Welcome to installment 2 of the House to Home series! If you haven’t done so already, check out the first installment where I share our personal testimony of our home buying experience. The link to that video is here.
Before I jump into the nitty gritty of this post, I just need to make a disclaimer. I am not a realtor, attorney, or lender. The information that I provide below is solely based on my experience as a home buyer. Please seek professional advice if you intend on purchasing a home.
Now that that is out of the way, let’s get started! So, you want to buy a home? I’ll admit, when we first began the process of buying a home, I thought that it would be so overwhelming. We were fortunate to have a very smooth and, for the most part, stress free process, even without using a realtor. I credit it to God’s favor and lots of research, planning, and organization. Well, I can’t help you with the favor part, but I can share with you how we went about preparing.
First things first, you need to start early. Don’t wait until a month before you’re ready to buy to start pulling together cash and finding a lender. It pays to start early. That way, if you need to clean up your credit report or save a bit more, you’ll have time. We knew that we would be buying a home around mid 2017. So, in 2016, after paying off student loan debt, we began saving, driving around different areas, and contacting lenders. Because we started early, by the time 2017 rolled around, we knew what area and style home we wanted and had a significant portion of the funds saved up to purchase. So, when the perfect home came on the market, everything was lined up and ready to go. Don’t miss your blessing because you aren’t prepared!
Step 1: Budget and Save, save, save!
If there’s anything that you need during the home buying process, it’s patience and cash. So, before you even step foot into a house or start binge watching HGTV, you need a budget. How much house can you actually afford? And, ultimately, how much house are you willing to pay for? There are tons of tools online that will calculate how much financing you can be approved for, but you need to be looking at what you can afford. As a baseline, we started with Dave Ramsey’s mortgage calculator. You can find something similar here. This gave us an idea of what our budget should be, but ultimately, we decided on a number that we were comfortable with. Once we determined that number, we started saving for a 10-20% down payment.
Even if you can get 100% financing, you’ll need to come to the table with some money. How much is dependent on the stipulations of your sales agreement (ex. the seller may pay closing), the cost of the home, and/or your financing terms. Regardless, you’ll need funds for things like inspections and an appraisal upfront. One way that we began saving was by putting all money that we received as a wedding gift into a house savings account. This gave us a jump start on saving right after the wedding, so once we were done with our emergency fund we just added to what was already there.
We had a great lender who gave us a breakdown of all expected costs so that we could budget accordingly. Depending on where you live, inspections and appraisals can be upwards of $500. This cost is separate from what you will potentially have to bring for closing costs and your down payment. So, when you’re saving, consider saving for a down payment, inspections, appraisal, and HOA fees. Yes, the HOA gets you before you even move in. *side eye* We were surprised to get a HOA statement fee of a few hundred dollars. This was merely for them to release information on the home’s account. Thankfully, though, we had saved and were able to absorb the cost….albeit begrudgingly. The moral of the story, save and start doing so early.
Step 2: Find a Lender & Get Pre-Approved
The next step in our process was finding a lender. Being debt free, we were in a bit of a peculiar situation. Because we had no debt, we essentially risked the chance of not having credit history when we decided to buy. In fact, my husband had been debt free for so long, they were unable to find anything for him. So, when looking for lenders, we specifically searched for lenders who could do manual underwriting. If you’ve listened to Dave Ramsey, you know that he talks about this as an option for those who are debt free. It’s a more tedious approval process that requires documentation of timely payments from various sources — such as a cell phone account, rent, etc. This immediately limited our options to two lenders. So, despite people suggesting that we go through specific lenders to get cash back and other incentives, we couldn’t in our situation. Crazy how you get “punished” for being debt free…
After a long process of asking questions and weighing the costs, we decided on a lender who was local to us. Our loan officer understood our unique situation, including the fact that we weren’t using a buyer’s agent, and was extremely helpful. If he wasn’t already getting paid (well), we’d probably tip him for all of the valuable information that he taught us. This guy has the spirit of a teacher and he went out of his way to make sure we didn’t miss anything. Additionally, he provided us with spreadsheets and checklists– an engineer’s dream!
Now, I know what some of you are thinking. You guys went back in debt after getting out of it? If you’re following Dave Ramsey, then you know that a home is the only “approved” debt; however, the expectation is to also pay it off quickly. The alternative would have been to keep saving for years to buy with cash. We chose not to do that for several reasons, but I anticipate our next home buy to be cash.
