Is Buying a home right for me?
Well, only you can genuinely decide if buying a home is right for you. Everyone’s circumstances, dreams, wants and needs are different.
As with everything in life, there are pros and cons to buying a home and hopefully with information you can determine if now is the time to buy. One thing for sure, home affordability has never been better since prices are down and mortgage rates are at historic lows, which means lower monthly payments and in most cases you can own cheaper than you can rent, as this graph below shows.
The reasons for wanting to buy your own home or stay renting are numerous and will be different for each person:
For example, homeowners who decided to take that leap might say:
Buying a home is not for everybody, whether for financial reasons or you are just content to be a full time renter. Renting has many benefits as does owning your own home.
If you are a renter and you believe that you would not qualify for a mortgage but would like to buy a home, talk to an agent or lender. The worst that could happen is that your suspicions are confirmed but at least you will know what you need to do to improve your credit score and improve your chances of qualifying the next time around.
My dream home
Dreaming of my dream home.........
Once you are ready to start seriously looking at a home to buy, it is a good idea to have your list of “must haves”. You will be consumed with the urge to pop into every open house on the weekend, surf listings on-line when the boss is not looking, plus an additional three hours of surfing at home in the evening. I’ve been there! It is nice to dream; however, when a sack of money is at stake, a reality check is required. Many factors are required to determine what you can afford and before you get to deep into the house hunting you should take the next step then homes that best match your budget, area etc. can be searched for and so forth.
Better to be pre-approved than pre-qualified.
Getting prequalified by a lender is an informal process where a lender asks you some simple questions regarding your debts, assets and credit score and comes up with a ballpark loan maximum for you. However, when getting preapproved for a mortgage, you must fill out a loan application and provide the required supporting documentation. Assuming you qualify for a mortgage, the mortgage lender will commit to you in writing the amount you can borrow and give you a preapproval letter.
Preapproval for a home loan has a number of advantages:
How much can I REALLY afford?
When you apply for a mortgage, the lender will base how much you can borrow on your debt-to-income ratio. The lender uses this ratio to determine how much mortgage debt you can handle and thus the maximum loan you will be offered. Your debt-to-income ratio is based on how much personal debt you are carrying as a percentage of your gross (before tax) monthly income.
When a lender makes a decision about your mortgage application, they consider both your ability and your willingness to repay the loan. The lender will gauge your willingness to pay the loan based on your credit report and previous commitment to paying rent, utility bills and previous loans. Lenders prefer for you to have been employed at the same place for at least two years, or at least be in the same line of work for a few years.
After your debt-to-income ratio, the next major factor in determining how much you can borrow is how good is your credit rating?. In order to be approved for the prime (best) interest rates and hence lowest monthly mortgage payments, you need to have a high credit score . Interest rates can have a big impact on how much financing you can afford to borrow. A 1% higher interest rate means reducing your buying power by 10%!
Making and negotiating offers and doing home inspections
Finally, after a long search of real estate listings, you are standing in front of the home that meets all or most of the items on your wish list. This is where working with a Realtor pays off and you don’t even have to pay them a penny for their services (the seller pays their commission).
But first, are you sure this is the right home for you? Step back for a minute and take an objective look at the home.
The sales contract and contingency clauses
A buyer’s offer to purchase a home is presented in the form of a sales contract (officially know as a Purchase and Sale Agreement). This is a five page legal document, the main elements of which are:
The buyer fills out the sales contract paperwork with the help of their agent. Do not let your agent dictate what goes on the paperwork. Definitely listen to their advice, but all final decisions should be yours to make! If you are not sure what you are signing, have your agent clearly explain to you what the paperwork means. This is important stuff! The agent will then send the offer to the listing agent who then presents the offer to the seller. The offer must be in writing and signed. Verbal agreements are not legal for real estate transactions in the Washington State.
The initial offer from the buyer will have a stated deadline within which time the seller can respond to the offer. The seller is not obligated to respond to the offer. Once that period has elapsed, and no action has been taken by the seller, the offer is considered no longer valid. However, if the seller accepts the offer as is great. More than likely, the seller will come back with a counter-offer and the negotiation process continues.
Contingency clauses are there to protect you
Contingency clauses are various conditions that need to be met in order for the sale to go through. They are there to protect you, the buyer. For example, the inspection contingency protects you from buying a lemon house and the financing contingency means that you are not forced to buy the home if you are declined financing by a lender. They are part of the whole contract / offer that you submit to the seller. The conditions of these clauses must be met before the sale can go through to closing. However, once the conditions of a contingency clause(s) have been met, then the agreement must be honored and the sale must go through.
