check for soft spots in the flooring and look for freshly painted patches on the ceiling or walls that could be hiding water damage. Turn electric switches and water faucets on and off. If it's summer, turn off the air conditioning and turn on the heat to make sure it works. Likewise, if it's winter, test out the air conditioning. Tour the basement looking for water on the floor, and see if the hot water heater looks rusted or cracked. A little diligence before you start negotiations could save you a lot of time, effort and disappointment.
Thank you for reading!
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