Important: Unless you are using manual under writing, using a lender does require a decent credit score. You can find out information on credit scores here. Though our original intent was to do manual underwriting, we decided to play the system by opening a credit card and canceling it after closing just to have credit history and a high score. This helped us get a lower interest rate and removed the hassle of acquiring documents for manual underwriting.
Once you’ve found a lender, they can give you an estimate on what you will be qualified for. Qualification and approval amounts are not the same. Many lenders will tell you that you are pre-qualified for a specific amount based on little information that you provide. However, once they have access to your accounts, pay history, etc. they can give you a more accurate number on what you are pre-approved for. In our case, our lender had an underwriter’s commitment process which is being fully approved. This gave us our approval amount and a commitment to lend us the funds from the beginning. Therefore, there was no guessing or looking at homes out of our price range or questions of whether the loan would fall through. Typically, lenders will give you a pre-approval. Read about the difference here.
Now, despite the fact that the lender gave us an approval amount, we still had our own limit. In fact, we instructed them to put our limit amount on the documentation that would typically be given to the realtor to help find homes in that range. We created a house budget that included how much we wanted to save for retirement, travel, etc. and that gave us an idea of how much we could spend on a home and still live comfortably. I highly recommend that you do this. It is so incredibly important that you do your own budget and know what you can comfortably afford each month and not just take what the lender gives you. So many people are in homes that they were approved for but cannot realistically afford. Being house poor is when the majority of your income goes toward paying for your home and you aren’t able to afford much or anything else. Don’t let that be you.
Step 3: Find a realtor and/or find an attorney
This step would traditionally be reserved for finding a realtor, but as I mentioned, we did this process without one. If you plan on using a realtor, I would recommend contacting more than one to get a feel for who you would work with best. This person should be knowledgeable of the area that you’re looking to buy in and the industry. If you’re going to be paying them, make sure they know their stuff! Don’t just go with the first person that you find on a Google search.
Even if you are not using a realtor, I would still recommend talking to a few. This is how you can get valuable information. We actually did not go into our home buying process with the intent of doing it without a realtor. So, when we contacted them, it was with the intent of selecting someone. Many of them provided us information, such as a process checklist, referrals for lenders, attorneys, and inspectors, and access to more up to date home search engines. Ultimately, we used all of this information even though we did not choose a realtor. You are under no obligation to use them, so take advantage of the free information. We also had the advantage of family friends who are realtors. So, in addition to the information we received, we were able to run things by them and they were happy to help.
Now, because we did not use a buyer’s agent, we sought out an attorney a little sooner than most would. Since we would be drafting up the contract and other legal documents, it was critical that we had legal counsel. So, using the referrals for those realtor lists, we found an attorney who was very helpful and willing to answer questions. Some didn’t, which made our decision on our closing attorney that much simpler. After informing our attorney of our situation, she immediately provided standard sales contracts and other documentation for us to use. Additionally, she reviewed all documents before we sent them out for signatures from the seller. Having an attorney assist you during this process without a realtor is critical to avoid some costly legal mistakes.
Important: We reached out to many of our friends who were recent home buyers to ask questions about their offers, contracts, etc. and I was surprised to learn that many of them did not know what was in their legal documents. They essentially filled out and signed what their realtor told them to. DO NOT DO THIS! The advantage of us not using a realtor was that we knew every dot and tittle that was in our documents. Even if you use a realtor, make sure you read everything and know what you’re agreeing to. This is even more important at closing, where you’re signing tons of documents. Take the time to read them. We found $1000’s of dollars worth of mistakes in ours that we were able to correct before signing all because we read and knew what was supposed to be in our legal documents. It’s a tedious task, but remember, this isn’t just a buy from Walmart.
Step 4: Start searching for a home
You’ve probably already started your Zillow and Trulia search before any of the above. Don’t worry, we did too. In fact, we went to one new build neighborhood so many times, they knew us by face and just let us walk around. This gave us an idea of what we liked and didn’t like and the areas that we wanted to shy away from. But, what you don’t want to do is schedule a home tour, fall in love, and not have any of the above steps done. Your dream house will be off the market before you know it by someone else who had their ducks in a row. So, before you start seriously looking, get your pre-approval letter so that the seller’s agent knows that you’re serious and not just coming around to be nosy.
