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The process of buying a home may be exciting and overwhelming at the same time. Apart from financial perspective, there are also a number of other factors to be considered. There are certain steps to be followed in a home buying process. If you are a first time home buyer, this might help as a guide to go through the home buying process step by step. If you are an experienced home buyer, this might help to keep track of the home buying process.
Deciding on Buying Vs Renting
The decision of buying a home or renting varies depending on both financial and emotional considerations of the individual person. Buying a home gives a lot of tax benefits, financial freedom once you pay off mortgage. Paying monthly mortgage also builds a forced savings habit. Buying a home benefits a lot if you decide to stay long term. The choice of buying a home or renting a home depend on various factors depending on the choices of an individual, Financial situations, long term visions and goals of an individual, risk factors that are able to be handled. Every situation is unique.
Credit Score and Financial health
A credit score consists of three digits and they typically range from 300 - 850. This helps as an estimate of how likely are you able to repay your debt, how likely are you to pay your bills time, credit risk, etc... The score is calculated from the transactions of your credit accounts. These transactional data are collected by the Credit Reporting agencies, which are also called as Credit Bureaus. Checking your credit score beforehand is a very important step as lenders use this as one of the main factors on granting the loan.
The lenders estimate the ability to repay by looking at your credit score and credit history. You can check your credit for free through the website Annual credit Report.com once a year. You may also get a free credit report from each of the three agencies (Experian, Transunion, Equifax) once a year. If the credit reports are checked beforehand, you may get a chance to inform the credit reporting agencies about any errors and fix it. There are e few ways to improve your credit score to get better loan and financial terms.
Preapproval
Mortgage Preapproval is a document or letter from the lender stating how much they are willing to lend money to you to buy your home. Getting preapproval is the crucial step in buying a home. The preapproval is an indication that the lender is willing to move forward with the loan if the home meets the criteria expected and there is no drastic changes in your income or assets etc. The lender checks the borrower's creditworthiness based on income, assets, credit history, employment history etc. Preapproval doesn't guarantee that the loan will be given to borrower, a proper appraisal has to be done to be approved for mortgage.
It is advisable for the borrowers to continue to asses their financial situations even after getting preapproval as appraisal costs, Home owners insurance costs etc are usually not factored in preapproval process. The result of the preapproval process is that the borrower receives a Good Faith Estimate from the lender with details such as term of the loan, Interest rate, Loan type, closing costs etc.
Affordability and downpayment
Once you get pre-approved, your lender will let you know the maximum amount that you may be able to borrow for your home. Typically in the process of pre-approval, the lenders consider your annual income, debt to income ratio, source for down payment etc. While calculating your expenses, there are lot of factors to be considered along with your monthly mortgage payment such as insurance, property tax, HOA fees and other maintenance expenses. There might also be additional expenses if you decide to renovate your home after buying. It is very important to plan and budget accordingly.
The affordability usually depends on your income, current monthly expenses, interest rate etc. The amount of down payment needed may vary from 3% - 25% or more depending on the type of mortgage loan unless you are eligible for a VA loan where no down payment is needed. Generally.
With a conventional loan, you will need at least 3% down payment with Private Mortgage Insurance.
With FHA loan, you will need at least 3% down payment
With VA (Veterans) loan, you can obtain with 0% down payment.
Finding a Real Estate agent
Hiring a real estate agent may save you a lot of time and money and also help to negotiate the terms of the offer with the seller or seller's agent. They also may refer you to other professionals like appraisers, home inspectors, title companies etc. Once, you select a real estate agent to work with, they may take a look on your preapproval letter, discuss about your affordability in the neighborhood. They may also help in evaluating the mortgage options possible for your financial situation. Buyer's agent also may make sure that you get to view the potential properties you have chosen, this includes making dozens of phone calls, planning the best route for showings and making sure the you get the pertinent information about the homes you are interested.
Real Estate agents have access to multiple listing services (MLS) which is one of the best services available in home buying process in the marketplace which is not accessible to the buyers. MLS is a powerful tool that alerts real estate agents about the open houses and new listing notifications. They may also have access to off-market properties. The process of buying a home involves a lot of paperwork and they may also help with communications from your loan officer or title company. They make the home buying process and the transactions to be done in a smooth and organized manner.
