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Thinking about buying a new house — or your first house — is an exciting time, but it can be overwhelming when you consider all the moving parts.
If you’re selling your long-time home to downsize or you’re relocating to the Arlington, Virginia area, some time might have passed since you went through the home-buying process. You don’t have to be overwhelmed though. Your realtor will help you through the process and you can do a little homework to get a better understanding of the things you need to do and the way things work.
This guide offers a complete overview of the home-buying process from start to finish, answering many of your questions, so you can rest easy as you plan to by a house, search for the perfect home, make an offer, close on your home, and celebrate your purchase!
Plan for Your House Purchase
Once you’ve decided you’re buying a home, regardless of the reason why you will get excited researching neighborhoods and thinking about all the features you want in your new home. Yet, money makes the world go round, making it imperative that you deal with some preliminary financial aspects before you do anything else. You need to come up with a budget and plan to make sure you have the funds you need for a down payment and closing costs, most often paid by the buyer. Below are three important aspects you must consider when planning to purchase a home:
How Much House Can You Afford?
You might have a clear answer to this question if you are relocating, but in any case, you need to spend some time putting together a tentative monthly budget for after you buy a home. Standard numbers provided by a host of financial experts and lenders suggest you shouldn’t spend more than 28% of your monthly gross income on housing and no more than 36% of your monthly gross income, whether work or retirement income, on combined debt, which includes a mortgage.
How Much Will You Need for a Down Payment and Closing Costs?
Down payment costs vary among types of loans, but you can expect that you will need at least 5% down on a conventional mortgage. If you qualify for an FHA loan, you are only required to put down 3.5%. Yet, it’s in your best interest to put down as much as feasibly possible. When you make at least a 20% down payment you will get a much lower interest rate for your mortgage, you won’t have to pay private mortgage insurance (PMI), and it will help you more easily secure the home you want when the market is crowded.
Although the seller might offer to cover closing costs, in most cases, the buyer pays closing costs for a home purchase. You will need to include anywhere from 2-5% of the total purchase price, as you figure how much you need to save to buy a home. Of course, these are only preliminary numbers, but they will help you get started on your goal.
How Will You Save to Prepare for Your Purchase?
If you do not have the savings to cover the down payment and closing costs, you will need to prioritize saving to ensure you have what you need when the time is right.
One of the most effective ways to save money is to pay yourself first. This means you should put away your desired savings amount before you pay any other bills, go shopping, or head out to your favorite restaurant.
Moving is a good time to go through your things and eliminate those you don’t use or need anymore. If you are looking for other ways to add to your income above your salary, consider selling unwanted items online, in a consignment store, or having a yard sale.
Choose a Realtor
Once you have a plan to get your finances in order to purchase a home, it’s time to contact a realtor and set up a consultation. You can expect your consultation to include the following:
- Discussion of market and strategies. Your realtor will inform you about the Arlington, Virginia market, as well as a sub-markets you are interested in. Specifically, he or she will discuss whether you are in a buyers market or a seller’s market, and what the best strategy will be to find your dream home. In popular areas, you might find heavy competition for available properties, and your realtor can advise you on how to better your chances to get the property you want.
- Sign a Representation Agreement. If you like what you hear during your initial consultation, you will need to sign a Representation Agreement which says you will only go through your realtor to look at any available properties.
- Do’s and Don’ts. Your realtor will advise you on actions you should and should not take during the home buying process. For example, you cannot make and big purchases on credit if you plan on getting approved for a mortgage and you shouldn’t attend new construction properties without notifying your realtor.
Choose a Lender
A lender is any financial institution or mortgage bank that underwrites the loan for your home. You can talk to your own bank and shop lenders in general, but you might want to wait until you meet with your realtor. Often times, realtors have established relationships with brokers and lenders; when you use one of these companies, it can sometimes make the entire approval process go a bit smoother. In any case, you will want to get a pre-qualification letter or a pre-approval letter to show buyers you are serious when you make an offer.
