If you’re renting your home, you’ve probably had a lot of people tell you that you’re throwing your money away.
Your Uncle Bob says if you don’t buy now, you’ll be priced out of the market. Your co-worker, who’s now selling real estate on the side, tells you buying a home is guaranteed to be a good investment. The random guy on the treadmill next to you who’s always watching CNBC keeps talking about rising interest rates. The real estate market has soared in recent years. And rising prices and home sales have generated a lot of noise from people who will tell you that you’re making a huge mistake with your money if you don’t buy right this second.
On top of that, it can seem like everybody is buying a house right now. Who among us isn’t inundated on Facebook and Insta with sunny pictures of friends holding their new house keys in one hand and a glass of Champagne in the other?
But guess what? Homeownership isn’t all sunshine and Champagne.
This course will teach you about the good, the bad and the downright terrifying parts of buying a home. Should you decide to forge ahead, we’ll guide you through the maze that is getting a mortgage, shopping for a home and making it through the finish line to closing. We’ll hold your hand and explain the brave new world of real estate lingo you’re about to encounter, from ARMs to Zillow.
(Disclaimer: The Penny Hoarder is not responsible for any mind-numbing headaches that arise during this journey.)
What you won’t find in this course is the answer to the question “Should I buy a home?” Only you can make that decision — regardless of what your Uncle Bob or your co-worker or the guy on the treadmill are telling you. This course will help you take an honest look at how homeownership aligns with your finances, your life and your goals. We hope that when you’re ready, it will make you a smarter homebuyer.
Not sure whether it’s worth your time? Your call. But hey, we’re only talking about the biggest purchase of your life.
Here’s the honest truth about renting vs. buying: Each will probably make sense at different times in your life.
You may feel a lot of pressure from people who say you need to buy a home ASAP. But the smartest time to buy isn’t based on market conditions — it’s when you’re ready.
There’s a strong correlation between homeownership and wealth. The average homeowner’s household wealth is $231,420; for renters, the average is just $5,200, according to 2016 Federal Reserve data.
Of course, this discrepancy raises cause-and-effect questions. After all, wealthier people are the ones who can actually afford to buy a home. And homeowners skew older, meaning they’ve had more time to build wealth.
That said, here are four key advantages to buying a home.
Owning helps you build wealth because home prices tend to go up, or appreciate, over time. Meanwhile, what you owe decreases as you make payments each month. As a result, you build home equity, which is the market value of your home, minus how much you owe on it.
Generally, the longer you stay in a home you buy, the more equity you’ll build.
Many experts recommend following the Five-Year Rule, which is simply that you shouldn’t buy a home unless you plan to keep it for at least five years. If you sell your home before that point, closing costs could eat up most of the equity you’ve built.
But if you’re buying in an area where home prices are rising rapidly — think places like San Diego, Seattle and Austin, Texas — you could build serious equity in a shorter amount of time. If you think sales will stay on the upswing in your area, buying could still make sense even if you might sell in a couple years.
You don’t have to worry that you might have to scramble to find a new home because your landlord just sold the one you’re living in or raised the rent too high. You can plan for your kids’ educations because you know their school districts. By staying put for the long haul, you’ll likely develop stronger ties to your community.
You can paint your house a funky purple if you want. You can knock down a wall, add a bedroom or put in a swimming pool. You can get the giant, slobbery dog you’ve always wanted without getting permission from your landlord because it’s your house.
You’re allowed to deduct the interest you pay on $750,000 worth of mortgage debt for homes purchased after Dec. 15, 2017. However, because the $1.5 trillion tax cut that passed in 2017 nearly doubled the standard deduction, many homeowners will save money by taking the standard deduction rather than itemizing and deducting their mortgage interest.
If you’re renting a home, you have plenty of company: As of 2016, more households were headed by renters than at any time since 1965, according to U.S. Census data. Rising housing prices, coupled with rising debt — looking at you, student loans — have put homeownership out of reach for many, particularly younger people.