Home searching process
Best way to track down the positives of a home or to compare the homes that best fits your need is by creating a checklist of your family's needs. There are certain things that can be done while touring homes to determine the quality such as checking on the structural and exterior defects on the walls, roof. Water pressure by turning on the faucets, flushing of the toilets, electrical issues by turning on the switches etc. These only provide a rough idea of the health of the home, a proper home inspection may be needed to determine the condition of the home precisely. These are certain factors that can be considered during the house hunting process.
HOA - CC&Rs
It is very important to know the covenants, conditions and restrictions of a Home owner's association before deciding to buy a home in a particular community. There might be a lot of restrictions such as parking rules, restriction in owning certain types of pet, architectural controls, Limitations in Insurance coverage, home maintenance standards, home occupancy limit, noise complaint policies, lawn and holiday decoration restrictions. It is also important to know the meeting minutes of HOA for at least a year and know about the reserves, plans for future as well as your future HOA fee may increase accordingly.
Make An Offer
Once you find a home that you like that meets your budget and other terms, then you may have to decide on how much has to be offered for the home, what contingencies may have to be added in the offer proposal such as appraisal contingency, inspection contingency etc and how much earnest money are you planning to deposit. Earnest money is the amount of money a buyer is willing to deposit to purchase a home which is typically 1-2% of the home which is deducted from the down payment or the closing cost while closing your home.
The more the buyer is willing to put down as an earnest money, the more serious the offer looks in the Seller's point of view. Once the seller receives the offer, depending on the terms disclosed, the seller may decide to accept it, reject it or make modifications. The modifications made are sent as a counteroffer to the buyer with modified terms and conditions. If for any reason the buyer decides to back out from the deal for any reasons other than that are outlined in the purchase contract, then seller may keep the earnest money. If the deal falls through due to any contingencies listed in the purchase contract, then the buyer may get their earnest money back.
Seller's Disclosure
A seller's disclosure is a legal document that enlists the details about the condition and history of the property including the list of defects present currently that the buyer must know about the home, it usually includes the problems that might have occurred before and the details about the remedy that was done to fix it. It may also include the details about whether the repair that has been fixed need a regular maintenance or does it have the potential to cause any future problems. Usually the questions about the property are answered as Yes, No or Unknown. In California, death in the property has to be disclosed if it was within the last 3 years.
Get A Home Inspection
A home inspection is a process where a qualified home inspector examines the safety and condition of the real estate property and provides a report. It is a very important step to consider during both the buying process of a home. They usually examine the interior structure, exterior structure, plumbing system, electrical system, sewage etc from the foundation to the roof and look for the signs of damage caused by water, fire, insects etc to assess the real condition of the property before buying and selling. After the property's condition is assessed, the home inspector provides a Home Inspection Report. A home inspector may only be able to assess the problematic areas, for example, defects in the structure of a home may only be corrected by hiring a proper structure engineer.
Home Inspection contingency is a clause added to the purchase contract before buying the home. It typically means that the offer to buy the home depends on the results obtained from the home inspection report. The buyer may decide to cancel the contract or negotiate the repairs to be taken care of with the sellers. Usually the contract offers the buyers a time period of 7-10 days to respond to the sellers of any objections or negotiations regarding the inspection report from the date the purchase contract is signed. The contract is not legally binding until the period ends. The rules of the Home inspection and the number of days vary from state to state and in some states, they are added as a clause in the purchase agreement. Usually the negotiation between the buyers and sellers are done within the time period in writing.
Shopping for a mortgage
The term mortgage is the term defined as the loan used to purchase or maintain a home, land or other types of real estate. It is an agreement between the borrower and lender to pay the loan over a period of time in a series of regular payments with principal and interest. These are called as secured loans and the home serves as a collateral. The lender ensures that the borrower meets certain requirements such as credit score, credit history, debt to income ratio, down payment etc. The requirements are checked through a process of underwriting before the loan is sanctioned. There are various types of mortgages such as conventional loans, government backed mortgage loans etc. Also, you may consider 15 Yrs mortgage, since the 30 Yrs mortgage rates are rising.
