Intro to Homebuying
by Heidi Knightposted on February 3rd, 2020
We believe that homebuying doesn’t have to be a struggle. We’ve helped tens of thousands of buyers (and sellers) across the country achieve their real estate goals, and we know that with the right planning, the process can also feel equally empowering, exciting and rewarding.
So, we created Home Schooled, a first-time homebuyer playbook, to help you buy the home of your dreams with confidence. Here’s what you can expect from our Home Schooled series.
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Making the decision to buy a home isn’t always an easy one. While many of the reasons people decide to buy might vary from person to person, there are some universal perks all potential buyers should consider:
It’s easy to feel overwhelmed at the thought of buying your first home, but the process isn’t as scary as it may seem. Sure, it requires a time commitment, a little (okay, a lot) of paperwork and a few moments of frustration, but you’ll come out the other side with a serious (and potentially profitable) investment on your hands.
Now that you’ve decided that you’re ready to be a homeowner, it’s time to take a closer look at how that’s done.
The homebuying process can actually be summed up in 5 simple steps:
Preparing to buy a home involves investigating a few factors. To determine your budget, you’ll need to do an audit of your finances. This will give you an idea of what you can afford and ensure that you have all the paperwork necessary ready for your loan application. Next, you’ll want to consider what kind of home you want to purchase, where you want to purchase and if you will enlist the help of a buying agent. This is important because knowing what you want helps you navigate the browsing and touring process more efficiently.
It might seem weird to do this before you even look for a home, but a lender can help you determine how much home you can afford which, as mentioned before, is an important thing to know before you start looking. Having a pre-approval (not to be confused with a pre-qualification) in hand also gives you the agility to move fast on properties you love. Most buyers will require a mortgage pre-approval with an offer as proof that a buyer is motivated and qualified to buy. In competitive markets (think: cities where the median home price is high, i.e. Los Angeles and San Francisco), many buying agents and sellers won’t look at offers or work with prospective buyers unless they’ve gotten pre-approved.
This is when the real fun begins. Thanks to the internet, buyers can easily find listings via websites and apps (like ours) on their schedule. Once you’ve selected a few properties that interest you, you’ll want to see them in person to get a feel for whether or not it will be a fit for you. Many homes on the market will have open houses, or you can schedule a private tour. We’ve got more on what to look out for in another lesson.
When you’ve found “the one,” you’ll need to make an offer to the seller. Your buying agent will be able to help you draft your offer and assist you with details like offer price, contingencies and your schedule for closing. Once you’re with the terms of your offer, your agent will submit it to the seller’s agent or listing agent. Once a seller has accepted your offer, you’re officially in escrow!
You’ll now have a predetermined amount of time (outlined in your contract) to satisfy the terms of your purchase agreement. This includes completing any inspections to the satisfaction of both parties.
When all issues have been resolved and your loan is fully underwritten, you’re now ready to close escrow! This may happen in-person, at your lender’s office, or with a title company online. Either way, this is when the final paperwork is signed, any your closing costs are squared away, and you get the keys to your new home. Then, the home’s all yours.
There you have it! Buying a home doesn’t have to be too complicated. Be prepared, stay mindful of your goals, and you’ll be the proud owner of your very own home in no time.
In the early stages of the house hunting journey, your options feel limitless.
Now, we won’t argue that day dreaming about calling a sprawling estate home isn’t a very enjoyable pastime; however, according to the US Census, the national average sale price for a home in July 2019 was $368,600. Additionally, the average size of a home in the US was just above 2,000 square feet which is not exactly sprawling. That doesn’t mean you should immediately delete your “Dream Cribs” board on Pinterest. What it does mean is that if you’re serious about owning a home, being realistic about what you’re looking for is vital.
One of the first things you’ll want to consider about your future home is how long you intend to live in it. Thinking about when you’re going to move out before you even move in might feel like you’re looking too far ahead, but it’s not. Consider the following:
Why? Well, you’ll want to think about your short-term and long-term goals and whether the home you buy now could accommodate those goals later. Take into account where you are now, where you want to be, and how your home will factor in. Ask yourself if this home will suit your needs in 5, 10 or 20 years.
We all adore Chip and Joanna Gaines. The things they do with shiplap are honestly breathtaking; however, they often make the process of flipping a home a little too easy. While purchasing a fixer-upper or “fixer” home can be a great investment for a handy, DIY buyer, it’s definitely not the ideal choice for everyone.
“Fixers” are bargains for a reason. It takes money to fix a home that has fallen into disrepair and those costs could far exceed the amount you saved on the initial purchase of the home.