Housing is typically your largest expense. That’s why, even though your rent payment is buying you a place to live, making that payment can make you feel as if you’re throwing that money away. But here are some reasons renting can make sense.
Homeownership made a lot of sense in the 1950s and 1960s, when you were likely to work for the same employer for decades, and then retire with a pension. And if you know you want to stay in one place, it still makes a lot of sense.
But with the average job tenure now just 4.2 years, there’s real value in being able to pursue a new opportunity without being anchored to a home.
A mortgage is a loan that’s used to purchase property; the property is the collateral. We’ll get into the nitty-gritty of mortgages later, but for now, let’s just say this: Getting one is really, really complicated. Getting approval often requires a solid credit history, which takes time to build.
Typically, buying a house requires a down payment of anywhere from 3% to 20% of the home’s value.
Compare that with signing a lease: You’ll need your first month’s rent, a security deposit and sometimes your last month’s rent. Sure, it’s a lot, but these costs pale when you consider the typical cost of a down payment.
Even if you have enough cash for a down payment, you may benefit from keeping it liquid to use in an emergency or putting it toward investments. If you don’t have enough for a down payment, it might make sense to knock out debt or build your emergency savings before you start saving for a down payment.
Leaking roof? Broken toilet? When you’re a renter, the solution is easy: Call your landlord. But when you become a homeowner, you’re suddenly responsible for these emergencies, along with routine maintenance and repairs. If you don’t want these responsibilities or you can’t afford them, it’s probably in your best interest to rent.
At first glance, a mortgage payment can look ridiculously cheap compared with what you spend on rent. But there are tons of costs you may not be aware of when it comes to homeownership.
Let’s pretend you’re purchasing a $200,000 home. You put 10% down.
You mortgage the remaining $180,000 over 30 years. Your interest rate is fixed, meaning it won’t change, at 4.5%. You’ll owe $912.03 each month in principal (the amount you borrowed) and interest (the fee you’re charged to borrow money).
That’s probably a fraction of what you’d pay to rent the same $200,000 home. Ready to sprint to the nearest lender? Stop right there.
Taxes and insurance are frequently rolled into your mortgage payment, which is why you might hear the acronym PITI — principal, interest, taxes and insurance. Here’s what that entails:
Property taxes vary widely based on where you live, but the average homeowner paid 1.17% of their home’s assessed value in property taxes in 2017. For a $200,000 home, that amounts to $2,340.
The average annual premium for homeowners insurance is about $1,083, but actual costs vary widely by location. In Oregon, the average annual premium is just $574, whereas in hurricane-prone Florida, it’s a whopping $2,055. You can also expect to pay more if your home has amenities that are considered risky, like a swimming pool.
If you put less than 20% down on a home, most lenders will require private mortgage insurance, or PMI, which protects the lender in case you stop making payments. PMI usually costs around 1% of the loan amount, though you can often get rid of it once you have 20% equity.
So let’s go back to your hypothetical $200,000 home and $180,000 mortgage. Here’s what your monthly payment looks like with taxes and insurance rolled in.
Mortgage payment — $912.03
Property taxes — $195
Private mortgage insurance — $150
Homeowners insurance — $90.25
Total — $1,347.28
But wait! That’s not all. Here are some other costs to consider:
Prepare to spend at least 1% of your home’s value on repairs and maintenance each year on average. Of course, if you need a pricy repair, like a new roof, expect to spend even more. Consider budgeting even more if you’re buying an older home, whereas if you’re buying new construction, you might get away with saving less.
If you buy a condo or a home in a deed-restricted community, you’ll probably have to pay homeowners association (HOA) fees, which pay for the building and upkeep of common areas, such as the lobby, landscaping or community swimming pool. HOA fees average $200 to $300 a month for a single-family home.
Some landlords cover the cost of certain utilities, but when you buy a home, these bills are all yours.
Open a separate bank account for home maintenance and repairs, and try to keep an amount equal to 1% of your home’s value saved so you’re prepared for maintenance and repair costs.