The most common contingency clause are:
Counteroffers, negotiating and reaching mutual acceptance
The seller receives your offer to purchase their home. The two parties enter into back and forth negotiations, each side making counteroffers against the other side’s offer. Ideally, this process will not have too many rounds (2-3 is good) and hopefully remain civilized. The best result is when a consensus is reached and both sides feel like they got a fair deal.
It’s a game of give and take (and maybe even some bluffing) and can be the most nerve wracking part of the home buying (and selling) process. You are so close to getting your dream home and your anxiety levels can sky rocket. If the negotiations are less than smooth, it is important to try to stay calm. Working with a good realtor will help keep you sane and hopefully get the best deal under the prevailing market conditions. Go for a hike on Mt. Rainier, down a couple of fine Seattle micro-brews, rent a movie, or all three of them!
When the seller comes back with a counteroffer to your initial offer, they will probably cross out the offer price you entered and write down a new price somewhere between your offer and the actual listing price. They may also come back with some other comments such as “washer and dryer not included”.
The modified sales contract will be faxed back to your agent, who will review it with you. The dance can end here or go on for another couple of rounds. Avoid nit-picking over minor issues, focus on the major items. Also, avoid protracted negotiations. If the seller gets a better offer from a less demanding buyer, you may not hear back from the seller again and lose out on the home.
All things going well, you and the seller will come to an amicable agreement and reach what is known as mutual acceptance.
And finally we reach the promised land of mutual acceptance
If you really want to know the nitty grity of how offers are handled during negations, here it is but it might make your head hurt…
Your objective is to reach mutual acceptance. This means that both sides have signed the contract and wish to move on to the next stage of the process. Now the clock starts ticking and it’s time for you to start getting busy.
Home inspections for buyers
As per the inspection contingency, you will have around 10 days or less to complete an inspection of the property. The status of the listing will be updated to form active to pending inspection by the listing agent.
The inspector will look at structural, electrical and plumbing elements of the home and also do a pest inspection. You the buyer, pays for the inspection. It is highly advisable that you do not skimp on this step. Most of us know little about plumbing, foundations and electrical circuits. You want to avoid buying a lemon of a house. Even if the home is brand new construction and has a 5 year warranty, have it inspected. Building contractors going belly-up is not uncommon and poor quality new construction does exist.
If you have not purchased a home before, you are probably not going to know too many home inspectors. Calling your uncle Bob who does some handy work on the weekends is probably not the best way to go. Your agent will be able to recommend an inspector for you but you are not obligated to use them. If at all possible, you should free up time to attend the inspection, as should your agent. Although the inspector will put together a report for you, it is a good idea to walk around with the inspector during the inspection. You will learn a lot about homes construction and more importantly, about your potential new home.
Once the inspection has been completed, you have three options.
Say for example, the seller’s roof needs replacing, then you could request:
Many times the home will require lesser repairs but you will be trying to get the price down by leveraging the information gained from your inspection and any disclosures in the Sellers Disclosure Statement (Form-17) provided by the seller. It is usually better to have the seller do the repairs before closing (assuming it will not delay the closing date), because if the seller discovers that the repairs are bigger and more expensive than expected, the seller will have to pay those extra costs, not you!
Escrow and closing for buyers
Once all the contingency clauses have been met, all the inspections completed and all negotiations are done with, it is time to march forward to closing.
Both signing and closing are coordinated by an escrow company. A good escrow company is worth every penny as they will ensure a smooth exchange of ownership between you and the sellers while taking care of a long to-do list in the background.
The last three steps in the whole transaction that the buyer will be most focused on are:
So what is escrow and what do they do?
Escrow acts as an independent and neutral third party whose primary responsibility is to coordinate closing the sale transaction as outlined in the sales contract. The escrow agent acts as a guardian over the process and makes sure that both the seller and the buyer adhere to their sides of the bargain.
In Washington State real estate, Escrow’s responsibilities include:
There are multiple escrow companies in the Tacoma - Seattle area but all must abide by the same code of conduct and state regulations. The buyer’s side chooses the escrow company and seller’s side select the title company but both parties will pay escrow title fees.
Your most important items at closing
At the signing appointment, you will sit on one side of the table and the escrow agent on the other side. The escrow agent will be putting various forms in front of you to sign, while they read them upside-down, having years of experience doing so. The agent’s catch phrase will be “sign here please”. Each form will merge into the next as you slip into a signing frenzy.
Slow down and take your time, especially if you are a first time buyer. Don’t be afraid to ask questions if you don’t understand or feel comfortable with something. Your real estate agent should be willing to attend the closing if you ask them.
