Home Buying Process
Does part of your American Dream include buying a home? Will this be the year you finally get out of the rent rut and become a homeowner?
A survey by Apartment List of 24,000 renters nationwide indicate homeownership is still an important goal and is high on their list of things they would like to accomplish. But many people, millenials in particular, feel bogged down by debt and the soaring cost of housing.
The U.S. Census Bureau reported as of the third quarter of 2017 about 63.9% of Americans own their home. In Denver County, homeownership is restricted to just 52% of the populace;. when you include Denver-Aurora-Lakewood, the home ownership rate goes up to 63.6%.
It’s easy to get caught up in numbers and point out why you can’t own your own place; it takes resolve and patience to learn how you can actually achieve the goal of home ownership. It’s really quite advantageous for you to start looking into buying a home — now!
You may be asking, why in 2018? Here are just a few reasons to get into the housing market:
Great investment
Home prices in the Denver metro area have increased 6.3% since 2017, according to Zillow.. That is a big increase in not only pricing but the value of home ownership. It’s important to think long term with home ownership and think of it as the savings account that potentially builds big interest each year.
Great transportation options
Even if you can’t find a home in the city of Denver, the outlying metro area offers a number of housing options that are close to the RTD light rail and bus lines. Being close to public transportation makes accessing all the the city has to offer incredibly easy and convenient. In many cases, you can get from the suburbs to downtown Denver in less than 20 minutes and not have to deal with parking or traffic. Whether you buy a home downtown or in the suburbs, it’s likely a bus connection or light rail station is going to be nearby to take you to your desired location in the Denver metro area.
Build equity
When you rent, you are not investing in anything except your landlord’s portfolio. Owning a home is a great investment and what you save on your taxes is significant. The value of a home typically rises at least 2 percent per year; in Denver, many homes are valued 50 percent higher than they were 10 years ago! Building equity (the difference between your home’s value and how much you owe your mortgage lender) in your home is an easy way to invest towards your retirement or future home improvement projects.
Social/Health Benefits
According to report by the National Association of Realtors, “owning a home embodies the spirit of individual autonomy and is the aspiration of most American households. Homeownership allows households to accumulate wealth and social status, and is the basis for a number of positive social, economic, family and civic outcomes.Many studies found that homeownership still provides a variety of social benefits. Homeownership boosts the educational performance of children, induces higher participation in civic and volunteering activity, improves health care outcomes, lowers crime rates and lessens welfare dependency.
With a home purchase comes the pride of ownership and the sense of belonging in a community where one has a financial stake in the neighborhood. Also, ownership entails greater individual responsibility … More recent studies have found that the wealth building effect of homeownership and the sense of control it provides to homeowners in a stable housing market affect homeowners’ mental and physical health in a positive way.”
Once you make the commitment to becoming a homeowner, it’s important to know all the steps in the home buying process. Listed below are some of the keys to a successful journey in buying a home.
Start Saving — Now
Having an adequate down payment is critical in the home buying process. Saving money requires commitment and being tenacious. Use a mobile app like Every Dollar to budget your money each month and discover ways of savings whether it be setting aside a tax refund, avoiding eating out, cutting back on entertainment or getting monetary help from a family member.
Consult with a Lender/Qualifying for a Loan/Get Pre-Approved
You’ll never know if home ownership is achievable unless you sit down with a trusted lender. It doesn’t cost anything to set up a meeting and see if you can get pre-approved. Taking that first step is imperative and it’s relatively fast and painless.
Getting a pre-approval sounds pretty scary, doesn’t it? But the most frightening aspect of this first step is steeling yourself and getting the necessary documents and paperwork in order. Be prepared to show an ID, tax returns, pay stubs, bank statements including checking, saving, brokerage statements, 401K, IRAs, Roth, etc. It’s critical to show all sources of income as well as financial obligations. Assuming all the documents are in order, the pre-approval process goes pretty quickly and best of all, will help you determine how much home you’ll be able to afford.
At the worst, you’ll figure out what what your financial picture looks like and the steps you’ll have to take to qualify for a loan.