Home Appraisal
Appraisal is a process in which the home value is estimated by an opinion of a professional. This process helps in determining whether the home price listed is appropriate for the current home's condition, location and their features. It may help the lenders to make sure that the borrowers are not overpaying for the property as the home serves as the collateral for the loan. The value is determined by various factors such as location, square footage, number of rooms and bathrooms, functionality, floor plan, amenities etc. The appraiser also makes sure to have a visual inspection in the interior and exterior of the home to find any areas that may affect the property's value and any areas that need repairs. Depending upon the situation you may consider taking an Umbrella Insurance, since the risk reward ratio is high.
Purchase Homeowners Insurance
Homeowners Insurance is an insurance policy that you buy from an insurance provider which helps protect your home and family from unexpected events or disasters. It generally provides coverage to both your interior and exterior parts of your home. Though it is not mandatory to have Homeowners insurance by law, it is wise to invest in an insurance to protect your home and family and have peace of mind from unexpected events and disasters. If you have a mortgage for your home, then Lenders may require you to have Homeowners Insurance or Hazard Insurance as a mandatory element before closing to provide financial protection against losses or unexpected events.
Title Insurance
A title is a document that stands as an evidence that the owner has the lawful right in possession of the property. Title insurance provides protection to the mortgage lenders and home buyers against any defects, encumbrances, liens or problems with the title during the transfer of ownership of the property. Unlike the homeowners insurance or car insurance which provides protection against future losses, title insurance provides protection to the insureds against the claim of past events or occurrences. It is a one time fee paid at closing to insure your home against any claims outlined in the policy for as long as you live in that home, it may extend to heirs as well.
Final walk through
Final walk through is an opportunity for the home buyers to go through their home before closing the home buying process for one last time. The buyers may check the home to make sure it is in the same condition when the buyers agreed to buy it or make sure the necessary agreed upon repairs are done by the sellers during the negotiation period. It is an important step in the home buying process to check the home one last time before becoming legally and financially responsible for the home. Some of the things that may be checked are checking walls and floors for damage as it is possible to have damages due to the seller's moving out process. If there were any issues found in the walk through process, you may delay the closing, renegotiate the contract terms with seller or arrange for an escrow hold back for the repair cost that might be paid by the buyer.
Set up utility services
The change of address may be notified to the utility companies well in advance to make sure the services are uninterrupted when you go to your new home. This can be done simply through phone or mail. Depending upon the location, you may have to disconnect the current services and connect to the newer services.
Water
Electricity
Gas
Home security services
Sewage & Garbage
Internet
TV Cable
Close your home & get keys
Typically it takes around 30-60 days to close a home and may take longer depending on various factors including whether you have a preapproval ready, how long does the home inspection process takes to complete, repairs and negotiations etc. Once the contract is signed by both the buyers and sellers, they are combined with any other documents in the escrow process. The Escrow officer sends all the documents to the lender. The lender funds the loan once they receive all the documents necessary. The final step of the process is when a Grant deed is recorded and stamped at the county hall of records. This final step officially transfers the ownership of the property from the seller to the buyer. Usually the keys are handed to the title company by the seller and the title company hands it over to the buyer once all the signing, funding and recordation are done. The timeline and the process may vary according to the location and the rules followed.
Moving to your new home
There are certain processes the mover can follow in order to ensure that they are fully prepared to relocate to their new home. Moving is one of the big task and can become overwhelming if not planned properly. Plan a relocation checklist to make the process smooth and stress free.
If you are moving to a new city or state, you may have to research details about those places in advance to get an idea about the cost of living, schooling, neighborhood, supermarkets, Groceries etc. it is advisable to pack an essential bag with essentials for at least a week like clothes, food, toiletries, chargers so that you are covered if your packers truck is delayed during transportation. Getting a truck with loading ramp makes the loading and reloading easier during the move. Gather and carry all the financial records, medical records, important documents, receipts and contact information in one place. Refer for few tips on moving with kids and moving with pets.
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