Now, you are ever so close to getting the keys to your new home, finally taking possession and moving in!
Show me the keys to my new home!
Your agent places the keys to your new home in your hands. The urge to rush over there faster than Speedy Gonzales will be over-whelming. “It’s all mine!”
It is genuinely a great feeling, particularly if you are a first time buyer. Adios landlord!! On the way over, grab yourself a bottle of champagne, or whatever your poison is. Wander around your new home and take it all in.
Well, only you can genuinely decide if buying a home is right for you. Everyone’s circumstances, dreams, wants and needs are different.
As with everything in life, there are pros and cons to buying a home and hopefully with information you can determine if now is the time to buy. One thing for sure, home affordability has never been better since prices are down and mortgage rates are at historic lows, which means lower monthly payments and in most cases you can own cheaper than you can rent, as this graph below shows.
The reasons for wanting to buy your own home or stay renting are numerous and will be different for each person:
For example, homeowners who decided to take that leap might say:
• I just wanted a place to call my own.While dedicated renters might say:
• I felt that I was pouring money down the drain and making the landlord rich.
• I wanted to start building some equity and take advantage of the tax benefits
• I could never afford to buy a home and my credit score is not so good.
• I don’t want to be tied down to one location and haven’t decided where I want to live.
• I’m afraid of losing my job.
• I like having someone else being responsible for taking care of all the repairs.
Buying a home is not for everybody, whether for financial reasons or you are just content to be a full time renter. Renting has many benefits as does owning your own home.
If you are a renter and you believe that you would not qualify for a mortgage but would like to buy a home, talk to an agent or lender. The worst that could happen is that your suspicions are confirmed but at least you will know what you need to do to improve your credit score and improve your chances of qualifying the next time around.
My dream home
Dreaming of my dream home.........
Once you are ready to start seriously looking at a home to buy, it is a good idea to have your list of “must haves”. You will be consumed with the urge to pop into every open house on the weekend, surf listings on-line when the boss is not looking, plus an additional three hours of surfing at home in the evening. I’ve been there! It is nice to dream; however, when a sack of money is at stake, a reality check is required. Many factors are required to determine what you can afford and before you get to deep into the house hunting you should take the next step then homes that best match your budget, area etc. can be searched for and so forth.
Better to be pre-approved than pre-qualified.
Getting prequalified by a lender is an informal process where a lender asks you some simple questions regarding your debts, assets and credit score and comes up with a ballpark loan maximum for you. However, when getting preapproved for a mortgage, you must fill out a loan application and provide the required supporting documentation. Assuming you qualify for a mortgage, the mortgage lender will commit to you in writing the amount you can borrow and give you a preapproval letter.
Preapproval for a home loan has a number of advantages:
• Most realtors will only work with buyers who have been preapproved. By getting preapproved, you are demonstrating you are serious about looking for a home.
• You will know exactly how much you can afford and can base your home search on that value.
• If you are competing with other buyers in a competitive seller’s market and you are the only one who has bothered to get preapproved, you will have an advantage.
How much can I REALLY afford?
When you apply for a mortgage, the lender will base how much you can borrow on your debt-to-income ratio. The lender uses this ratio to determine how much mortgage debt you can handle and thus the maximum loan you will be offered. Your debt-to-income ratio is based on how much personal debt you are carrying as a percentage of your gross (before tax) monthly income.
When a lender makes a decision about your mortgage application, they consider both your ability and your willingness to repay the loan. The lender will gauge your willingness to pay the loan based on your credit report and previous commitment to paying rent, utility bills and previous loans. Lenders prefer for you to have been employed at the same place for at least two years, or at least be in the same line of work for a few years.
After your debt-to-income ratio, the next major factor in determining how much you can borrow is how good is your credit rating?. In order to be approved for the prime (best) interest rates and hence lowest monthly mortgage payments, you need to have a high credit score . Interest rates can have a big impact on how much financing you can afford to borrow. A 1% higher interest rate means reducing your buying power by 10%!
Making and negotiating offers and doing home inspections
Finally, after a long search of real estate listings, you are standing in front of the home that meets all or most of the items on your wish list. This is where working with a Realtor pays off and you don’t even have to pay them a penny for their services (the seller pays their commission).
But first, are you sure this is the right home for you? Step back for a minute and take an objective look at the home.
The sales contract and contingency clauses
A buyer’s offer to purchase a home is presented in the form of a sales contract (officially know as a Purchase and Sale Agreement). This is a five page legal document, the main elements of which are:
• Identification of the parties in the transaction, plus a legal description of the property.
• The offer price and method of payment (cash or loan). Also states the earnest money amount.
• States the type of deed and the condition of the title.