When you make your first mortgage payment, your balance will only go down by a teensy amount. That’s because most of your early payments are going toward interest rather than principle. The majority of your mortgage payment will go toward interest for the first 10 years or so of the loan.
The good news is, every month throughout the amortization schedule, i.e., the lifespan of the loan, you’ll pay a little more toward principal and a little less toward interest as your balance goes down.
Lenders will scrutinize your debt-to-income ratio, which is the percentage of your gross household income that goes toward debt payments.
While you might be able to get approved for a mortgage with a debt-to-income ratio of 50% or even more in some cases, many experts recommend you follow the 28/36 Rule, which is that you shouldn’t spend more than 28% of your household’s gross monthly income on housing expenses, and your debt-to-income ratio should be no higher than 36%.
That means if your monthly income is $5,000 before taxes, your mortgage, property taxes and insurance shouldn’t exceed $1,400. Your total monthly debt payments — including mortgage, car loan, credit cards and student loans — shouldn’t exceed $1,800.
A down payment is often the No. 1 hurdle for first-time homebuyers. Most likely, saving up for one will be the financial equivalent of a marathon — and the first steps should start long before you start shopping for a home or a loan.
Traditionally, you needed a 20% down payment to purchase a home. But the 20% down payment requirement has pretty much gone the way of flip phones and the Macarena.
The median down payment for first-time homebuyers is just 6%, according to the National Association of Realtors. Some programs that we’ll discuss later let you put as little as 3% down, or 0% if you’re a veteran.
Even though you probably won’t need to put 20% down, there are a lot of advantages to doing so, including:
Let’s be honest, though: Saving 20% for a purchase as large as a home is really, really hard. Making a lower down payment isn’t necessarily a bad thing. In addition to getting you into a home quicker, it can help you keep cash liquid for emergencies, or put more money toward investments or retirement.
But even 3% to 5% of a home’s value is a substantial chunk of change. Here’s where to find the cash.
Saving for a down payment is a long-term goal that might take several years. So you might not know what your budget will be when you get started. That’s OK. The most important words of advice we have are: Just. Start. Saving.
Debt drags you down when you’re trying to buy a home. The average annual percentage rate (APR) on new credit card offers is 17.11%. The interest rate for student loans is 4.45% on federal subsidized loans, and typically much higher for private student loans. By comparison, you might only get 1% interest in a high-yield savings account.
Your money will go further if you tackle debt before you save for a down payment. You’ll also be more likely to get approved for a mortgage down the line if you have little or no debt.
Take a close look at how much you’re bringing in and spending each month to determine where to cut back and how much you can afford to put toward savings. If you need help making a budget, check out TPH Academy’s Budgeting 101 course.
Sometimes there isn’t much fat to cut from your budget. Earning extra income through a side hustle may help you save money faster than you would if you invested the same amount of time in money-saving strategies like couponing. Need ideas? Here are 50 side gigs that will earn you extra cash ASAP.
You’re way less likely to spend money when you don’t see it. Set up a separate bank account for your down payment and have a portion of your paycheck funneled there via direct deposit.
Could you survive in a smaller house or apartment while you save? The cost difference between two-bedroom and one-bedroom apartments can be as much as 30%, according to USA Today.
Putting bonuses, pay increases, extra side hustle income, tax refunds and even birthday cash in your down payment fund will help you reach your goal faster. If you have an important milestone like a wedding coming up, consider forgoing a traditional registry and registering on a site like Feather the Nest, which will allow your family and friends to contribute to your down payment.
Down payment assistance programs are most commonly offered by state and local housing authorities, but you can also get them through cities, counties, nonprofits, your employer or labor union, or even directly through your lender.
Assistance can come in the form of grants, loans, tax credits and more. It can only be used for a primary residence.
Most programs have income limits based on household size and require you to contribute toward the down payment. There’s usually a limit on the price of the home — typically, it’s a percentage of the median home price in your area. You’ll also probably have to take a course about homebuying.
