HOME BUYING PROCESS
A GUIDE for HOME BUYERS
Most buyers who begin the process of looking for a home begin the journey filled with excitement and a bit of trepidation.
This is understandable when you consider that purchasing a home is one of the biggest financial decisions you will make during your lifetime.
Not only do we understand this, we believe that home ownership is something you can be proud of. We believe it’s an honor and privilege to ensure that the home buying process is the most pleasurable experience possible.
Whether this is your first home or your tenth, this guide is intended to help you navigate the home buying process.
Let’s get started on the journey of getting you the home you want!
Associate Broker | REALTOR®
West USA Realty
TOP TEN REASONS TO BUY A HOME
1. Quality of Life – Home ownership is part of a better quality of life for most buyers. The quality of our living situation directly impacts how we feel.
2. Avoid the Tax Man | Tax Deductions – Buying a home helps you avoid the tax man with tax deductions for both mortgage interest and property taxes. Property taxes and qualified interest are deductible on an individual’s federal income tax return.
3. Spend Money to Make Money – With the right real estate consultant, home ownership and the potential for appreciation means that ultimately you have the opportunity to get a return on your investment.
4. Deferred Gain and Capital Gain Treatment – A homeowner can exclude up to $500,000 of capital gain tax if married and filing jointly or up to $250,000 if single or filing separately when you sell your home. The home must have been the taxpayer’s principal resident for the previous two years. *”If you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale.” Please consult with your accountant to verify.
5. Principal Accumulation – As a homeowner, a portion of each amortized mortgage payment typically goes towards paying down your principal, which in the long run is an investment.
6. It’s The American Dream – Owning a home is THE American Dream. We work with many first time home-buyers; and it truly is a dream come true for them.
7. Independence – For many homeowners, one of the greatest freedoms is acquired through home ownership. They can get rid of their landlord and are no longer surrounded by neighbors in an apartment with thin walls. The freedom to do whatever they wish with their homes is a big incentive for many new homeowners.
8. Leverage – At the current interest rates, you can put your money to work somewhere else. These days you can still purchase a home for as little as 3.5% down or less.
9. Why rent when you can own? The real cost of renting at $1000 per month without even a rental increase per year means you will pay $120,000 over 10 years. Just think, you could how much you could pay off on home for that amount! Keep in mind that as of 2014 Rents have gone up over 36% in the last 5 years in the Greater Phoenix Metro area.
10. Because you get to work with us!
5 Buying Tips WHEN PURCHASING A HOME
These 5 buying tips will save you time, money, and headaches.
- Get Pre-Qualified – before you can seriously consider purchasing a home, it’s important to know exactly how much you can afford. This can be the scariest part of the buying process for some. It’s perfectly natural to be nervous, but we can put you in touch with someone you can trust to help get you pre-qualified.
- Always Think Resale – In the US, due to the mobility of our economy, the length of ownership is about 5 to 7 years (This may have increased to 8-13 years recently). This is important to keep in mind when looking for your next home. For instance, homes backing up to a busy street, commercial, industrial or even railroad lines sell for less, and take longer to sell than other homes in the neighborhood.
- Aesthetics Can Be Changed – flooring, light fixtures, plumbing, paint colors and wallpaper can all be changed. Don’t let the lime green wallpaper turn you off of your potential dream home. Think of how much fun it will be to make a home yours!
- Don’t WAIT! – too often, we have seen home buyers fall in love with a property, wait a few days to make a decision because they are nervous, and the home that they fell in love with SOLD! If you love the home, don’t wait for someone else to live in YOUR home – be prepared to write an offer!
- Compare Sales – to determine the best price to offer, or to know if the asking price is correct, look at the recent sales of similar homes, called “comparable ” Comparable sales are recent sales of homes that compare closely to the one you are looking to purchase, usually sold in the past few months. Specifically, you want to compare prices of homes that are similar in square footage, garage spaces, number of bedrooms and baths, lot size, etc. Let us help you with a Buyer’s Market Analysis.