• Any attached contingency clauses.
• Includes the date of transfer of possession and title to the property to the buyer.
The buyer fills out the sales contract paperwork with the help of their agent. Do not let your agent dictate what goes on the paperwork. Definitely listen to their advice, but all final decisions should be yours to make! If you are not sure what you are signing, have your agent clearly explain to you what the paperwork means. This is important stuff! The agent will then send the offer to the listing agent who then presents the offer to the seller. The offer must be in writing and signed. Verbal agreements are not legal for real estate transactions in the Washington State.
The initial offer from the buyer will have a stated deadline within which time the seller can respond to the offer. The seller is not obligated to respond to the offer. Once that period has elapsed, and no action has been taken by the seller, the offer is considered no longer valid. However, if the seller accepts the offer as is great. More than likely, the seller will come back with a counter-offer and the negotiation process continues.
Contingency clauses are there to protect you
Contingency clauses are various conditions that need to be met in order for the sale to go through. They are there to protect you, the buyer. For example, the inspection contingency protects you from buying a lemon house and the financing contingency means that you are not forced to buy the home if you are declined financing by a lender. They are part of the whole contract / offer that you submit to the seller. The conditions of these clauses must be met before the sale can go through to closing. However, once the conditions of a contingency clause(s) have been met, then the agreement must be honored and the sale must go through.
The most common contingency clause are:
• Financing contingency means that the buyer needs to secure financing from a lender to be able to purchase your property. This protects the buyer in the event that they are unable to secure a loan.
• Sale of property contingency means that the buyer has to sell their own home first before they can buy the new property.
• Appraisal provision allows the buyer’s lender to carry out an appraisal of the property to assess whether the property is worth the agreed to sale price.
• Inspection contingency allows the potential buyer to carry out a full inspection of the property at their own expense to determine its structural soundness.
Counteroffers, negotiating and reaching mutual acceptance
The seller receives your offer to purchase their home. The two parties enter into back and forth negotiations, each side making counteroffers against the other side’s offer. Ideally, this process will not have too many rounds (2-3 is good) and hopefully remain civilized. The best result is when a consensus is reached and both sides feel like they got a fair deal.
It’s a game of give and take (and maybe even some bluffing) and can be the most nerve wracking part of the home buying (and selling) process. You are so close to getting your dream home and your anxiety levels can sky rocket. If the negotiations are less than smooth, it is important to try to stay calm. Working with a good realtor will help keep you sane and hopefully get the best deal under the prevailing market conditions. Go for a hike on Mt. Rainier, down a couple of fine Seattle micro-brews, rent a movie, or all three of them!
When the seller comes back with a counteroffer to your initial offer, they will probably cross out the offer price you entered and write down a new price somewhere between your offer and the actual listing price. They may also come back with some other comments such as “washer and dryer not included”.
The modified sales contract will be faxed back to your agent, who will review it with you. The dance can end here or go on for another couple of rounds. Avoid nit-picking over minor issues, focus on the major items. Also, avoid protracted negotiations. If the seller gets a better offer from a less demanding buyer, you may not hear back from the seller again and lose out on the home.
All things going well, you and the seller will come to an amicable agreement and reach what is known as mutual acceptance.
And finally we reach the promised land of mutual acceptance
If you really want to know the nitty grity of how offers are handled during negations, here it is but it might make your head hurt…
• A buyer’s initial offer to purchase becomes invalid if the seller does not respond within the required deadline listed on the sales contract.
• If the seller signs the buyer’s offer as-is and the agreement is then delivered back to the buyer within the required deadline, the offer is considered accepted by the seller. This is mutual acceptance.
• However, if the seller comes back with a counter-offer, the buyer’s offer is no longer valid. It is important to remember that a counter-offer is NOT an acceptance. In addition, a counteroffer invalidates the latest offer from the other side.
• If the buyer does not respond within the required deadline, the counter-offer from the seller will expire.
• However, if the buyer then signs the counteroffer from the seller, and the offer is then delivered back over to the seller within the required deadline, the offer is deemed accepted and you have mutual acceptance!
Your objective is to reach mutual acceptance. This means that both sides have signed the contract and wish to move on to the next stage of the process. Now the clock starts ticking and it’s time for you to start getting busy.
Home inspections for buyers
As per the inspection contingency, you will have around 10 days or less to complete an inspection of the property. The status of the listing will be updated to form active to pending inspection by the listing agent.
The inspector will look at structural, electrical and plumbing elements of the home and also do a pest inspection. You the buyer, pays for the inspection. It is highly advisable that you do not skimp on this step. Most of us know little about plumbing, foundations and electrical circuits. You want to avoid buying a lemon of a house. Even if the home is brand new construction and has a 5 year warranty, have it inspected. Building contractors going belly-up is not uncommon and poor quality new construction does exist.