The words pre-qualification and pre-approval are typically used interchangeably, but there is a difference between the two. You cannot really know what you are getting until you know how your lender defines each type of letter. In cases where lenders offer both, pre-qualification is often the initial step buyers take to get the ball rolling on the financial side of things, and pre-approval comes later. Requirements typically included for each include:
When you seek pre-qualification, you typically provide the lender with an overview of your financial history, including your income, assets, debts, and your credit score. The lender uses this information to give you a broad estimate of the amount of a mortgage you can qualify for. Pre-qualification is a good way to shop lenders because they don’t pull your credit during this phase.
A pre-approval does not guarantee you will get approved for a mortgage, but it does provide a more solid estimate of how much you will likely be approved for. You provide the same information as you would for a pre-qualification, but the lender needs to verify it all. This means you must provide tax returns, pay stubs, other proof of financial assets, and you must give permission for the lender to run a hard credit check.
You should be very careful about shopping lenders and getting multiple pre-approvals. Each credit check deducts points from your credit score and could cause you problems later on.
Types of Mortgages
When you secure funding for your home purchase, you will have several mortgage options based on your credit and the amount you need to borrow. The most common types are fixed-rate mortgages, adjustable-rate mortgages, and government-backed mortgages.
- Fixed-rate mortgages. These are the most popular type of mortgages. Their terms vary from 15 to 30 years, but they have a preset interest rate which allows for you to have regular monthly payments throughout the length of the term.
- Adjustable-rate mortgages. Although far less popular, adjustable-rate mortgages (ARMs) provide another option for homebuyers, especially those with borderline credit. ARM mortgages can be beneficial when interest rates decrease because they result in a lower payment. Unfortunately, the reverse is also true, meaning when interest rates increase so do your payments!
- Government-backed mortgages. Several different government agencies have lending programs for specific groups of people with FHA loans and VA loans being the most popular. These programs have lower required down payments and are especially advantageous for first-time homebuyers, veterans, and those with poor credit. Your lender can let you know if you qualify for any of these special programs.
Search for Your Dream Home
During your initial consultation with your realtor, you provided him or her with your budget, the type of home you are interested in purchasing, the special features you need, and one or more desired locations. Your realtor will set up searches on their website which provide you with potential houses that fit most or all of your criteria. Your realtor can provide you with a link to these searches, so you can review listings and watch for new listings as they show up.
When you are interested in a property, you need to inform your realtor so he or she can set up a viewing for you to tour the property. In some cases, you might also find listings for open houses.
Attending Open Houses
It’s in your best interest to attend as many open houses as you can in your desired neighborhood as you can. It will help give you a sense of exactly what you do and don’t want in your dream house. When you arrive, the selling agent, who is sometimes also the listing agent, will have typically offer you an informational flyer providing you with all the details of the house. As you proceed through the open house, some of the things you should look for include:
- Indications of damage or neglect such as smells, stains, and warping
- Black spots in the kitchen and bathrooms which might indicate a mold problem
- Condensation in the windows which indicates they might need to be replaced
- Adequate closet space and bedroom sizes for your needs
- Amount of privacy
Attending a private viewing is similar to attending an open house to the extent that you want to inspect the house for issues and faults, which you might be able to use to justify an offer below asking price.
If you are single, it’s smart to bring a friend or family member with you to the viewing, so you have an extra set of eyes helping out. Also, consider using your phone to take as many pictures as you can. As you are reviewing your options later, it will be helpful to look back at specific things you liked or didn’t like about a particular property.
Sometimes selling agents want to rush you through the house so you don’t have time to notice any negative features. If you arrive at least 15 minutes early to a viewing, you have the opportunity to thoroughly check out the property’s exterior and get a feel for the neighborhood.
