Most Important Things You Need Before Buying a Home Part Two
Here we are on part two of things you need to know before buying a home. We’ve covered that you need to have income, good credit, and to know what you can afford.
Here’s the rest:
You Need to Know How Much Cash You Can Bring to Closing
This is broken down into two parts: the down payment and the closing costs.
Down Payment: When you are buying a home, most loans will require a down payment, and it varies with the type of loan. For the most popular loans you are looking at:
For a $200,000 home, you would be looking at a minimum of $6000-$7000 on your down payment, in most cases. If you are a veteran, you qualify for a VA loan (provided you are not already using it) which requires no money down. If you live in more rural areas, you may qualify for the USDA loan, which is also no money down, but it is difficult to qualify for. We will go more into the different type of loans in the future. Of course, this is just the down payment. The other half is the closing costs.
Closing Costs are the costs associated with the loan, taxes, community fees, etc… In my area (sunny Florida), we are looking at anywhere from 5-6% of the price of the home for closing costs. For a re-sale home, that is split between you and the seller. So, for a $200,000 home, you can end up around $5000- $8000 for your part. For a new construction home, you are responsible for ALL closing costs (around $12,500- $15,500). The builders do tend to contribute towards closing costs, but that amount goes down in a seller’s market, like the one we are in now, in my area.
In all, you would be looking at anywhere from $11,000- $22,500 out of pocket for a $200,000 home depending on what type of home you are looking at. When we bought our home, we paid a little over $15,000 out of pocket and it was new construction. We were willing to spend $20,000 total out of pocket. Knowing your max here can save you lots of heartache in the future. Loving the home and being able to afford the monthly payment is one thing, but you also need to be able to afford the up-front costs.
This leads us into the most important part of all of this:
You Need to Find Out What You Qualify For
Everything up to this point was you learning everything you could about your finances to this point (having good credit, what you can afford, what you can bring to the table, etc.). This is the implementation of all your hard work: You need to talk to a lender and figure out what you actually qualify for. No sense in planning for a 3% conventional loan if you can only qualify for FHA or planning on a USDA loan when you make too much money for it (that is a thing with USDA loans).
This is where you go see a licensed professional who will take all your information and tell you what you qualify for. They may even have other loans that can work for you beyond the most popular I listed above. Credit Unions, if you are a member, tend to offer special programs for their members. Some banks and professional mortgage lenders offer special things as well.
If you are looking at a new construction home, they typically have their own lender that you would need to use to get their incentives (money towards closing costs, design center upgrades if applicable, etc.). You would still want to get pre-qualified before looking at new construction since you could still be looking at stuff outside of your price range.
When I say pre-qualified, I do not mean that letter that banks send you saying you can afford up to $450,000 for a home. I mean you actually go in, provide documentation (taxes for the last two years, last two months of paystubs, etc.), and then they process it and put it through some form of underwriting to see what you can actually afford. If the bank/lender/loan officer cannot do this, then you are looking at the wrong one.
Once you meet with someone and you know what you can afford and where the monthly payment would end up, then you almost ready to start looking. You just need one more thing:
You Need a Licensed Agent
I cannot stress this enough. You want an agent in your search.
They are licensed professionals who are experts in their market. If a home is overpriced, they would know. If the home is priced for multiple offers, they would know. If there is room for negotiation, they will know. They are your best line of defense. Not to mention, it also takes away all the hours of searching for homes that you would be doing. That is their job, and they tend to know what’s available in certain price points, especially in the metropolitan areas.
They will also know the specifics. You will know that a home in a neighborhood you were interested in was advertised for $275,000 and went under contract. They would know that it actually went under contract for $260,000, and had less upgrades than you were hoping to find in the home. Definitely good information to have.
They also tend to have a list of vendors (lenders, home insurance, home inspectors, etc.) that have proven themselves time and again that they can refer you to. Due to how our world works, some may be a little more hesitant to share due to legal liability, but they can still provide you with a list of options. You are not flying blind when you have an agent.
Of course, you will need to find the right agent for you. Referrals from friends and family are a good place to start, and so are open houses in neighborhoods you are interested in. Personality and experience are equally important things to look for when you interview agents. If you cannot get along with them, then their experience doesn’t matter. At the same time, if they have no clue what they are doing, then them being nice doesn’t help you either. Once you find an agent you can work with, you’ll be good to go.
That wraps up the most important things you need before buying a home. Let me know what you think in the comments.
Until next time!