ARE YOU READY FOR HOME OWNERSHIP?
Owning a home may be your dream, but in order for the experience to go smoothly you need to first ensure that you are financially and mentally prepared for the responsibilities that come with it.
Some people think home ownership is like renting, but with the freedom to have pets and paint the walls. While this is part of the excitement, there are also responsibilities like a mortgage, taxes and home maintenance to consider. Don't worry though, we can help you evaluate your finances and goals so that you get a house that you love without breaking the bank.
Buyer Frequently Asked Questions
Is it better to rent or buy?
Most would agree that in the long run, it is better to buy than rent. That said, there are factors that affect this sentiment:
- Would my payment on a new house be greater than what I am currently used to paying? What affect will this have on my lifestyle?
- Will I have to make sacrifices on amenities and location to be able to buy?
- How much will maintenance cost per month, year?
- Are there any other costs to consider, like Home Owners Associations dues for example?
If you can answer the above questions and still be ready to buy, you can look forward to:
- Probable asset appreciation over time
- Possible tax benefits, like being able to deduct mortgage interest from your taxable income (consult your tax professional)
- Freedom to improve/renovate your property as you desire
What should I look for when buying a house?
Make a list of needs and wants and then prioritize. You can’t always get what you want. But if you try sometimes you just might find, you get what you need.
- Focus on structural stuff like the roof, wiring, plumbing, and foundation over minor details like paint color and decorations.
- Remember, new windows, proper insulation, and efficient heating and cooling systems will save you money on utilities in the long run.
- Does it pass the sniff test? Don’t rely just on your eyes, use the power of your nose as well. If you smell pet odors, cigarettes, mildew or sewage you should take that into consideration before you buy.
- Never skip the home inspection. Repeat. Never skip the home inspection.
What are the steps involved in a Real Estate Transaction?
There are lots of details in the actual purchase transaction (which is why you need a RESLIST agent!), but here are the basics:
This list assumes you have been pre-approved for a loan prior to beginning your search for a home
Making an offer - Your agent will walk you through this and will guide you to offering the right price and terms. You can usually expect a response in a day or so.
Opening Escrow – When your offer is accepted, escrow is opened. Escrow acts as an impartial 3rd party in the transaction. They are there to make sure both sides of the transaction follow the prescribed process and that neither side is favored over the other.
Title Review – Sometime after escrow is opened, you will be provided with a title report. This report describes who currently owns the property and lists any liens that may be attached to the property. Unexpected liens could present a problem if the seller does not have the money to cover them, your agent will advise you in that event.
Appraisal – Sometime after your offer is accepted, your loan agent will arrange for the property to be appraised. The purpose of the appraisal is get an opinion of value from a licensed practitioner. In a fairly balanced market, the contract price of the property and the appraised value should be very close, if not identical to the appraised value.
Final Loan Approval – Yes, your loan was “approved” initially based on things like your credit, employment, income and assets. But, your lender will still need to approve the title and appraisal for the home you ultimately chose. Most of time, these are items are signed off without issue.
Closing – You’re almost there… This is when all loan documents are signed and any money required for down payments are collected. This is generally the last step for you as a buyer and homeownership is only days away. If you don’t understand something, ask questions, this is the time to do it. Also, you should receive a copy of everything you sign. Keep in mind that signing documents does not make you a homeowner – see the next and final step…
Funding/Recording – You’ve made it! The transition to homeownership happens when your loan funds and certain documents, like the Grant Deed, are recorded at the Recorders office in the county where the property is located. Recording notification is usually provided by the escrow company.
What are the first steps I should take when thinking about buying a house?
Assess your financial situation – How is your credit? Do you have money for a down payment? What about employment/income: do you have a steady job and income? All of these factors will come into play very quickly when you apply for a loan to buy your home. Your very first step may be to make a plan to work on these things. Whatever you do, don’t make any substantial credit purchases if you are thinking about buying a home. That new payment might decrease your home buying power significantly.
Find an agent – Finding the right real estate pro to represent your interests will make all the difference. Get referrals from your friends and family, and choose the agent that is right for you. For further guidance, see our section on “What to look for in a real estate agent”.
Get Pre-Approved for a Home Loan – Knowing how much home you qualify for is essential. Without this number, you may be looking at homes you can’t afford. Conversely, you may be able to get more home than you think. If you don’t already have a lender in mind, your agent will have some recommendations. Once you have a lender online, you should:
- Get pre-approved – this will require a credit check and verification of some personal information like employment and income and is valid for around 60 days
- Get a Loan Estimate - this will detail out all the costs associated with the loan, including payment break downs and interest rate
- Get a pre-approval letter – this lets the seller know you’re a bona fide buyer who’s ready to close a deal
What should I look for in a Real Estate Agent?