About 63% of assistance programs are for first-time homebuyers, but guess what? You may still qualify for first-time homebuyer programs, even if you’ve owned a home. The Federal Housing Administration defines a first-time homebuyer as someone who hasn’t owned a primary residence in at least three years.
Your profession could also help you get assistance. About 14% of down payment assistance programs are for people who work in a profession that serves the community, like education, health care and law enforcement or veterans.
The U.S. Department of Housing and Urban Development has a list of local homebuying programs that’s a great place to start your research.
Work with your lender and your real estate agent to determine your eligibility for down payment assistance before you seek preapproval for a mortgage, because these programs can have a major impact on your budget.
We hear alarm bells whenever someone asks if they should borrow from a 401(k) or individual retirement account (IRA). After all, that money is meant to grow over decades. Borrow from these accounts and you miss out on compound growth. That said, here are the rules if you’re considering using retirement funds for a down payment.
The IRS allows you to borrow up to $50,000 from your 401(k) or 50% of your vested balance — whichever is lower. But when you take out the 401(k) loan, you’re incurring more debt, which could make it harder for you to qualify for a mortgage.
If you’re 59 1/2 or younger and withdraw money from your 401(k), you’ll pay a 10% penalty AND owe income tax.
You can borrow up to $10,000 to put toward a first-home purchase from a traditional IRA, and your spouse can also borrow $10,000 from their traditional IRA. You’ll pay income tax on the withdrawal, but you won’t pay a 10% penalty.
A better option might be to withdraw from your Roth IRA. Because you’ve already paid taxes on your contributions, you can withdraw them at any time for any reason. You can also use up to $10,000 of the earnings from your Roth IRA for the purchase of a first home. You’ll have to pay income tax if you haven’t had the account for five years, but you won’t face a 10% penalty.
You also need to start getting your credit in shape before you start talking with lenders or hunting for homes.
Your first step is to check your credit reports. You’re entitled to a free credit report from each of the three bureaus every 12 months. To get yours, go to AnnualCreditReport.com.
Here’s what shows up on your credit report:
such as your name, address, Social Security number and date of birth.
The type of account, when it was opened, the limit or loan amount, the account balance and its payment history are all reported.
This section includes information on every lender that has run a “hard” credit check on you in the past two years — the kind that happens when you apply for a loan or credit.
Public records, such as bankruptcies, liens and judgments, along with accounts sent to collections, will show up here.
What you won’t see on your credit reports are your credit scores. But you can get your credit score and a “credit report card” for free from Credit Sesame. It breaks down, in layman’s terms, exactly what’s on your credit report, how it affects your score and how to address it.
Because it simplifies everything, you should be able to spot any errors. For instance, if you find an “unpaid” credit card that you know you paid, or a bill in collections you know never existed, you can dispute the incorrect information and correct your credit score.
We’ll get into the credit score requirements for various programs and mortgages later, but for now, let’s just say many require at least a 580 score. To get the best interest rates, you’ll need a score of around 760.
If you spot errors on your credit report, you may be able to improve your score quickly by disputing the information with the credit bureaus.
Otherwise, improving your credit won’t happen overnight. The most important thing you can do is to make your payments to creditors on time.
Almost as important: Keep paying down your debt without taking on new debt. While you’re doing that, ask your credit card company to increase your credit limits. This will lower your credit utilization ratio, or the percentage of your credit that you’re currently using. Lenders typically like to see credit utilization lower than 30%.
For a complete guide to credit scores, check out TPH Academy’s Credit Scores 101.
If you have a down payment saved and your credit is in decent shape, you might be ready to contact a lender. You could talk with the bank you already do business with. Or you could contact a major mortgage lender like Quicken Loans or SoFi.
You could also hire an independent mortgage broker to shop around and find the mortgage that works best for you. You’ll pay your broker about 1% of your loan amount for the convenience, but that won’t happen until closing.