Depending on the condition of the home or the repairs needed, you might not be able to move in immediately. So it’s imperative that you make sure you have a thorough understanding of the work and resources required to make a “fixer” habitable before making an offer on one.
If you’re not the DIY type, or you need to quickly, a move-in ready or turn key property could be a better option for you. A turn key property could be newly constructed or pre-owned, one story or multi-level, single family or a duplex. The common trait amongst all turn key homes is that their condition allows you to move into them as soon as you get your keys. You can read more about turn key and other property types here.
If you’re a fan of list-making, you’re in for a treat! This is the part in the process where you get #analog, put pen to paper and write down all the things you want in a home. What’s your ideal number of bedrooms? Does mid-century modern architecture speak to you in a way that tudor never could?
Got your list? Great! Now, start crossing things off. That’s right. We’re getting realistic about your homebuying journey, and expecting to find a home with everything on your list (that’s within your budget) isn’t realistic. The point is to identify the things that you can’t live with or without in your new home. Not a big fan of cardio? Well, all the stair action involved in that multi-level home you thought you wanted might be a dealbreaker. Ruthlessly prioritize the items on your list of “must haves”. Knowing what you value most in a new home will help ground you when the euphoria of touring homes kicks in. Being realistic about your search criteria for a home will also make the daunting task of setting a budget a lot less stressful.
That’s right. Next up, we’re taking a cold hard look at your money…honey.
The true cost of buying a home will vary by buyer and property. Ultimately, it is determined by numerous factors like location, property condition, financing type, etc. When it comes to money, here’s what you need to know:
Most buyers have heard of a mortgage but many don’t realize what’s included in that monthly payment beyond the loan amount. Let’s break down what can factor into a mortgage payment:
It’s also important to note that your mortgage payment will change over the course of its life -- likely every year. Your lender will send you an annual analysis that details where your funds went, how much your property taxes were, and alerting you of any changes to your payment.
Pro tip: Using a mortgage calculator is a great way to get an estimate of what your monthly payment might be. They will generate the amount based on factors like the location and purchase price of the home, length of the loan and down payment amount.
You’ve probably heard the term “closing costs” thrown around at some point. But what exactly are they and how much will they be? Closing costs are extra fees charged by the lender, title company, underwriter, processor, real estate agent, and other parties in the process for the work they do on your loan. Like monthly mortgage payments, they vary greatly; however, some of these costs may be negotiable. Each lender charges its own unique closing costs, but generally they may include fees for:
In general, closing costs clock in at about 2-5% of the home’s total purchase price. Most lenders require you to pay these fees either by cashier’s check or wire transfer before you can get your keys.
Let’s talk about your financing options. While there are many financial products available to you as a buyer, generally speaking, home financing options can be broken down into two categories: cash or a mortgage.
If you’re paying in cash or making an “all cash” offer, this means you’re purchasing a home outright with assets that are liquid (immediately at your disposal). To put it more plainly, you’re paying “cash” for a home rather than using a mortgage loan to finance the purchase. Cash purchases aren’t common amongst first-time buyers or those shopping for residential real estate in general. Most cash buyers tend to be investors looking to fix-and-flip a home or use the home as a rental property. There are benefits to all cash offers for both sellers and buyers.
A mortgage loan, like an auto loan, is a line of credit that is meant to finance a specific type of purchase. Without a doubt, mortgages are the most common method of financing the purchase of a home for most buyers. This is because a mortgage loan allows buyers to purchase a home with lower out-of-pocket expenses upfront.
The repayment terms for mortgage loans typically range from 3-30 years with most falling within a 20-30 year repayment period. Interest rates for mortgage loans also tend to be lower on average than those of other forms of credit like hard money loans and credit cards.
Mortgage loans are most beneficial to buyers. Perks of financing with a mortgage include:
That said, there are some downsides to using a mortgage to finance your home purchase:
Keep in mind that even if you get a mortgage, you’ll still need to provide a down payment for your purchase. Though it’s commonly believed that you need to provide at least 20% for your down payment, many buyers are able to put down 10-15%. First-time homebuyers can actually pay as little as 3.5% percent when financing with an FHA loan.
A quick pro tip: It’s best not to dedicate all of your available funds towards your down payment. You want to be certain that you can cover your first mortgage payment as well as any other incidentals or unexpected costs that come up in the first month or two in your home.
Yes, “the market” is a thing. If you’ve done even the smallest amount of research on the homebuying process, then you’ve probably seen the phrase “the market” thrown around…quite often.
“It’s a seller’s market.”
“The market is hot.”
“It depends on your local market.”
But, what does it all mean? More importantly, what sort of impact can “the market” have on your experience as a homebuyer?
Let’s find out!
