How to prepare for a home purchase?
There are three main financial objectives you need to accomplish to prepare for a home purchase:
- Save money for the down payment, closing costs, and other home-buying expenses.
- Maintain and improve your credit score.
- Reduce your debt-to-income ratio.
These are the primary criteria that your lender will use to approve your loan and set your interest rate.
Additionally, there are several things to avoid while you are preparing for a home purchase, and you should continue to avoid these until you close on the house.
- Do not make large deposits or withdrawals from your bank accounts.
- Do not make large purchases like a new car or new furniture for your new home.
- Do not take out a new loan or cash advance.
- Do not co-sign a loan or a lease for anyone.
- Do not open a new line of credit.
- Do not close your existing bank accounts and do not open any new ones.
- Do not quit your job, or retire.
- Do not change your job, unless it is a promotion for the same type of work.
How to save money for the down payment?
The best way to save money for your down payment and other home-buying expenses is to review your budget and cut your expenses. Additionally, you can try to earn more from your current job, or start doing side jobs for extra income. Basically, you want to make more money and spend less of it.
Since you’ll be needing this money in the short-term, you should save your money in CDs or a high-yield savings account. You should not invest your money in the Stock Market if your timeline is shorter than 5 years because there is a possibility of loss when you invest short-term.
How to increase my credit score?
The first thing you should do is to check your current credit scores and review your credit reports. You can do these for free without hurting your scores.
To get started check your credit reports for errors, late payments, and accounts in collection. These derogatory items are really bad for your credit and it may take a while to fix. However, you should start the credit repair process right away by doing the following:
- Dispute any inaccuracies you find on your reports.
- Catch up on all of your late payments. If you have a hard time making the payments, call your creditors to work out a payment plan that you can follow for each account.
- If you have accounts in collection, work with your creditors to resolve the collection and close out the account.
Once you get the big three items out of the way, there are things that you can do to maintain or improve your credit:
- Pay your bills on time.
- Keep your credit lines open, especially older accounts. Do not close your unused credit card accounts.
- Pay down your debts and keep your balances low.
- Ask for higher credit limits (this has a similar effect as paying down your debt)
- Do not open a new line of credit.
- Do not take out a new loan.
- Report on-time payments for your rent, cell phone bills, and utility bills (there are some services that let you do this if you need to boost your credit)
What is the first thing I should do when buying a house?
The first thing you should do is talk to a good lender or a good Realtor. You can either search online or ask your friends and co-workers for recommendations.
A good lender will know several good Realtors that you can choose from, and likewise, a good Realtor will provide you with a list of good lenders that you can work with.
Once you put together your home buying team, your next step is to get a pre-approval letter.
How long does it take to get a pre-approval letter?
Getting a pre-approval letter is a fast process (usually 3 days or less) if you’re prepared and you have a responsive lender. Typically, the lender will ask you to submit the following information to get you a pre-approval letter.
- Two most recent months of bank statements and retirement accounts statements
- Two most recent paystubs
- Two most recent tax returns
- W2 forms
- Two most recent mortgage statements (if you already have a mortgage)
There might be more documents if your financial profile is more complicated — for example, the lender could also ask for your business P&L statement, your business tax returns, rental property lease, rental property P&L statement, etc.
How much money do I need to buy a house?
There are several fees you have to pay while you work toward closing, and at closing. Also, some agents do charge a Retainer Fee which you pay upfront for them to work with you.
After you place a house under contract, there are three major expenses:
- Earnest Money Deposit
- Inspection-related Fees
- Appraisal and Credit Check Fees
At closing, there are two major fees that you’ll be paying:
- Down Payment
- Closing Costs
For more information, see How Much Money Do You Need to Buy a House?
How do I start my home search?
Once you’re pre-approved, you will know how much you can borrow. The top two criteria for your search should be price and location.
If you’re getting too many results for your search, you can narrow down the search by specifying the following:
- # of bedrooms
- # of bathrooms
- type of property, e.g.,
- Single Family Homes (SFH) – has a yard and will require yard work, usually the most expensive, low HOA fee.
- Townhomes (TH) – smaller yard, less expensive than a comparable size SFH, low HOA fee.
- Condos – No exterior maintenance. Comes in a variety of style, e.g., Townhouse, Garden-style apartment, and High-rise apartment. The condo fee can be significant and must be considered with the price of the property.
- Other features
- Garage parking
- School district
If you’re not getting enough results for your search, you need to broaden the search as follow:
- Wider area for your search
- Eliminate or reduce some of the criteria
Depending on your timeline, budget, and market condition, you may not be able to get everything you want. As your Realtor, I will help you explore your options.
How long does it take to buy a house?
In general, it takes about 4-8 weeks to find the right property. In a Buyer’s market with more homes for sale than buyers, it will be slightly faster, but this step could take a long time in a Seller’s market with low inventory.