10 Critical Questions TO ASK AN AGENT BEFORE YOU BUY
Now that you have a background regarding the Reasons to Buy a Home and 5 Buying Tips, the question is how will you be able to make sure that you not only find your dream home, but that you ensure that the real estate agent you choose to represent you has the knowledge and expertise to help you with the biggest financial decision you will make in the next 5 years?
Unfortunately, many people choose a real estate professional based on the idea that all real estate agents are basically the same. They sign with the first agent to come along, only to realize too late that they should have “shopped around.”
The following questions are designed to help you avoid that mistake by equipping you with what to look for when selecting an agent to represent you.
First, start by asking friends, acquaintances and/or family for the names of real estate agents they know. A personal referral is the absolute BEST manner in which to select your professional real estate agent. Once you have compiled a list of names referred to you based upon a great experience, use this guide to help you determine which agent is the best for YOU. We recommend interviewing at least 2-3 real estate agents.
Here are the questions you should ask each agent:
1. Can you send me some information about yourself? Look for professionalism and consistency. What are their professional accomplishments?
2. How do you approach your work? Look for a businessperson that has a strategy
3. Is the Agent Full-time or is this just a side job? Look for an agent who is a full time professional. Part-time agents are simply unable to keep up with the ever-changing demands of the market and the industry
4. How long have you been in business? Longevity in the industry does not always mean success. However, look for an agent that has been in the business for a minimum of three years. The fall-out ratio for agents in the business less than 3 years is over 80%.
5. What will you do keep me informed? Do you want daily or weekly reports from your agent? Will the agent be able to meet these expectations? Determine how much communication you want, and then find an agent who will give you the attention and time you want and deserve.
6. Can you provide me with further resources I may need? The best agents have built strong relationships with their “Teams” and can often get expedient service or be able to “cash in a favor” for you should a crunch or problem arise.
7. Can you give me some references from other clients you have worked with?
Don’t be afraid to ask for references. An agent who provides raving fan service and is proud of their work will be happy to provide references.
8. What is the best way for me to get in touch with you? You should know exactly how to get through to your agent.
9. Are you a fiduciary? And how will you represent my best interests?
Absolutely, do not hire someone that you don’t believe will represent YOUR best interests at all times. Have your agent give you examples of how they represent their client. Remember that finding the home is the easy part; true representation begins when you sign a contract and continues through negotiation and closing. Ask around for horror stories and you will find that they don’t involve the home search BUT after the contract was signed!
10. Are you comfortable with the agent? Do you feel you can trust this person? Do you feel understood and listened to? The biggest complaint I hear from clients is that an agent didn’t listen to them. Make sure you connect and communicate well with your agent.
Home Buying Process
10 Steps to Buying a Home
The Following are highlights of the process and vary from state to state.
Your Home Journey Begins
Find a REALTOR® You can Trust
Analyze your needs in a consultation
Obtain financial Pre-qualification & Pre-Approval – Credit Report | Provide Documentation to loan officer
Start Home Search to Select Properties
Write an offer to purchase with Earnest Money Deposit
Negotiate offer and possible counter offers
Accepted Contract – Complete Home Inspections – Remove Contingencies
Complete Mortgage Application – Appraisal -Verifications
Secure Underwriting – Conditions Satisfied
Obtain Loan Approval
Final Walk-thru of your new home
Escrow/Title Company Sign Docs
Close on property
Take Possession of your new home
- Get pre-approved with a lending specialist. In Arizona, there is a Pre-qualification form that you and your lender sign showing proof that you are pre-approved for financing. (Credit pulled, documentation has been provided to the loan officer) You need this before looking at homes also need this when you make an offer. It is now a required document on Arizona Purchase Contracts unless you are paying cash in which case you must provide proof of funds when you make an offer.
- Shop for your dream home with an accomplished real estate professional
- Choose a top 2 list
- Place an offer on #1
- Be prepared for a counter offer
- Sign and date the effective contract
- Take note of the contingency period – generally you have 10 days to perform all inspections
- Order inspections and negotiate repairs
- Terminate or proceed with the contract
- After final loan approval, go to closing to sign and own your new home
In addition to the 10 steps to buying a home you will need to consider the following up-front costs in order to determine if you have the appropriate cash reserves to get started:
- Earnest money – typically $1000 to 1% of sales price – the amount of earnest money is negotiable and varies with the value of the property
- Inspection fee & Termite – $400 – $450+
- Appraisal – $500-$600+
- Credit report -$50- $75
Now that you know the upfront costs, let’s explore what you will need in order to determine your buying power and how to get pre-qualified for financing.