Quite simply, your market is defined by the area in which you are shopping for a home. It could be a zip code, a city or even the state. Every city, state, county, and even neighborhood is different; therefore, the conditions of your market are dictated by your exact location. Factors like availability of jobs, nightlife options, walkability, and quality of schools can make homes in a specific area more desirable, increasing demand.
How does this impact your experience as a homebuyer? Well, market conditions are dictated by the aforementioned factors, how they drive demand and whether or not the supply of homes in the area can meet that demand. Market conditions most directly influence sale prices and average days on market (DOM).
This is why knowing the market in which you’re shopping is key to succeeding as a buyer.
Buyer’s market: The hallmark of a buyer’s market is a surplus of available listings. In conditions such as this, sellers are more motivated to sell which usually makes them more likely to negotiate on various aspects of an offer. They may even be willing to throw in some extras like closing costs or appliances if they’re in a time crunch.
Seller’s market: In a seller’s market, that law of the land is “first come, first served”. Sellers know that demand is high and aren’t apprehensive about charging a premium price for their homes. Bidding wars are common in a seller’s market, so buyers really need to make an effort to stand out. In a seller’s market, it’s crucial that buyers be “offer ready” at all times.
It should come as no surprise that, as a buyer, you’ll ideally want to shop in a buyer’s market. You’ll have more options, more time to decide and a better chance of getting a deal on your home. If you have not yet settled on where you’d like to live, consulting your agent would be a great idea. Your agent should have a thorough understanding of local markets and be able to help you hone in on areas that offer what you’re looking for without doing too much damage to your wallet.
Here’s want you’ll want to consider when crafting an offer in a competitive seller’s market:
Talk to your buying agent about other ways you can stand out as a buyer. Every market is different, and your agent will be your best resource when crafting an offer that catches eyes.
Now that you’ve got a better understanding of your market and how to navigate it, it’s time for the house hunt to begin. When it comes to homebuying, you’ve got to keep your options open. Buying a home is a big commitment involving not only your money, but also your time. It's smart to be thorough in your search so you’re sure to get what you want. Here are a few pro tips to help you shop like…well, a pro!
Get digital: Thanks to modern technology, looking for a home more convenient than ever. With no more than a smartphone, a sturdy index finger and a little patience, you can find the home of your dreams in no time. Once you’ve downloaded an app, the process is usually as simple as entering your location and search criteria (type of property, bed/bath count, price, neighborhoods, etc.). Some great options for matching with the perfect home include:
Kick the tires: That’s right! You’re not going to find the home of your dreams sitting at home. Take your search into the real world by attending open houses in your market. It’s a great way of getting up close and personal with your prospects. You can find out if the property looks like the photos you’ve seen online and size up the competition at the same time.
Pro tip: Try sparking up a conversation with the listing agent as they may be able to provide additional information about the property that helps you with making a decision.
Check out the area: Where you’re buying is just as important as what you’re buying. Your neighbors, local attractions, the cost of living and even commuting times are all location-based factors that will directly impact your quality of life in any given area. Make the time to explore any neighborhood you’re considering. Pay special attention to:
Once you’ve narrowed your search down to a few choice neighborhoods, you can consult Google for more info. Sites like AreaVibes and NeighborhoodScout can give you important details about crime rates and safety issues in the area. Niche and GreatSchools are useful resources to find out more about the quality of local schools.
Pro tip: When you decide to buy your home is just as important as where you decide to buy it. Talk to your agent about how you can time your purchase just right to get the best deal.
Got the info you need? Alright, let’s make some choices!
At this point in your journey, you came, you saw, and, now, you’re ready to conquer. And by conquer, we mean you’re ready to choose which home you want to buy.
You’ve made your list. Check it twice.
Remember that list you made of all the things you absolutely need to have in a home? Now is the time to put that list to use. As you’ve viewed homes, it’s likely that some of the must haves and deal breakers on your list have changed. Don’t fret! That’s actually a good thing. It just means that touring homes has helped you re-prioritize.
Your pre-approval amount is actually the maximum value your lender is willing to lend you to purchase a home. While it can be very tempting to look for homes at the max price point your pre-approval will allow, try not to fall into that trap. Just because you can pay a certain amount for a home, doesn’t mean you should. If you’re not in a highly competitive market, it’s especially important to be conservative with your approved loan amount. Keep in mind that the lower your purchase price, the lower your monthly mortgage payments will be.
It’s very important that you try not to focus *too* much on the cosmetic elements of a home. Instead, think big picture. In general, you’ll want to pay closer attention to the things that could affect your quality of life while living in the home rather than the aesthetics of the home. As we mentioned before, it’s the things like home condition, local amenities/utilities, location, neighborhood, that will have a bigger impact on your living experience than something like old carpeting, peeling wallpaper or outdated cosmetic fixtures. Think big picture.