If you have not purchased a home before, you are probably not going to know too many home inspectors. Calling your uncle Bob who does some handy work on the weekends is probably not the best way to go. Your agent will be able to recommend an inspector for you but you are not obligated to use them. If at all possible, you should free up time to attend the inspection, as should your agent. Although the inspector will put together a report for you, it is a good idea to walk around with the inspector during the inspection. You will learn a lot about homes construction and more importantly, about your potential new home.
Once the inspection has been completed, you have three options.
1. Decide to withdraw your offer (you do not have to tell the seller why).
2. Accept the offer as-is and move on to closing.
3. Make a counter-offer where you ask for repairs to be done or renegotiate the price down.
Say for example, the seller’s roof needs replacing, then you could request:
1. That a new roof be installed before closing
2. The sale price be dropped to cover the price of replacing the roof
3. The sellers credit you cash back at closing to pay for a new roof
Many times the home will require lesser repairs but you will be trying to get the price down by leveraging the information gained from your inspection and any disclosures in the Sellers Disclosure Statement (Form-17) provided by the seller. It is usually better to have the seller do the repairs before closing (assuming it will not delay the closing date), because if the seller discovers that the repairs are bigger and more expensive than expected, the seller will have to pay those extra costs, not you!
Escrow and closing for buyers
Once all the contingency clauses have been met, all the inspections completed and all negotiations are done with, it is time to march forward to closing.
Both signing and closing are coordinated by an escrow company. A good escrow company is worth every penny as they will ensure a smooth exchange of ownership between you and the sellers while taking care of a long to-do list in the background.
The last three steps in the whole transaction that the buyer will be most focused on are:
1. Signing the loan and other documents at escrow
2. Closing and recording of the transaction by escrow
3. Taking possession of the home
So what is escrow and what do they do?
Escrow acts as an independent and neutral third party whose primary responsibility is to coordinate closing the sale transaction as outlined in the sales contract. The escrow agent acts as a guardian over the process and makes sure that both the seller and the buyer adhere to their sides of the bargain.
In Washington State real estate, Escrow’s responsibilities include:
• Acting as intermediary between various interested parties, including lenders and lien holders.
• Ensuring that the title to the property is marketable, in other words, is the seller legally entitled to sell the property?
• Facilitating the signing of all closing and lender documents.
• Receiving, holding and disbursing the funds involved in the sale including the buyer’s earnest money.
• Responsible for ensuring that the appropriate security documents are recorded with the County Recorder.
There are multiple escrow companies in the Tacoma - Seattle area but all must abide by the same code of conduct and state regulations. The buyer’s side chooses the escrow company and seller’s side select the title company but both parties will pay escrow title fees.
Your most important items at closing
At the signing appointment, you will sit on one side of the table and the escrow agent on the other side. The escrow agent will be putting various forms in front of you to sign, while they read them upside-down, having years of experience doing so. The agent’s catch phrase will be “sign here please”. Each form will merge into the next as you slip into a signing frenzy.
Slow down and take your time, especially if you are a first time buyer. Don’t be afraid to ask questions if you don’t understand or feel comfortable with something. Your real estate agent should be willing to attend the closing if you ask them.
• Bring your driver’s license, the cashiers check to cover closing costs as well as a copy of your last TIL (Truth In Lending Statement)
• Make sure your pre-printed legal name is spelled correctly on the forms.
• Make sure the correct address is listed for the Seattle property you are purchasing.
• When you get to the Settlement Statement and the Note, put your pen down, pick up the forms and review carefully. The Settlement Statement lists all your closing costs while the Note will list the terms of your mortgage. Compare the numbers on these forms to the numbers you have been shown previously. Do they match? Check the APR, type of mortgage, pre-payment penalties and closings costs. These documents have the large financial consequences so treat them as such. Not a good time for blind faith. Human, and other, errors can occur.
• After you have signed the mound of documents, do not leave the Escrow office without getting photocopies of the paperwork you have just signed. Most competent escrow companies will make copies without you needing to ask.
Now, you are ever so close to getting the keys to your new home, finally taking possession and moving in!
Show me the keys to my new home!
Your agent places the keys to your new home in your hands. The urge to rush over there faster than Speedy Gonzales will be over-whelming. “It’s all mine!”
It is genuinely a great feeling, particularly if you are a first time buyer. Adios landlord!! On the way over, grab yourself a bottle of champagne, or whatever your poison is. Wander around your new home and take it all in.
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