The Pre-Qualification & Pre-Approval Processes
Now that you know you want to buy a house, how do you know how much you can afford and if you can qualify for a loan? The way to get started is to go through the pre-qualification and pre-approval process with a lending specialist.
Pre-Qualification versus Pre-Approval
- Pre-Qualification is how much money a mortgage company might lend you based on your income, assets, and debts. Pre-Qualification is typically done over the phone with a lending specialist. This is the first step to get started in the buying process. The lending specialist will do a minimal credit review over the phone which means discussing your credit background. When you begin the Pre-Approval process the lending specialist will actually check your credit, but during Pre- Qualification they will simply gather basic information regarding your financial and credit.
- Pre-Approval is a more formal process and includes completing a loan application, often on-line and providing documentation regarding income and assets. During the Pre-Approval process the lending specialist will ask for authorization to check credit in order to analyze debt ratios. Pre-Approval is typically done when you start looking at houses with a real estate agent and prior to writing an offer.
What Factors Affect What I Can Afford?
There are three factors that affect how much you can afford when you decide you would like to buy a home.
- The down payment – do you have enough liquid cash to make a down payment?
- Your ability to qualify for a loan – as mentioned earlier this is determined during the Pre- Qualification & Pre-Approval Process
- The associated closing costs on your home
How Much is My Down Payment?
Most loans today require a down payment from 3% to 20%. Contrary to what many people think, there are still loans that have lower down payment requirements depending on the type and terms of the loan. Keep in mind; if you are able to come up with 20-25% down you will eliminate mortgage insurance. There are also down payment assistant programs you may qualify for to help. Also, VA loans that are available to qualified veterans have zero down payment requirements.
How Much are Closing Costs?
You will be required to pay fees for acquiring the loan and other closing costs. These fees must be paid in full at the closing unless you are able to include them in your financing. Typically, closing costs will range between 3%-6% of your mortgage loan. In some cases you are able to negotiate having the seller pay some of your closing costs
What Does my Monthly Mortgage Payment Include?
Most lenders require that your monthly payment range between 29-36% of your gross monthly income. Your mortgage payment to the lender includes the following:
- The principal on the loan (P)
- The interest on the loan (I)
- Property taxes (T)
- The homeowner’s insurance (I)
This is what we call PITI and your total monthly PITI and all debt (from installments to revolving charge accounts) should range between 36-45% (some program with allow a higher amount) of your gross monthly income. These key factors determine your ability to secure a home loan: Credit, Assets, Income and Debt Ratios. (These ratios do vary)
***In Arizona it is quite common for there to be a Homeowners Association with HOA fees. These fees are included in the calculations above in order to qualify for financing. Also, if you are putting a minimum amount down on the property the lender will generally have you pay a monthly amount for mortgage insurance, because their risk is higher.
When choosing a mortgage company it is highly recommended you use a local mortgage firm that does underwriting in state and specializes in mortgage financing. We do not advise you to just go talk to your local bank’s customer service representative or go online to a generic website to apply without an experienced loan officer to help you.
You want to work with a loan officer that is experienced and knowledgeable regarding mortgage programs and the loan process, so you get good advice and avoid some of the loan issues and time delays that may arise from out of state lenders or out of state underwriting.