Down Payment Options
The down payment aspect of buying a home still strikes fear in the hearts of potential home buyers. Many people are still under the impression that a 20 percent down payment is necessary and that’s just not the case anymore. Down Payment Resource, a group that helps first time homebuyers get the assistance they need to purchase a home, indicates that the average down payment is 6 percent,.and that payment may be augmented by many state assistance programs.
As an example, Community Resources and Housing Development Corporation’s NeighborhoodLIFT program provides eligible homebuyers with $15,000 of down payment assistance on qualified properties, and provides homebuyer education that will prepare them for their home search, financing and managing of the financial responsibilities that come with homeownership. This initiative includes covers homes purchased in Denver and Aurora, and the greater metropolitan area. In 2016, the average assistance package for a down payment on Denver homes was $16,121, according to Down Payment Resource.
Use Down Payment Assistance
The Colorado Housing and Finance Authority (CHFA) offers financial resources to help first time home buyers with down payment assistance, as well as finding affordable first mortgages. These packages have enabled over 95,000 Colorado homebuyers to achieve homeownership, according to CHFA. Often lenders can be found that will offer reduced closing costs and no mortgage insurance, even with a low down payment.
The continuing low interest rates alone are reason enough to buy a home. This really is a no brainer. Right now, you can still find interest rates around 4%. As interest rates rise, the value of the home you can afford to purchase decreases. Roughly, with every quarter of a percent interest rate increase, you are able to afford 2.5% less home. If today you are able to afford a $400,000 home at a 4% interest rate, when interest rates increase to 5% you’ll only to be able to afford a $360,000 house at your current income.
Selecting a Broker
It’s natural to go online and start looking for a home. But to make it happen, it’s advisable to hire a professional. An experienced, reputable and trustworthy real estate agent is well worth the price when you get ready to make what will most likely be the biggest purchase of your life. The knowledge they possess of the local market and their ability to zero in on the properties that will be best suited for you is worth the time and effort you’ll save yourself. Their commission comes from the sale price of the home so you pay nothing and get all the benefits. Usaj Realty brokers are carefully selected and offer “white glove service.”
While homebuyers can read about an area online, it’s not the same as getting knowledge and advice from a local realtor. Also, an agent can suggest neighborhoods and properties you might not have considered that could meet your needs.
Realtors can help make sure you are purchasing a home with no surprises and that will stay within your budget for repairs and renovations. Even before you pay for a home inspection or get estimates from contractors, a realtor may know about common problems with homes in a particular location or those built during a specific time frame.
They may also know what the best contractors in the area charge for a kitchen or bath remodel. If a home clearly has more problems than you can handle or afford, an experienced realtor may be able to give you that information early on, before you go to the trouble of making an offer and going under contract.
Realtors know People
Thanks to their personal relationships with brokers and sellers who are looking for buyers, realtors can help buyers in a fast-paced market like Denver’s hot housing market by matching them with properties. An agent may know about a house that’s perfect for you that’s not yet on the market. Buyers who rely solely on online listings will miss those opportunities.
Realtors can help you get the best deal by negotiating your contract with the seller’s agent. Buyers who don’t have agents may not have the skills or the experience to thoroughly understand, let alone successfully negotiate, a real estate contract. And because it’s the seller who pays the agent’s commission, there’s little reason for a buyer to forego an agent. An agent can also help the buyer negotiate with the seller for repairs or price reductions if the home inspection reveals problems.
By working with a professional realtor, you’ll have someone helping you manage deadlines and stress to ensure a smooth process until you get the keys to your new home. There are multiple deadlines to meet between the time a home goes under contract and when the deal closes, and missing any of them could cause the transaction to fall apart.
Moreover, there are nearly always hiccups in the closing process, and having a realtor to help you manage both the logistical and emotional aspects of these occurrences can be a major relief.
Selection Process
There are many objective criteria that prospective home buyers can use to figure out what kind of home they want, and limit their home search to properties that meet those requirements. When homebuyers carefully evaluate these aspects for each home considered, they will have a better idea if the property will suit them appropriately. Here are some tips to keep in mind when searching for a new home.