Above all, you should feel comfortable that your agent has your best interests at heart – after all, this is what they get paid to do. To find and retain that right agent, you should:
- Check the RESLIST Agent Directory – Our vetted directory covers a wide variety of specialties
- Get references - family and friends are great sources
- Check credentials – make sure their licensing is in order. You can do this easily by visiting the CA Bureau of Real Estate (BRE) website: http://www.dre.ca.gov/
- Interview prospective agents - make sure you like them and trust them. After all, they will be guiding you through one of the biggest investments you will ever make!
What are the different mortgage types, and which is right for me?
There are a wide variety of home loans or “mortgages” to choose from but let’s focus on the basics:
Fixed Rate – This is the most common type of home loan
- Best suited for someone who plans to stay in the home for a long time
- Interest rate and payment do not change during life of loan
- Usually, you can pay back this loan type in 15 or 30 year terms
- Very straightforward and simple loan. Predictable.
Adjustable Rate or “ARM” – although less common than the fixed rate, ARM mortgages are still a popular choice in today’s real estate market.
- Best suited for someone who does not plan to keep the home for very long or maybe plans to refinance the loan in a short period of time.
- Interest rate and payment can change during life of loan
- Usually a fixed rate initially (the first 3, 5, or 7 years for example), then adjustable after that
- Rate adjustments are based on financial market indexes and have “caps” that limit how high they can adjust during any given period
- More complex to understand. Unpredictable.
How much do I have to put down on a house?
For most people 3.5% is the lowest amount you can put down on a house. Veterans, and those who qualify for rural, agricultural loans can actually put down 0%. However it is important to keep in mind that anyone putting down less than 20% will pay an additional PMI on their home. Your lender will be able to discuss your finances with you and figure out what is best for your specific situation.
What is the difference between Traditional, REO, and Short Sale properties?
Traditional – Buying from a private party. When the owner of the property lists the property with an agent through the local MLS service. As the name suggests this process is the most common, and in most markets, represents the vast majority of transactions.
REO (Real Estate Owned) – Buying from a bank or other institution. These are properties where the previous owners have defaulted and the bank has taken over ownership. REO transactions are generally less emotional for the seller which is a benefit for the buyer. On the flip side, since your dealing with an institution, these transactions can take a little longer in some cases. Also, banks may be less willing to make concessions, but your agent will guide you through that part of the process.
Short Sale – Buying from a private party. For all intent and purpose, these are very similar to traditional sales. The only difference is that the bank must approve the sale. This is because the property is being sold for less than the current owner owes to the bank (thus “Short” sale). As with REO sales, an institution is involved so you may have to have a little more patience.
What is mortgage insurance?
Mortgage insurance (MI) is an insurance premium added to mortgages when the borrower puts down less than 20%. This insurance protects the lenders equity position should the borrower default on the loan. For some loan types, once you have at least 20% equity in the home you may no longer required to pay the MI.
It is important to know that this is NOT hazard insurance and also that it protects the lender in the case of default, not the borrower.
How can I lower my monthly payment?
There are a few different ways to lower your monthly mortgage payment, depending on your current situation.
- Get rid of your MI. If you have MI and have at least 20% equity, contact your lender to start the process of removing the MI (if your loan allows that)
- Refinance. Check your current rate against prevailing market rates. If it appears you could obtain a substantially better rate, call your loan agent.
How can I borrow against my equity?
There are a few different ways to take out an additional loan or second mortgage on your home.
Home equity loan - A second mortgage for a set amount, at a set interest rate, which is to be repaid over a set period of time.
Home equity line of credit (HELOC) - A second mortgage with a fluctuating balance similar to a credit card. The interest rate on HELOC’s varies according to the market rate.
Cash-out refinance - A refi on your current mortgage that exceeds the current amount you owe. The borrower receives the difference in cash up front to be repaid as part of the refinanced mortgage. See the section titled “Should I refinance my current loan?” on this page for additional info.
As for how much you can borrow that depends on your lender, and the amount of equity you have in the house, and your credit score. You will need to discuss terms with your lender, but most will approve you to borrow 80-90% of your equity.
Should I refinance my current loan?
Just because you can refinance doesn’t mean you should. Consider these factors when deciding whether to refinance:
- Pre-Payment Penalties. Do you have a pre-payment penalty on your current loan? This could be a substantial amount that could make a refi a bad idea.
- Closing Costs. If your objective is to lower your payments, make sure you are considering closing costs in your savings scenario. Divide your closing costs by your monthly savings to see how long it will take you to recoup them.
- Extra Payments. Remember that you have likely already paid on your mortgage for a while. Refinancing will “restart” that clock. Make sure you count those extra payments.
- Cash-Out? Having this objective will make the pre-payment, closing cost, and extra payments factors a little more subjective but, you should still consider these while deciding if the deal makes sense.
Contact us anytime to learn more about the local home buying process.
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From pre-approval to the moment that you receive the keys, RESLIST can help you with the sometimes overwhelming process of buying a home. Don't hesitate to contact us and find out more about how RESLIST can provide piece of mind to your home buying experience!
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25520 Commercentre Dr, Suite 150, Lake Forest, CA, United States email@example.com