Understanding the different types of mortgages is one of the most head-scratching, migraine-inducing parts of buying a home. Here’s a quick primer for those who aren’t fluent in mortgage speak.
A fixed-rate mortgage will stay the same over the entire life of the loan. That’s right — if you get a 30-year fixed-rate mortgage and don’t sell or refinance, your monthly payment and interest rate will be the same in the first year as it will be in the last. The most common term for a fixed-rate mortgage is 30 years, followed by 15 years.
The advantage of a fixed-rate loan is stability; the drawback is you pay for that stability, particularly at the beginning of the loan.
If you have an adjustable-rate mortgage (ARM), your interest rate will “adjust,” or change, every so often. Typically, the payment will stay the same for a certain number of years, and then periodically adjust after that period. One popular type of adjustable-rate mortgage is the 5/1 ARM. Under this type of mortgage, your introductory interest rate will last five years, and then your interest rate will adjust to match the credit market annually after that.
During the initial period, the interest is often lower compared with what you’d pay on a fixed-rate mortgage. A bank that sells you an adjustable-rate mortgage is betting that interest rates are going to rise and make your payments go up.
While adjustable-rate mortgages come with uncertainty, they can be a good option for those who plan to sell their homes after a few years.
The government “backs,” or insures, some mortgage loans. That means the government guarantees the lender will be paid back even if the borrower defaults on the loan. By backing loans, the government makes it easier for lenders to give mortgages to people the lenders might otherwise deem too risky.
A conventional loan is a mortgage that isn’t backed by the government. Unconventional loans, which include Federal Housing Administration (FHA) mortgages and VA loans, are backed by the government.
If you get a conventional loan, your lender will often require that your loan conform to guidelines set by Fannie Mae and Freddie Mac.
But before we go any further, let’s back up and talk about Fannie and Freddie, and what exactly these two giants in the mortgage world actually do.
Fannie and Freddie are government-controlled companies that primarily buy up loans on the secondary mortgage market. What the heck is that, you ask?
Well, when you get a mortgage from a bank or credit union, there’s a good chance they won’t hold onto your mortgage for the life of the loan. Instead, they sell it on the secondary mortgage market. Doing so frees up capital, allowing the banks and credit unions to make more loans.
That’s where Fannie and Freddie come in. They buy up mortgages and either keep them in their portfolios or bundle them with other mortgages into packages known as mortgage-backed securities and sell them to investors. (The primary difference between Fannie and Freddie is that Fannie works with large commercial banks, while Freddie works with smaller banks, often known as “thrifts.”)
A conventional loan presents your lender with greater risk than an unconventional loan, because the former doesn’t come with a guarantee from the government. So lenders will often require that conventional loans conform to the guidelines set by Fannie and Freddie so they’re eligible for the mortgage giants to repurchase them. These guidelines include:
The main advantage of a conventional loan is that interest rates are lower. Also, unlike unconventional loans, conventional loans don’t typically require an upfront mortgage insurance payment.
Unconventional loans can be a good option if you don’t have a lot saved for a down payment, or if your credit isn’t great. Keep in mind, though, that the minimums are the requirements for the government to insure your loan. Just because you qualify doesn’t mean you’ll actually be able to find a lender to approve you.
The Federal Housing Administration (FHA) insures these mortgages, which have smaller down payments and lower closing costs than conventional loans.
With a credit score of 580 or more, you can qualify for an FHA loan with a down payment of 3.5% of the home’s purchase price, according to the FHA. If your score is lower than that — between 500 and 579 — you’ll have to put 10% down.
No matter how big your down payment is, you’ll pay an upfront mortgage insurance premium of 1.75% of the loan’s value. This fee can be rolled into your loan.
Your monthly payment for an FHA loan can’t be more than 31% of your gross income.
The U.S. Department of Veterans Affairs guarantees parts of mortgages for active-duty military, veterans and surviving spouses. While there’s no down payment required, you’ll pay an upfront funding fee of 2.15% to 2.4% of the loan unless you qualify for a waiver.