How Much Home You Can You Afford
Use the following chart to determine your monthly principal and interest payments at various interest rates for either a 15 or 30-year term:
|Interest Rate Factors Per $1,000|
|Interest Rates||Term 15 Years||Term 30 Years||Interest Rates||Term 15 Years||Term 30 Years|
|4 ¼||7.52||4.92||8 ¼||9.70||7.51|
|4 ½||7.65||5.07||8 ½||9.85||7.69|
|4 ¾||7.78||5.22||8 ¾||9.99||7.87|
|5 ¼||8.04||5.52||9 ¼||10.29||8.23|
|5 ½||8.17||5.68||9 ½||10.44||8.41|
|5 ¾||8.30||5.84||9 ¾||10.59||8.59|
|6 ¼||8.57||6.16||10 ¼||10.90||8.96|
|6 ½||8.71||6.32||10 ½||11.05||9.15|
|6 ¾||8.85||6.48||10 ¾||11.21||9.33|
|7 ¼||9.13||6.82||11 ¼||11.52||9.71|
|7 ½||9.27||6.99||11 ½||11.68||9.90|
|7 ¾||9.41||7.16||11 ¾||11.84||10.09|
- Find the appropriate interest rate from the chart
- Look across the column to the appropriate term to determine your interest rate
- Multiply the interest rate factor by your loan amount in $1,000s.
- Interest Rate = 5%
- Desired term = 30 years
- Interest rate factor per $1,000 = $5.37
- Mortgage = $200,000
- Monthly Principal & Interest = $1074 (5.37 x 200)
Add your monthly insurance premium and your property tax to your principal and interest to determine your total monthly payment. (Add any HOA fees that may apply to calculating your monthly cost)
The above information is provided as a guide. We strongly recommend that you contact our lending specialist to determine exactly home much you can afford.
Please note if you are making a small down payment then there will generally be private mortgage insurance added to your monthly costs. Discuss your options with your lender.
***The loan Pre-Approval will allow you to know what your maximum purchasing power is for your new home. However, only you know what monthly payment amount you are comfortable with paying each month. Perhaps you have other financial commitments or goals that affect how you want to spend your money. For example, savings for college, retirement, a second home, a boat or some other interest or personal goals you may have planned.
Look at your budget and decide how much you want to spend per month on your home. Then we can simply adjust the price range you look at homes in to this amount. There is no rule that you need to spend the maximum qualification amount. ***
Loan Application CHECKLIST
Most lenders will have you go online to apply in order to gain pre-approval. Following is the information you generally need to provide during the loan application process (these documents are usually uploaded to the lending specialist through a secured link) Your loan officer will advise you on exactly what you need for your specific situation.
- Non-expired Government ID and Social Security Number
- Name and complete address for past 2 years of residence
- Employment history, including names, addresses, phone numbers for the past 2 years
- Copies of your most recent pay stubs and W-2 forms (past 2 years).
- Verification of other income (social security, child support, retirement).
- Copies of signed tax returns including all schedules (past 2 years).
- Social Security & Pension Award
- If you have rental property income: Copies of all signed lease agreements
- Copies of all bank statements from checking/savings accounts (past 2 months).
- CD certificates and statements for retirement accounts (most recent 2 months or quarterly statement).
- Gift funds will need gift letter and proof of gift
- Credit cards (current balances and monthly payments).
- Installment loans (car, student, ).
- Mortgage loans (property address, lender with address, account numbers, monthly payment and balance owed on all properties presently owned or sold within the last 2 years). Bring proof of sale for properties sold.
- Childcare expense/support (name, address, phone number). [VA loans only]
- Bankruptcy – bring discharge and schedule of creditors
- Adverse credit – bring letters of explanation
- Divorce – bring your Divorce Decrees, property settlements, quit claim deeds, modifications,
- VA only – bring Form DD214 and Certificate of
- Retires – bring retirement and/or Social Security Award Letter
WHEN APPLYING FOR A REAL ESTATE LOAN
- Thou shalt not change jobs, become self-employed or quit your job.
- Thou shalt not buy a car, truck or van (or you may be living in it)!
- Thou shalt not use charge cards excessively or let your accounts fall behind.
- Thou shalt not spend money you have set aside for closing.
- Thou shalt not omit debts or liabilities from your loan application.
- Thou shalt not buy furniture or appliances.
- Thou shalt not originate any inquiries into your into your credit.
- Thou shalt not make large deposits without first checking with your loan officer.
- Thou shalt not change bank accounts.
- Thou shalt not co-sign a loan for anyone.
Thank you for taking the time to read through this information. We hope you have found this guide valuable. When you are ready, give me a call! I am happy to answer your questions as you begin your home quest!
Associate Broker | REALTOR®
West USA Realty
Jamie@JamieLevy.com or call or text 623-332-7755