An Educated Buyer is Our Best Client
Whether this is your first experience buying a home or you are a seasoned buyer and seller you may have questions about the buying process. Policies and procedures change often and can be different from one state to another. Meet with an agent early in the home buying process and ask to be educated about the current process.
“Can I afford to Buy a Home?”
The most common question I am asked by first time home buyers is…”How much will it cost to get into my first home?” Knowing the answer to this question will let you know right away whether you are ready and able to move forward with your plans to buy your first home.
There are five types of costs to consider when determining how much it will cost you to get into your first home. They are: costs involved with making your offer, inspection costs, financing costs, closing costs and your loan down payment.
Costs When Making an Offer
When you submit an offer to purchase a home it is customary to offer a good faith deposit (also called an escrow deposit).
This deposit is an amount you are willing to give the seller if you default on your contract. The purpose is to show the seller you are serious about buying their home. This deposit will go toward the purchase of the home at closing.
The amount you put down is your decision and can vary based on the price of the home and what is customary in your area. I suggest you let your Realtor® help you determine the appropriate amount. If the deposit is too low, the seller may counter your offer with a higher deposit request.
The good faith deposit is submitted either immediately with the offer or depending on how the contract is written, submitted once your offer has been accepted. It will be held in escrow by either your agent’s brokerage or a title company. Your check will be cashed and the funds held in an escrow account until closing. At closing this deposit will be added toward your down payment and/or closing costs.
Costs for Home Inspections
Once your purchase contract has been accepted you will have an agreed upon number of days to complete any and all inspections on the home.
We always recommend a full home inspection ($350 and up), a WDO (Wood Destroying Organism) inspection ($75 and up) and a Wind Mitigation inspection ($75 and up). A 4 Point inspection ($125 and up) will most likely be required by your homeowner’s insurance company if the home is 30 years old or more. A wind mitigation inspection can save you a significant amount on your homeowner’s insurance, so we highly recommend you have one.
Other inspections that are sometimes recommended are well and septic, mold, and structural engineering.
Once you are under contract you must apply for your financing within 5 business days. Your lender may charge an application fee ($150 and up) and they will collect an appraisal fee ($400 and up) at the time of application. Don’t hesitate to ask your Realtor® or your lender if you don’t understand fees or terminology. We want our clients to understand the process and feel comfortable throughout their entire buying experience.
Closing costs vary greatly by area, so the best advice I can give you is to contact a Realtor® or lender in your area and ask. Here in the Tampa Bay area closing costs are anywhere from 4-6% if you are financing your purchase and 1-2% is you are paying cash.
Closing costs include taxes and recording fees on notes and mortgage, recording fee for deed, survey, title company closing fee, lender’s title policy, homeowners association transfer fees, loan expenses, appraisal fee (paid in advance), and prepaid items like taxes and homeowner’s insurance.
One way a homeowner can reduce their out of pocket spending for closing costs is to ask the seller to pay some of their closing costs as part of the offer to purchase the home. It is not uncommon for the seller to pay 2-4% toward a buyer’s closing costs.
Many new home builders will offer to pay some or all of your closing costs on your behalf. Be sure to take a Realtor® with you when you visit a new home sales center. An agent who is educated in negotiating for new homes can save you money and ask for items you may not have considered.
It is important to keep in mind that you are asking the seller to take less than their asking price when you ask them to pay your closing costs. Whether negotiating on a new or resale home you may have to offer the full asking price or more than the asking price to make this option appealing to the seller.
Mortgage Down Payment
When financing the purchase of your home the lender will require a down payment. The amount of your down payment depends on the type of financing.
Three of the lowest cost options for financing are VA, FHA and USDA loans. VA loans are for veterans and require zero down payment. USDA loans are available only for eligible homes in more rural areas and the down payment can be rolled into the loan. FHA loans usually require 3.5% of the purchase price as a down payment.
Conventional loans can require as little as 3% down for those with excellent credit scores and typically require 10-20% down payment.
One other factor to consider when financing, is Mortgage Insurance Premium (MIP) or Private Mortgage Insurance (PMI). PMI is an additional cost that is required when you put down less than 20% on a mortgage. MIP is essentially the same but is required on FHA loans. The monthly amount varies depending on your down payment amount. A lender will provide an estimate of this amount when you apply for your loan pre-approval.
There also may be down payment assistance programs available to you that can help with down payment and/or closing costs. Please ask your lender if there are any programs currently available and whether you qualify.
Your best resource is a knowledgeable lender. Don’t be afraid to contact a lender and ask questions. Most lenders work on a per transaction basis so they may only get paid if they can find you a loan. They should be very helpful and if not, don’t hesitate to call another lender.
Now that you have a general idea of what your costs will be in order to buy a home, it’s time to talk to a lender and ask for a pre-approval letter. Ask your agent if they can provide a list of lenders they have worked with in the past. A good lender can make the sale much easier for all parties.
In today’s market most sellers insist a pre-approval letter be submitted with all offers. If you wait until you find a home you love to get pre-approved, you could lose out to another buyer. Many agents won’t show homes to buyers until they are pre-approved for this very reason. Don’t miss out on your dream home, ask your agent for a list of lenders today!
Once you are pre-approved and have the funds needed to buy your home, you’ll want to understand the overall home buying process.