Location
While location is a crucial part of the decision-making process, it should be considered as part of the bigger picture. Buying a home that does not fit a buyer’s needs but happens to be in a good location may not be the most practical choice. Proximity to necessary or wanted services, access to good schools and ease of getting from one place or another are all viable reasons buyers might prefer one location over another.
Size
The size of the home should be appropriate for the home buyer in the present, but also for when size needs fluctuate. Additionally, there are two ways to assess size: square footage and spaciousness. A 2,000 square foot home might have three bedrooms or five. It may feel open and airy, or closed and private. When thinking about size, buyers should take these concerns into account and create specific preferences.
Style and Layout
Given the investment, buyers should feel free to place some emphasis on the home’s architectural style, design and overall layout. People sometimes feel like they should not set preferences on what they perceive is largely aesthetic, because they may think it frivolous. However, for a home in which a person might live for decades, aesthetic pleasure is important and ultimately ascribes value to the home. A one-story rambler might be more appropriate for someone who wants free, fast movement from one end of the home to another. A buyer who prefers to keep the sleeping areas more private from visitors might prefer to have the bedrooms on a second floor.
Price
The sale price of the home may be the one factor that has fairly objective limits. Buyers are restricted by the price of homes in the area where they want to buy and cannot spend more than they can afford in cash or a mortgage. However, in many regions, these limits provide a great deal of wiggle room. Financial experts often recommend that buyers try to avoid buying homes at the maximum of their buying power, so that their finances are not tapped when it comes time to maintain the property.
Property and Area Amenities
Buying a property calls for prospective owners to answer the following questions: Does this property have everything I need? Can the neighborhood or nearby areas provide what I cannot get from the property? Will the property support improvements to add features I want? Making upgrades can often solve problems that are inherent at the time of purchase, but there are exceptions. No amount of maximizing space will turn a small yard into a big one, if that is what a buyer wants. A careful analysis of the amenities of the property and the neighborhood benefits would be considered when targeting properties.
Overall Condition
The condition of the home is vital to the buying process, because buyers need to know how much work they will have to put in after they close on the property. A home that needs a little care or a few upgrades might be ideal for someone who is looking for a property that they can customize and maybe save some money on the purchase. People who are too busy or otherwise uninterested in making upgrades would be better off buying homes that require little or no work to be move-in ready.
Resale Value
Future resale value has a way of wrapping all the various components of a property into one package that buyers also need to keep in mind. Over a long time, properties should appreciate. However, regions and neighborhoods encounter regular fluctuations in value. Buyers who are not planning to live in the home for decades should carefully research the real estate trends in desired neighborhoods, and get expert opinion on the expected resale values in the future. Choosing a stable or upcoming location, and buying a property in good condition at a reasonable price are excellent ways to increase the likelihood of a good resale value.
Associated costs
Before making an offer, be aware of the extra costs that go into being a homeowner. Is there a homeowner’s association and if so, will you be able to afford those fees? How much are the property taxes? What kind of costs are associated with maintaining the property (lawn moving, snow removal, tree trimming, driveway repair, etc.)? What’s the average bill for utilities and other monthly payments (water, sewer, heat, electrical, garbage pickup, internet, etc.)? It’s important to know upfront the carrying costs of the property since it has a direct impact on your monthly budget.
Making an Offer
Making an offer on a home and getting under contract is one of the last, but probably the most important, steps in home buying. Having a knowledgeable real estate broker by your side is critical in knowing the true value of a home and what should be included in the contract. Many times, the buyer and seller will go back and forth not only on price but on other aspects of the potential sale. Below are some line items that can be negotiated by a realtor on behalf of their client during the home buying process:
Price
Just like any high priced commodity, the listing price of a home isn’t always the “real” price. Negotiation is expected in any real estate transaction. In a hot market, it may represent the point where bidding begins. In other scenarios, the price tag may be reduced significantly. It’s important to know the neighborhood and have access to the most up-to-date comparable sales of similar type properties.
Terms
Unless you have a cash offer, acquiring a loan to buy a home is the most critical piece on the contract. Outlining the finance terms and whether the contract is contingent on financing should be included in the offer. It is beneficial to get pre-approved for a mortgage and know ahead of time what kind of interest rate you’ll need. It may behoove you to lock in at a specific rate, especially if a rate hike is anticipated. A .25 % interest hike can mean hundreds of dollars extra in your monthly payment.