The VA doesn’t have minimum credit score requirements, but lenders will typically want to see a credit score of at least 620.
The U.S. Department of Agriculture backs mortgages in this program, which focuses on homes in certain rural areas. No down payment is required. The USDA doesn’t have a minimum credit score, but most lenders will require at least 640, according to the independent Mortgage Research Center.
If you’re just starting the homebuying process, you might want to get prequalified by a lender. To do so, you’ll provide information to the lender about your income, assets and debts, along with your credit score, and the lender will estimate how much you’ll qualify to borrow.
But preapproval is when it gets serious. With prequalification, you’re self-reporting most of your financial information. When you get preapproved, you’ll have to provide LOTS of documentation, such as:
Your lender will also perform a credit check, which will show up on your credit reports as a “hard” inquiry.
Applying with a co-borrower? Sorry, but your lender will base its decision on the lower set of scores.
When you’re preapproved, your lender will provide you with a letter that says you qualify for a specific mortgage amount based on your financial information.
Having a preapproval letter gives you a huge edge when you’re shopping for a home. It means that you’re approved to borrow a certain amount as long as your financial situation stays the same and the home’s value holds up on appraisal.
Note: For the purposes of this course, we’re assuming that you’re going the traditional financing route and working with a lender to secure a mortgage.
But as many as 40% of home purchases are cash sales. These buyers are often investors or retirees who paid off their mortgage and are downsizing. The bad news is, sellers almost always prefer a cash offer to one that involves a mortgage.
If you have a decent amount saved, you may be able to pay cash, particularly if you’re buying a foreclosure or short sale.
You might not have to choose between getting a mortgage or paying cash. Seller financing or rent to own are two ways to finance a home without a mortgage.
Once you’ve been preapproved by a lender, do not — we repeat, DO NOT — borrow more money, take out new loans or rack up new charges on your credit cards. Even minor changes to your debt-to-income ratio could delay closing or cause your loan to fall through. If you need to finance a major purchase, wait until after closing.
If you have a preapproval letter in hand, you’ve made it past a huge hurdle. Now it’s time for the fun part: shopping for your home. Woohoo!
If you’re not serious about buying a home soon, you probably don’t need a real estate agent yet. You can always visit open houses and call listing agents about homes that interest you without an agent. When you’re ready to buy, ask friends, relatives and co-workers to recommend an agent.
You’ll work with a buyer’s agent, also known as a selling agent. Their job is to help you find homes that fit your needs and your price range. A seller’s agent, also known as a listing agent, works on behalf of — you guessed it — the seller. They help the seller with pricing, showing and marketing the home, as well as negotiating offers.
When you find homes that interest you, your agent will go with you to tour them. When you find a home you like, they’ll help you make an offer, and they’ll negotiate on your behalf. They’ll even guide you through the paperwork blizzard that follows.
Your real estate agent will almost always get paid by commission. That means if you don’t close on a home, they don’t get paid.
You can look for houses the old-fashioned way — by driving through neighborhoods, looking for “for sale” signs. Your real estate agent can also help you in your house hunt.
Real estate websites like Zillow, Trulia and Redfin are increasingly popular starting points in the home search. They’ll let you search for listings by city, neighborhood or ZIP code. You can filter the results by price range, number of bedrooms and bathrooms, and more.
Many will also let you filter by the type of home you’re looking for. Here are some common options you’ll find:
Single-family home: A house that isn’t attached to any other structure. You have your own yard and entrance, and your house is the only home on the property.
Condominium: An individually owned unit within a multifamily community where you share the common areas, like yards and amenities. Multiple condo units are often in a single building, meaning you’ll share walls and a roof with your neighbors, although detached condominiums do exist.
Town home: A town home is an individually owned house that usually has at least two stories. It’s attached side by side to other homes, meaning you’ll share at least one wall, but you won’t have another residence above or below you. Town homes often have small private yards and sometimes even individual garages and driveways, but you share some common areas with other residents.