For our home search, Zillow, Trulia, and the realtor granted home search tools were our best friends. Even with all of those sources, we still managed to initially overlook our home. It wasn’t until we were ready to buy did it miraculously appear in our searches. God just does stuff like that. One thing to note is that the public sites like Zillow and Trulia do not update as frequently as the sites that realtors have access too. So a home that may be showing for sale may actually be under contract or sold by the time you see it. If you’re ever in doubt, just reach out to the selling agent listed on the posting and they can give you the correct information. This is also the person that you’ll need to contact to schedule a home showing.
Step 5: Put in an Offer
Now the fun begins. I say this with sarcasm, as this was my least favorite part of the process. What I did enjoy, however, was the research that went into determining the amount to offer. Your offer is essentially you presenting the seller with how much you are willing to pay for their home. This is different for new builds, where the price is typically the price.
To prepare for our offer, we did tons of market research. That’s a fancy way of saying, we looked at similar houses in the area and how much they sold for. This is what a realtor would call comps, or “comparables”. They have a fancy program that does it for them, but we had to do it the hard way…Google. Know that you can find almost anything on the internet, specifically public records. Mortgages and property taxes are public records. Therefore, we were able to go to our county’s website and see how much the seller and neighboring home owners paid for their homes, the fair market value, and how much was paid in taxes. This is all valuable information for determining how much you are willing to pay for the home.
With all of this information in hand, we put the numbers in a simple spreadsheet and came up with our starting offer, acceptable price, and max offer. I’ll be honest, there is no formula. Use the comps as a guide. In the end, everyone will just be throwing out a number that they have justified in some manner. For us, it was extrapolating numbers, for the seller, it was how much their neighbors home sold for. In the end, the ultimate goal is to exchange property at a price that is agreeable to both parties. Don’t get so caught up in the nickels and dimes that you forget the main objective.
During this phase, be prepared to go back and forth with the seller or to even be rejected. A seller can either accept, counter, and reject your offer. If they accept, that means they’re willing to accept the price and terms that you’ve offered them. If they counter, they will modify the terms and/or price and present it to you. You can then either counter back, accept, or reject their counter offer. Lastly, they can reject your offer. This means that you’ve probably insulted them with your price and/or terms or they have another buyer with a better offer. Just be prepared for any scenario. We went through several rounds of counter offers until we finally came to an agreeable number and terms.
Anything is on the table during the offer step. In addition to giving a price for the home, we also requested the washer and dryer and that a portion of the closing costs be paid by the seller. I’ve also heard of people asking that the surround sound systems stay as well. Everything is negotiable. Be mindful that every counter offer is essentially a new offer. So if, in fact, you had the TV in the original sales agreement offer, you need to make sure it’s included every time you put in a counter offer. Items that are not permanently affixed to the home, like a washer and dryer or TV, but are being included in the sale, need to be documented in a separate legal document called a Bill of Sales. Don’t just take the sellers word for it. You want to make sure everything is documented and signed, so consult your attorney about this.
As a part of your offer, you will also need cash. Buyers will often put up earnest money to show the seller that they are serious about doing business. This can be anywhere from $500, $1000, or more. The amount that you offer as earnest is also considered in the seller’s decision to accept, counter, or reject your offer. When you submit your offer, you will include a copy of your earnest money check written out to the escrow agent— in our case, it was our attorney’s law firm. If the seller accepts and you go under contract, this check will be deposited in to an escrow account and held as a part of your down payment or refunded if the contract falls through under certain terms.
Note: There is no standard form for an offer. For our initial offer, we used a standard contract provided by our attorney and filled in the terms that we were offering. After that point, we communicated terms via email. In your initial offer, you may want to include a cover letter that will differentiate you from other buyers. This is optional and not required. You can find examples on Google.
Step 6: Go Under Contract
If you and the seller(s) come to agreeable terms, you are not at a point of mutual acceptance and will now go under contract as soon as possible. We used the standard contract given by our attorney and presented it to the seller’s agent to have the seller sign. It is very critical that you get this part right. This will be the basis for the sale and what your lender will use to determine financing amounts. Before submitting it to the seller, we had our attorney review it for completeness and accuracy. Standard contracts differ by state, so be sure to use one for your state.
The contract was essentially fill in the blank, with the remaining portion being standard purchase agreement terms. You (or your realtor) will fill out the price that you’ve agreed to pay, terms for closing costs, and dates for closing and for inspections. Pay careful attention to all of this, as this is what you and the seller will be held to.