Make an Offer
Once you’ve located your dream home, now it’s time to make an offer the seller cannot refuse. Your realtor will have the in-depth market knowledge to help you come to the right offer price if you aren’t sure. A purchase offer includes all the terms of the transaction and when you and the seller both sign, it becomes a legally binding purchase agreement. A purchase offer/agreement typically includes the following elements:
- Selling price you have agreed upon
- Earnest money to show the seller you are serious about purchasing the home
- Address of the home and description
- Terms of the sale
- A date for a final walk-through
- Closing date
- Homebuyer contingencies, if applicable
The time which occurs after you sign the purchase contract until closing is referred to as the escrow period. During this time an appointed escrow officer from the title company will hold the earnest money and signed purchase agreement until they distribute final paperwork, oversee the closing, and file necessary paperwork.
The title company will also run a title search on the property to ensure no liens prohibit or delay the closing. Escrow is also the time when an appraisal and inspection occur; the results of these activities can either make or break the sale.
Homeowners might have an independent home appraisal for many reasons. When buying a house, it’s the lender who hires an appraiser to place a value on the property once you complete your application for financing.
Even though they hire the appraiser, you will pay for the service as part of your closing costs. If you don’t pay your mortgage, and your lender has to foreclose on you and take your house, they want to make sure they can sell it and recoup their loss.
If the house appraises for more than the selling price, the deal will likely go through as planned. However, if it appraises lower than the selling price, you have four options:
- If your purchase contract includes a contingency for appraisal, you can walk away from the sale and keep your earnest money.
- Use additional savings or another source to come up with the difference between the appraisal and the selling price.
- Ask the seller to pay for the difference, or you can split the difference with the seller.
- You can ask for a second opinion and pay for a second appraisal.
Inspectors provide much more detailed reports than appraisers, but they are the responsibility of the buyer. Once you sign the purchase agreement, you want to hire an inspector to evaluate the structural, electrical, and mechanical aspects of the property.
Is it required?
You are not required to get an inspection, but it’s in your best interest to do so soon after signing the purchase agreement. In fact, the inspection should come before the appraisal because you might find something that is a dealbreaker.
Do I have to be there?
You should make sure you are present for the home inspection, so the inspector can point out any issues to you directly and you can make more informed decisions about whether or not to go forward with the purchase. If the inspector finds no major issues, and the house appraises well, you will complete your financing and do a final walkthrough before closing.
What happens if the inspection reveals major issues?
If, however, the inspection reveals major issues, you have to decide whether you want to walk away from the house or proceed. Completely walking away from the deal can carry negative consequences if you don’t have a contingency for a home inspection in the purchase agreement.
In some cases, the seller might be selling the home “as is,” which means an inspection only tells you what you are dealing with, it doesn’t give you any leverage with the seller.
If you still want to purchase the property after you find out about major issues, you have the following options if you have a contingency for a home inspection in your purchase contract:
- You can request the seller to make repairs, especially those which pose safety risks.
- You can insist on a new purchase agreement with a lower sales price to compensate for the repairs you will have to make.
Keep in mind that you don’t have much recourse in a seller’s market. In these cases, the seller might deny your request for repairs or refuse to renegotiate the purchase agreement, which is why it is so important to make your purchase offer contingent on inspection. This allows you to walk away if you really don’t want to deal with repairs.
Final Steps Before Closing
Once the house has been appraised and the lender approves financing, you can complete any final steps you need with the lender, including providing documents and signatures where necessary.
About one week prior to closing, your real estate agent will arrange a final walkthrough of your soon-to-be home, so you can make sure nothing has changed since you signed the purchase contract and ensure any agreed-upon repairs have been completed.
Attend the Closing
When you attend the closing, you will need to bring a certified check or a wire transfer receipt, as well as your photo ID, and proof of insurance as required by your lender. You, the seller, and other relevant parties will sign all the necessary paperwork. You will leave the closing with a copy of the loan estimate, the closing disclosure, the escrow statement, and the mortgage agreement, and your keys!
Your lender holds the deed until you pay off your mortgage, but they typically send a copy to you after closing.
Celebrate Your Purchase!
You’ve spent weeks and months planning and searching for the perfect home. Now that you’ve closed, you get to move in and celebrate!