Once you’ve narrowed down some possibilities, start by doing a little homework. Type in the addresses for the properties that interest you to the county property appraiser’s website to find out the home’s assessed value and how much the seller paid for it.
Next, you can check out the residence during an open house, or your agent can contact the listing agent to schedule a showing.
House hunting can be fun, but you have to keep your emotions in check — no falling in love until you’ve signed all the fine print.
When you’re looking at homes, you can never ask too many questions. Ask about the age of the roof, the home’s foundation and when the appliances were last replaced to get a sense of whether major repairs could be on the near horizon.
Also, request a copy of recent utility bills from the seller. Unusually high bills could be a red flag that major repairs are needed, or they could push a home out of your budget.
You’ll also want to ask questions about the neighborhood. Ask if there are any major projects in the works that could affect the home’s value. You’ll want to find out if there are foreclosures nearby, because these can negatively impact neighborhood property values. To find out the scoop on the neighborhood, don’t just take the seller’s word. Ask the neighbors, who are more likely to be upfront about the area.
Request a copy of a home’s Comprehensive Loss Underwriting Exchange (CLUE) report before making an offer on an existing home. The report will show you all insurance claims made for a home in the past seven years and could alert you that a house has major problems.
All the tips above are for if you’re buying an existing home. But what if you’re building your own home or buying a home pre-construction? You still need to play detective. Research the builder to make sure they have a good reputation. The Better Business Bureau is a good place to start.
If you’re buying in a pre-construction community, you’ll probably tour a model home. Be sure to ask lots of questions about what features are standard and which ones are pricy add-ons. If possible, check out other communities the builder has constructed in person, and talk with people who live there to see if they’re satisfied.
Before you make an offer, you need to educate yourself about the local market. Your agent and real estate websites can help you figure out whether it’s a buyer’s market or a seller’s market.
If it’s a buyer’s market, there are more homes for sale than potential buyers. That means you’ll have more time to make an offer, and the sellers are more likely to negotiate.
But you don’t have time to dawdle in a seller’s market, which means buyer demand is higher than the supply of available homes. Sellers in this market are likely to field multiple offers. If the market is super hot, you’re likely to find bidding wars, which is when two or more potential buyers compete against one another by gradually upping their bids.
Generally, when there’s more than six months’ worth of inventory, it’s considered a buyer’s market, whereas it’s a seller’s market when there’s less than six months’ worth.
To figure out how much inventory is available, use a real estate website like Zillow to find out how many homes are listed for sale in an area. Then, check out how many homes in the same area sold within the last month. Divide the number of homes for sale by the number of homes sold in the last 30 days to calculate how many months’ inventory is available.
For example, if there are 20 homes for sale and five sold in the last month, there’s a four-month supply. It’s clearly a seller’s market.
Before you make an offer, your agent will probably contact the listing agent to find out if there are other offers.
Your agent will help you figure out how much to offer. The sellers can then take your offer, accept another offer or get back to you with a counteroffer.
Even if the seller accepts another offer, it might not be time to give up just yet. A ton of things can go wrong before closing, so it could be worth it to submit a backup offer.
If you and the seller agree on a price, you’ll hand over what’s called an earnest money deposit that’s typically 1% to 2% of the purchase price to show that you’re committed.
A title company will hold the money in an escrow account, and the home will be listed as pending rather than for sale as you get ready to close. The deposit will eventually go toward your down payment and closing costs.
If you’re truly interested in a home, writing a heartfelt letter to the seller can increase the chances they’ll approve your offer.
You’ve found your dream home. Your offer has been approved. But wait! It’s not time to pop the bubbly just yet. There are still a few things standing between you and homeownership.
Your next step is to hire a licensed home inspector, who will scour the home for defects.
The most common problems they find are things like faulty wiring or plumbing, poor ventilation, clogged gutters, mildewy basements or missing roof shingles, according to the National Association of Realtors.
If the inspector finds serious defects that weren’t disclosed, you can take back your offer or renegotiate. Sometimes the seller will agree to make repairs.