Dates
Knowing how much time you’ll need to close is important, both for the buyer and the seller. Typically, a closing takes 35-45 days — not a long period of time! Unless your are purchasing a home with cash, the buyer’s lender dictates the length of time it will take to close. As a result, it’s imperative to have your loan pre-approved before getting too deep into the process. Once the clock starts ticking (upon a signed contract), you’ll have to be dealing with earnest money, home inspection, an appraisal, finding homeowner’s insurance and an array of other details.
Inclusions/Exclusions
Inclusions is one of the items that gets lost when negotiating. Just because the MLS says they are excluded or are not included, doesn’t mean they can’t be. Bottom line – it never hurts to ask! Typically, all major kitchen appliances (refrigerator, stove, dishwasher, trash compactor) are included but it won’t hurt to ask about the microwave, small convection oven, washer/dryer and any other items in the home, for that matter. Many homeowners might not want to mess with moving large pieces of furniture, especially if they are downsizing, and for first time home buyers, it’s a great opportunity to have furnishings already in place.
Contingencies
Contingencies in a contract are essentially a list of conditions or actions that must be met before a contract becomes binding. These conditions can be wide-ranging and are enacted for both the protection of the buyer and the seller.
Under Contract
Once your offer has been accepted by the seller, you are official “under contract.” With this comes a myriad of forms and tasks you will have to accomplish in a relatively short period of time. Be prepared to give the seller earnest money (typically 1-3% of the agreed upon selling price) which is kept in escrow until the buyer’s financing is approved. Other steps that are taken during closing include:
Appraisal of the Property
Whether someone is buying a home, having the right square footage for the listing and an accurate value of the property matters. This is why a home appraisal is a necessary piece of the road leading to closing. As a buyer, you need to know the exact valuation of the home based on its location, the structure and other features. The appraisal impacts the amount of money you can borrow and also the tax assessment you pay each year.
Loan Approval
It’s one thing to be pre-approved, it’s another to formally apply for the loan. Your designated lender will help you with the necessary steps but be prepared to provide a bevy of financial documents. You can’t have enough patience during this part of the process.
Home Inspection
This critical part of the home buying experience can often make or break the deal, and tends to create anxiety on both sides of the aisle. Recommended for anyone serious about a home purchase, this two- to four-hour examination of a home reveals the inner workings of the house and may provide additional facts for negotiation on the final price. Based on the findings, the potential buyer can go back to the seller and ask for concessions on the price or ask that certain items be fixed prior to closing.
Cost can range from $250 for some townhomes, up to $600 and more depending on the square footage of the home. There are ancillary services that can be added on as well such as radon and mold testing, and sewer scope inspection. There can also be an additional fee if the home is over 50 years old as these inspections can take longer.
Obtaining Property Insurance
It’s no surprise that obtaining homeowners’ insurance is a requirement of mortgage lenders when going through the home buying process. What may be surprising is the amount of detail that goes into adequately covering your home. It’s important to make sure you have adequate coverage on your home in the event of any property damage. It is estimated one in 15 insured homes will have a claim and it’s imperative to know what your policy includes. Condo living is often the choice of first time homebuyers, Make sure you have dwelling, personal property and personal liability coverages since the exterior of the building is insured by the condo association. Bundling your homeowners’ insurance with an automobile policy can provide significant savings. Also, many companies provide discounts if you have no claims history, security systems, smoke alarms and other safety features.
Transfer utilities
A few days before closing, arrangements should be made to transfer the home’s utilities over to the buyer.
Final walk-through
This is a very important final step to make sure that the home has been cleaned adequately, that nothing on the property has been damaged and there are no surprises before the home is transferred to the new owner. Be diligent about following through with this step to make the closing process an enjoyable one.
Closing
This is the day you’ve been dreaming about, the day you actually become a homeowner. Bring your driver’s license, a cashier’s check for the necessary costs and your favorite pen. There will be many documents to sign but in the end, you’ll finally have the keys to your new home!