After you place a house under contract, it typically takes 30-45 days in a Standard Sales to do everything needed to complete the process of buying a house. There are a few exceptions:
- A Short Sale typically takes 2-3 months to close because the Seller has to get approval from the Bank that the Seller owes money to. Once the Bank approved the short sale, it is possible for the bank to counter the contract sales price and/or seller’s subsidy. If you and the Bank cannot agree to the new terms, the contract is voided.
- An REO (or a Foreclosure Sale) typically takes about 45 days to accommodate the extra paperwork required by the Bank (who is the Seller in this case).
- A Relocation Sale typically takes about 45 days to accommodate the extra paperwork required by the relocation company.
- Some lenders are slower than others. Most lenders will close your loan in 30 days or less; however, there are a handful of lenders that are slow and could take 60 days or more to close.
- New construction homes built from the ground up in a community will take between 3-6 months to go from under contract to close. In this case, most of the time is needed for the construction.
Agency and Representation
Who does the agent represent?
When you call the agent shown on the sign in front of the house, or talk to the agent at an Open House, you’re most likely talking to an agent that represents the Seller (i.e., the Listing Agent). It is important to remember that the Listing Agent is bound by their contract with the Seller to look out for the Seller’s best interest and advocate for the Seller.
As a buyer, you should look for a Buyer’s Agent to represent your best interest and be your advocate. The best way to find a realtor is to ask for recommendations from friends, family, and co-workers. Next, you want to check their reviews online and eliminate those with bad reviews or insufficient experience. Once you narrow down your list to 2-3 people, talk to them on the phone and see if it is someone you’d like to work with.
Important: A written brokerage agreement between you and the agent is required to enter into a buyer agency relationship.
What is a dual agent?
A dual agent is a licensee who represents both the Seller and the Buyer in the same transaction. In Virginia, dual agency is legal, but I do not recommend that you work with a dual agent. I personally do not practice dual agency because it is extremely challenging for a single person to fairly and equally represent the interests of both parties in a transaction. I simply do not think it is in my client’s best interest.
How much do I have to pay my agent?
Usually, the Agency Agreement will state something along the line of the Buyer will pay the Buyer’s Agent X% of the Sales Price plus $Y amount in Broker’s Fee.
- X is usually 2.5%, 3%, or 3.5%
- Y varies a lot from Broker to Broker, and it ranges from $0 to $900.
Fortunately, Sellers usually pay some amount to the Buyer’s Agent, and this compensation often covers most or all of the fees that the Buyer owes to the Agent. This is why many real estate agent says that their service is free for their buyer clients — however, this simplification is not exactly right.
Can I ask the Seller to help me with the closing costs?
Absolutely, you can. For a primary residence purchase, you can ask the Seller for up to 3% of the Sales Price, and up to 2% for an investment property. In your contract, you could ask the Seller to help cover some or all of your Closing Costs. The ability to negotiate for closing costs credit (also known as the Seller’s Subsidy) depends on the property, market condition, competition, and the parties involved.
What do I need to bring to closing?
All you need to bring is a valid driver’s license or government-issued photo ID. Some lenders require two (2) forms of ID.
I’m expecting to bring money to closing. Who do I give my funds to, and what form of payment is accepted?
Your title company must receive funds before closing. The closing is not final until all funds are received. To ensure the title company has funds in their escrow account in time for closing, you need to wire the money at least a day before closing. Typically when wiring from a regular bank account, the wire transfer can take up to 24 hours to be completed.
Alternatively, the title company may accept a cashier’s check payable to the title company, which you can bring on the closing date.
If the title company does not receive funds on time, it could delay closing.
WARNING: Make sure you verify the wire instruction over the phone with the title company before sending the money to prevent fraudulent wire instruction.
What does the title company do?
Among the many responsibilities, the title company examines the title to make sure it clear for sale. In particular, they do:
- A title search – an examination of public land records verify (1) the seller is the legal owner of the property and (2) there are no pending legal encumbrances such as liens, restrictive covenants, taxes or other claims that may affect the value of the property and marketability of title.
- A PACER search – a search of the federal, district, and bankruptcy courts to verify buyers and sellers are not in active bankruptcy.
Why do I need an Owner’s Title Insurance?
An Owner’s Title Insurance Policy protects the Buyer’s interest in the real estate property and continues for the Buyer’s lifetime. This is important because liability for title defects can survive beyond the period of the Buyer’s ownership. The Buyer pays a one-time premium at the time of settlement. This protects the Buyer against prior title defects or claims made against the title, even after the property is sold.
There are two types of coverage: Standard and Enhanced. The enhanced provides many extra coverage items.
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Pinyo is a full-service Realtor with Berkshire Hathaway HomeServices PenFed Realty and an insurance agent with McEvoy Insurance & Financial Services. He specializes in representing clients in the purchase and sale of residential and investment properties throughout Virginia and Maryland areas around DC.