You want to tag along for the inspection. After all, you’ll get to know everything that’s wrong with your new house! Just don’t panic if the inspector finds minor flaws. (Spoiler: They always will, and usually, it’s not a deal-breaker.)
The knowledge will come in handy when you actually buy the place. Be sure to get a copy of the inspection and keep it in your records.
At this point, you’re still not committed to any lender — even if you’ve been preapproved. Getting quotes from multiple lenders puts you in a better bargaining position, says the Consumer Financial Protection Bureau. If you’ve been preapproved by one lender but a different lender offers you a better rate, show the first lender the lower quote, and ask them to match it.
Better Mortgage is a good option if you want to save time shopping. The company bills itself as an online mortgage lender that’s built like a tech company — fast and innovative. It emphasizes speed and efficiency. It can quote you an interest rate in seconds once you type in your ZIP code, credit score range, down payment amount and the price of the house you want to buy.
Getting one additional quote before locking in a rate and buying a home could save you $1,500 over the life of the loan, according to Freddie Mac.
The bank that lent you the money will require you to insure the home you’re buying.
Homeowners insurance covers the cost of repairing or rebuilding your home if it gets damaged by fire or the kind of natural disaster insurers call “acts of God” — earthquakes, lightning, etc. It typically won’t cover damage from flooding or hurricane winds, so you may need to purchase separate insurance policies for those, depending on where you live.
To find affordable insurance, shop around. You may also be able to save money by raising your deductibles, making certain upgrades, and buying your home and auto policies from the same company.
Yes… It’s time… You are now about to sign the mortgage papers and officially become a homeowner.
At closing, it will be you versus a mountain of paperwork. Expect to sign your name. Again. And again. And again. Your real estate agent and a loan officer from your bank will be there, along with your mortgage broker, if you hired one.
Expect total closing costs to run anywhere from 2% to 5% of your purchase price. This covers everything from having a property appraiser assess the value of the home to having a title company do a title search to make sure nobody else has a claim on the property.
You may be able to negotiate with your seller to cover some or all of the closing costs. Or you could ask the sellers to add closing costs to the purchase price. That way, they get the same amount of money, and closing costs will be rolled into your mortgage.
You’re still reading, so we’ll assume we haven’t scared you away from buying a home. But before you start on your homebuying journey, we have one final question for you.
Why do you really want to buy a home?
If it’s because everyone else is doing it or you’re afraid of missing out, stop right there. Ditto for if you’re counting on making a quick profit by reselling in a couple years.
But if you want to buy a home because you feel ready — both financially and in terms of life priorities — you have our approval.
Just remember: Whether you opt to buy, rent or couch-surf for life, what matters is what works for you.
Now you’re armed with the knowledge you need to buy a home. Should you continue on your journey toward becoming a homeowner, here’s a to-do list that will help you prepare.
If you decide you want to buy a home, here’s your action plan:
Evaluate your budget to determine how much you can put aside to save for a down payment each month.
Open a separate savings account for your down payment and have your monthly savings automatically transferred there via direct deposit.
Obtain a copy of your credit reports from AnnualCreditReport.com. Check each report for errors, and dispute any inaccuracies with the credit bureaus.
Sign up for Credit Sesame to check and monitor your credit score.
Estimate how much you can afford by getting prequalified by a lender.
Research down payment assistance programs, and talk to your lender and real estate agent about your options.
Gather the required documentation for preapproval and request a preapproval letter from your lender.
Find a real estate agent by asking family and friends for recommendations.
Search for homes on real estate websites like Zillow, Trulia and Redfin.
Talk to the sellers about the home’s condition and with the neighbors about the area before you make an offer.
Also before making an offer, obtain a copy of the home’s Comprehensive Loss Underwriting Exchange (CLUE).
After doing market research and consulting with your real estate agent, make an offer.
When your offer is approved, contact several lenders to be sure you’re getting the best rate.
Shop around for the best mortgage insurance rates.