Once under contract, you are now legally bound to follow through with the sale, unless any of the agreement stipulations are violated. For instance, if the home appraises for less than what you have agreed to pay, the seller can either agree to the lower price or you can terminate the contract and receive your earnest money back. Unfortunately, in this example, you would have already paid for inspections and the appraisal. So, although you’ve saved yourself from a bad buy, you’ve also lost some cash.
Being under contract also means that the home is no longer for sale and the seller can not take offers from other potential buyers. Essentially, you’re locked in. So don’t be surprised if, after the offer is accepted, the seller’s agent is in a rush to sign the contract.
Within a day of signing our contract, we delivered our earnest money check to the attorney’s office and went ahead and scheduled our closing based on the date on the contract.
Step 7: Inspections, Appraisals, Documents, galore!
At this point in the process, you will be arranging inspections, sending in documents, and signing papers with your lender out the wazoo! This is where organization and communication is key. To help stay on track, we created a checklist with due dates of everything that had to be scheduled, sent in, and paid for. We stayed in constant communication with the seller’s agent and our lender to ensure that we covered everything and that everyone got the information that they needed.
I can’t emphasize enough how important it is to be organized. After we decided not to use a realtor, it was our goal for the seller’s agent to not know the difference. That’s how organized, prompt, and professional we set out to be. If you are doing this without a realtor, you will need to be able to schedule and manage everything on your own. This is where I see the true value in having a realtor if planning and organization isn’t your cup of tea.
Plan to be present for inspections. We did both a general home inspection and pest inspection. The latter may not be required by your lender; however, you want to make sure you cover all of your bases. I’d hate for you to get the keys to your home and a week later find out that you have some kind of insect infestation. No bueno!
Your lender will schedule your appraisal. If the home appraises for the price that you’ve agreed to or more (even better), you are good to go. It’s only if the home appraises for less that you run into the issues that I mentioned above under the contract.
During this time, you’ll begin to hear from you closing attorney about title searches and things needed for closing. You’ll also need to get home insurance and provide that information to your lender. While under contract, we went ahead and scheduled movers and began looking at furniture. Your lender will be watching your bank account intently, so shy away from large furniture purchases until after closing. About a week before closing, you’ll need to request the service providers for the home (cable, utilities, gas, water, etc.) and have those scheduled to transfer into your name on the day of closing.
Step 8: Time to Close
It’s finally time to sign the papers and get the keys to your new home. This is where all the legal action takes place and where you should be most attentive. Up until this point, the lawyer and the lender have been hashing out who pays what portion of taxes, HOA fees, closing costs, etc. During this time, you’ll have to sign more papers and you should be given a copy of your closing disclosure (CD). This is a document showing how much money you’ll have to bring to closing– your down payment, any closing costs, etc. It also shows where every dime of the transaction is going. There are many pages, but its critical that you review this document before closing and note any errors. I mentioned that we found $1000s of dollars worth of errors on ours as a result of a simple miss by the underwriter. We combed through this document several times until it was correct and ready to be signed at closing.
As I stated, this document will outline how much you will need to bring to closing. Don’t fret if you don’t receive the final number until the morning of your scheduled closing. We received a final copy the Friday before closing and a final confirmation email with the numbers on the morning of closing. We had already expected this (based on our research), so we did not go to the bank until that morning. We purposely scheduled our closing for 10AM so that we could have an hour to go to the bank, which opens at 9AM. Make sure you consider this when scheduling your closing time.
Our closing took a little over an hour; however, I have read that some take longer depending on the complexity of the purchase. It was solely signing documents with the attorney and seller, exchanging money, and finally getting the keys to the home. Because we had already read through the documents, we didn’t have to stop to ask questions or wonder about what we were signing. If anything, I was progressively learning how to shorten my name with every pen stroke.
Note: Prior to closing, you will do a final walk through to ensure that the house has still been maintained. We did ours the day before we closed. Give yourself enough time to identify anything that may need to be fixed.
Step 9: Move into your home
It’s time to move into your new home! Don’t forget to change the locks, forward your mail, update your driver’s license, voter registration, and to update your address with your employer, bank, and the folks that you do business with.
Take it all in….and then, start unpacking!
Give yourself a pat on the back, because you’re now a homeowner and you made it through this whole blog! I hope that you found this blog helpful, as I tried to pour as much information in as I could. If you have anymore questions about our process, leave them in the comments below or shoot me a note in the contact page. Also, check out this website for more details on home buying. It was very helpful to us during our process.
Happy home buying!