So, you have a little money in the bank, a stable job, and are looking to stay in one place for a while. It’s time to buy a house! Follow my first time home buyer’s guide to know what to expect.
The first step is to speak to a lender to see if you qualify for a loan. Your Realtor can point you in the direction of a reputable lender, or you can speak to someone at your bank; most banks have a Mortgage Department. A loan officer will check your credit to see if you qualify for the lowest possible interest rate. A good lender will speak to you about different loan programs and explain if you qualify for them. These are the most common home loans:
Conventional Mortgages are loans that are not backed by a government agency. The minimum down payment with this type of loan is 5% of the purchase price of the home. Private mortgage insurance (PMI) is required if the down payment is less than 20% of the home value. Once you pay off 20% of the home’s value, PMI is dropped.
FHA Mortgages are insured by the Federal Housing Administration. They are great for people who have less than perfect credit, and the minimum down payment is 3.5%. Although FHA loans have enticing interest rates, there are extra fees compared to Conventional Loans.
USDA Mortgages are loans that can ONLY be obtained on homes that are in qualifying rural areas. They are a great program because they are a 100% financing option for qualifying homes, and often you can get the seller to pay for closing cost, causing buyers to bring virtually no money to closing. To see if a house is eligible, check this website and click on Single Family Housing Guaranteed.
VA Mortgages allow veterans 103.3% financing without private mortgage insurance or a 20% second mortgage. A VA funding fee of 0 to 3.3% of the loan amount is paid to the VA. This fee may also be financed. Only those that served in the military or had a parent that did, qualify for this type of montage.
It is important that you speak with a knowledgeable loan officer that can advise you on which loan is right for you. They can provide you with necessary information such as how much you qualify for and how much a comfortable payment will be for you. It is important to have these conversations PRIOR to writing an offer so that you know what your monthly payment will look like ahead of time. Once a lender has issued you a pre qualification letter, it’s time for the fun to begin!
The next step is looking for the perfect home for you. Let your realtor know what you are looking for in a home and provide her with a copy of your pre qualification letter. Since the majority of buyers start their search for a home online, start looking! A friend of mine once referred to real estate websites as porn for women. Hilarious, but man, give me nice kitchen and bathroom pictures and I am a happy girl! Your realtor will provide you with seller’s disclosures, a 2-page document that provides additional information on the house, and utility information for any house that interests you. There is no set number of homes that a buyer must look at before purchasing. Some people buy the first home they walk through while others need to see more options. One thing rings true for most people, you will know it when you see it!
Once you have found the right house, you and your Realtor will write up a Purchase Agreement. The Indiana State Purchase Agreement is an 8-page document that determines all the terms of the sale. Key points of the purchase agreement are price, closing date, inspections, payment information, and earnest money. This is a legally binding contract so your Realtor will explain it to you in detail, but be sure to look over the document carefully. The offer is then submitted to the seller’s agent and the seller typically has 24 hours to accept it, reject it, or counter it. Negotiations can take hours or days.
As soon as the offer is accepted, earnest money is collected. Earnest money is good faith money that is collected from the buyer. This is held in an escrow account and credited back to the buyer at closing. In our area it is typically 1% of the purchase price.
Within the first few days of the accepted offer, buyers must apply for their mortgage. The average escrow period is 45 days, and the lender will need all of this time to process the loan. Provide your lender with a copy of the accepted offer and the lender will advise you on the next steps in obtaining a loan and order the appraisal. An appraisal is the bank’s opinion of home value. A mortgage can only be obtained if the house appraises for purchase price or above. In most cases, the house appraises for exactly purchase price.
Inspections are the second round of negotiations during the home buying process. It is always advisable that buyers get full inspections. Full inspections in the Lafayette Area consist of a Whole House Inspection, Wood Destroying Insects Inspection, a Radon Test if there is a basement, and Well and Septic Tests if needed. For more information about the kinds of tests and what to expect during the process, read this blog post. Buyers should attend their inspection, that will take several hours, as they will learn valuable information about their house. All results from the home inspection will be obtained within 1-3 days. Upon receiving them, purchasers immediately meet with their Realtor to discuss the results. Inspectors always find something, even in new construction; no house is perfect. Buyers have the right to ask sellers to correct safety hazards and structural defects, only. If the seller corrects them, we move on to closing. If the seller is unwilling or unable to correct some or all of these issues, the buyer must decide if they want to move forward or would like to be released from the purchase agreement and get their earnest money back. In most cases agreeable terms are met and we move onto closing.
While you are working on the inspection with your realtor, your lender will be asking you for financial documents. Be sure to get them the documents they ask for quickly, so there is no delay in closing.
In the final days before closing there are some last steps to be taken. A day or two before closing, buyers will do a final walk through to verify that inspection item repairs were completed and that the house is in the same condition as when you bought it. Numbers will also be finalized by the lender and you will be told how much to bring to closing. Any amount over $10,000 will have to be wired, anything under can be brought to closing in the form of a cashiers’ check. You will also transfer all utilities into your name for day of closing.
Closings typically take an hour. Sometimes the seller is in attendance, other times they have presigned and it is just the buyer, closing agent, and realtor. Buyers are required to bring a valid form of state issued identification. Once the buyer has signed all of the lender’s forms and the funds have been received by the title company, closing is complete and you are a home owner!
In summary, here are all of the things you will pay for when buying a house:
Earnest money: 1% of purchase price. This will be credited back to you at closing
Inspections: $400-750 depending on tests
Down Payment: Depending on what type of mortgage you get, this number varies.
Closing costs and pre paids: Ask your lender what the amount will be during the pre-approval process. Sometimes you can get sellers to credit you all or part of this cost.
