Buying a home can be one of life’s most stressful events. I’ve been through it a few times myself and seen many clients do the same. Regardless if it’s your first time, or your fifteenth, I thought a little guidance would go a long way in helping alleviate some of that stress.
Step 1 – Decide if now is the right time to buy.
First thing to ask is: does it make sense to buy a house in the first place? Think about it. And, give this past post a quick read (Blog Post). I’m confident it can help you make the right choice. Assuming the answer is yes, let’s move to step 2.
Step 2 – Understand what you can afford.
Like many things I recommend in financial planning, start at the end. Determine your affordable monthly allocation to housing. I find using an online calculator (mortgage calculator) can help make good cost assumptions when using different variables.
Step 3 – Assemble a team.
Things often move very quickly in the acquisition process. That’s why it’s important to assemble a reliable team. You’ll need a mortgage broker, realtor, and an insurance broker immediately. Purchasing a home has many steps and creates even more questions. Make sure you have a dependable team by your side.
Mortgage Broker: Your mortgage professional will give you guidance on what you can afford, along with the different payment options. They’ll help develop the best repayment game plan for you.
Realtor: Your realtor will listen to your needs/wants and help narrow the focus of consideration. They should send you every listing in your desired area and budget range. They’ll help you get familiarized with your market and what each area has to offer. Try to think long term, as well. This may be where you are sending your kids to school or where you are retiring.
Insurance Broker: This person’s role will be to help keep the insurance costs down. They can also determine if you need to prepare for other liabilities, such as flood insurance.
Contractor/Handyman: Inevitably you will see many houses. It’s likely some work will need to be done. You’ll want a reliable individual who can help you understand the costs associated with each wish list item. Plus, a good contractor can advise you when to run from a house due to costly problem areas. This will be important both as you negotiate and after you move.
Step 4 – Discuss loans with your mortgage professional.
It is important to have an open discussion with your mortgage professional, as they will help you to see how much they are comfortable lending. As a loose rule of thumb, they will lend you up to 50% of your gross income in total debt payments (i.e. if you gross $10,000/mo they will lend a $5,000/mo mortgage payment inclusive of any other debt payments). Since the mortgage crisis of a few years ago, this is fairly standardized from lender to lender. They will also help you calculate the closing and transfer costs you will incur.
The goal is to put down 20%. That avoids PMI (private mortgage insurance) which is an extra insurance added to your payments. It’s unfortunately only for those who don’t meet the 80% loan to value rule. That said; however, paying for PMI will end eventually. It’s ok to have to pay, especially if it means not doing something imprudent financially. Before proceeding, you’ll need to understand all these costs.
Step 5- Become a student of the game.
Now that you’ve narrowed down price range and area, it’s time to be the foremost expert of that type of house in your search demographic. Go to every open house, look online, and block off weekends to see anything of interest. Talk to everyone to understand the pros and cons of each property and location. This is a critical step. You have to know this exact market place better than anyone (including the seller and realtor).
You need to know what your money should purchase and the real value. You’ll also know when things are overpriced. All this will lead you to having the upper hand in the negotiations.
Step 6- Time to make an offer and let the negotiations begin.
For whatever reason, houses fall into that category of things you can negotiate. Initially, you’ll put down a good faith deposit. Then you’ll go back and forth on price (usually meeting in the middle). Before doing so; however, make sure you fully understand what you need to get out of the house.
There are two major rules that you must not break:
- Know your walk away figure.
- Do not get emotional.
Know the exact value of the homes in the area and know what you are willing to pay. Really stick to it. If you don’t, you’ll lose the upper hand in the negotiation process. Remember, a home is only worth what someone is willing to pay.
It’s critical not to get emotional. Agreed, this is very hard to do. But, it’s rare to see a home so perfect nothing else could match it. Because of emotions, I’ve seen people over pay for a home, walk away from their dream home over $50, and purchase a home that was a money pit.
Step 7- My offer has been accepted! Now what?
Here are all the things you’ll need to get done by closing:
- Start the mortgage approval process. Nowadays, this is pretty painful and tedious. Just swallow your pride and get them whatever they ask for as quickly as possible.
- Get the house appraised to make sure the lender will accept the mortgage.
- Schedule the home inspection ASAP. You really want to understand all the problem areas beforehand. From there, you can determine the cost to fix and what you want the seller to repair.
- Work with attorney and title company to get everything scheduled for your closing date.
- Make a list of everything you’ll need to set-up, cancel, and notify with the address change. (Yes this may mean a trip to the dreaded DMV!)
Step 8 – Celebrate!
As you can see, there is lots to do when purchasing a home. But, in the end you’ll have a great feeling owning your own house. Now go get a drink, kick your feet up, and in the infamous words of Kool & the Gang –“Celebrate good times, come on!”