As you make your final decision, just keep in mind that unless you’re building a custom home from scratch, you’re at the mercy of the inventory in your market. What’s available is what’s available. You can always make moderations to a home after you buy it so try to keep your focus on making sure a home checks the most crucial boxes for you first.
At some point, whether it’s five days into your journey or one hundred, you’re going to find the one. The house that makes your heart stop. The one that just feels right. The precious, if you will. It’s a place where you can see yourself not just living but thriving. You’ve probably already imagined yourself perched in the living room’s bay window burning the midnight oil to meet a deadline or chasing your new toy labradoodle pup around the yard.
So, what do you do when that day comes? Read on.
There’s no hard-and-fast timing for when to make an offer on a house; however, generally speaking, the faster you do it, the better. Great homes move fast, and if you like a property, there’s a good chance that other buyers do as well. While getting your offer in first doesn’t necessarily mean you’ll beat them, it does give you a better chance of success, so time is of the essence. If you see a home that you just have to have, you need to act fast. That means:
An offer is simply that -- an offer to buy the house. It’s technically a bid that says how much you’re willing to pay for the property, your terms, your timeline, and details surrounding how you would buy the property.
Your agent presents your offer in the form of a proposed contract, which a seller can then accept, reject or counter and negotiate.
Generally an offer should include:
Your offer also needs to meet all the legal requirements for a real estate contract in your area; your agent will be able to help you with all of this.
Pro tip: Contingencies serve as a safety net for buyers. Don’t forget to talk to your agent about which of the following contingencies you should include in your offer:
So, are we really doing this?
There are several outcomes you can expect after submitting a bid on a home. Your offer could be accepted as-is, rejected outright, or turned into a week-long negotiation that has you playing email tag with your buying agent.
Let’s break down every potential scenario and what you can do in each one:
If your offer is accepted, the seller will sign your proposal, and it will become a legally binding contract. It’s then sent back to your agent, who will call you with the good news. Then, it’s time to move on toward closing!
The next step is to finalize your loan application with your mortgage lender, schedule a home inspection, get your down payment ready, and find homeowner’s insurance. You’ll do your final walkthrough, sign your papers, and get keys in just a few weeks if all goes as planned.
Unfortunately, rejections are a common part of buying a home. So don’t take it personally if a seller rejects your offer. It likely only means one thing: someone else made a better one.
The important thing here is to learn from the situation.
Sellers rarely accept an offer outright unless they’re super desperate to get the home off their hands or are positive they’ve received their best offers. In most cases, even on offers they like, a seller is going to come back with a few changes before finalizing the contract.
In the event the seller can’t move out quicker than the closing date, they may also add what’s called a “rent back” to the offer, which allows them to essentially rent the property from you until an agreed upon date. This is common when sellers are waiting to close on another property before they can move out.
If you’re no longer in love with the property or find a better one after you submit your offer, you can also choose to back out of the deal -- as long as you both haven’t signed the contract yet.
If you decide to back out of the transaction after the contract is already signed, a few well-placed contingencies in your offer can help make that possible.
There’s a chance sellers may try to remove these protections from the contract during negotiations, but think long and hard before doing so and talk to your agent about it first.
You’ve done it! Your offer was accepted. Congrats, you’re ready to go into escrow!
So, what is escrow?
When your offer is accepted, your lender will open what’s called an escrow account on your behalf. It’s what will hold your earnest money deposit, down payment, and other funds until the time they’re transferred to the seller. The opening of an escrow account also officially kicks off closing.
Generally speaking, closing takes about a month to complete. During this time, your loan officer will be focused on underwriting and processing your loan while you and your buying agent will take care of:
Pro tip: Some activities should be avoided during closing. For one, it’s best not to make any large purchases before your loan has been fully underwritten. Your lender might pull your credit and financial data just before closing day. If your credit report reflects an increase in your debt-to-income ratio or has too many new accounts or inquiries, it could send up all the red flags and jeopardize the terms of your loan.
When is the house actually mine?
Once your loan has been fully processed and underwritten, you’ll be assigned an official closing date. That’s when you and the seller will sign the contracts, deeds, and paperwork -- and a notary will be on hand to verify it all.
Once the notarization is done and your funds have hit the seller’s bank account, you’ll get your keys and be free to move into the house.
Congrats, homeowner. You did it!
This content is meant for informational purposes only and is not intended to be construed as financial, tax, legal, or insurance advice. Opendoor always encourages you to reach out to an advisor regarding your own situation.
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