So you want to buy a home. This in itself is a milestone, for with it you’ve taken the first steps in the journey to homeownership. Your personal journey will be uniquely yours, complete with surprising struggles and unexpected successes. But take comfort in the fact that you’re not the first person in the world to purchase a home. Millions of people in this country have gone through the same process that you’re starting now. It’s possible. It’s been done before. And like you, every other homeowner began with the same thought: “I’m ready to buy a home.”
We won’t sugarcoat it: Buying a home can be scary. Your home will likely be the biggest purchase of your life. But with the right tools at your disposal, you can continue down this path to achieve the stability, financial security and joy that comes with owning your first home.
So you want to buy a home? Continue to the next page, and we’ll show you how.
Section 1: Rent or Buy
Section 2: How Much Home Can I Afford?
Section 3: Understanding Mortgage Options
Section 4: Rate Types
Section 5: The Mortgage Process
Section 6: The Lowdown on Down Payments
Section 7: Finding an Agent
Section 8: Finding the Right Home for You
Section 9: Making the Offer
Section 10: Underwriting
Section 11: The Importance of a (Good) Home Inspection
Section 12: Why Do I Need an Appraisal?
Section 13: Closing Your Loan
Section 14: Moving Tips
Section 1: Rent or Buy
Is buying a home right for you? Renting and buying both offer benefits, but there are many things to consider in determining which one is right for you.
Where to Start
Begin with a rent vs. buy calculator. You’ll be able to compare the total cost of buying with the long-term costs of renting. While your rent now could be cheaper than a monthly mortgage, buying a home could have big savings down the line. You may be paying just as much for that one-bedroom rental as you could for a well-finished bungalow in the city.
Pros and Cons of Renting
As a renter, you don’t have to do or pay for any maintenance. You can call the building manager when something goes wrong, and your request will be taken care of. If you need to relocate for any reason, you don’t have to worry about selling your home.
In the majority of cases, renting a home is also easier than buying one. When renting, it may only take you a couple of weeks to find a place and pay the deposit.
Your rent will surely rise over time, and you can’t control that. Your rent may not be expensive now, but the price is going to climb due to inflation and other factors. If you have pets, your landlord could also charge a monthly fee and/or security deposit.
Renting also won’t help you work toward your financial goals. Your entire rent payment belongs to your landlord.
Pros and Cons of Buying a Home
As a homeowner, you can take tax deductions that renters can’t:
• Mortgage interest
• Real estate taxes
• Private mortgage insurance
• Discount points
While the annual amount saved will differ from person to person, these tax breaks are sure to help take the strain off your wallet.
Owning a home also allows you to build long-term wealth. When you make a monthly mortgage payment, it’s not all going to a lender’s pockets. Instead, a portion of the payment will go toward paying the principal (the amount you owe on the house), while the interest you owe will go to the lender.
In other words, you’re paying for your house a little bit at a time. The ownership you gain every month is called equity. While the amount of equity you have in your house will ebb and flow with the housing market, even modest gains will add up over time.
Another perk of buying a home is that there’s an end date on house payments. Whether you’ve got a 30-year or a 15-year mortgage, you’ll own your house outright when that term is up.
You’ll need to save money before you buy a home to cover your down payment and closing costs. You’ll also be required to pay property taxes, which can increase from year to year. And there’s no guarantee that your home’s value will increase over time.
If you want to sell your home, you might be stuck if no one makes an offer, or you might not get what you paid for it. If you need to relocate for any reason, there’s definitely stress and pressure if you can’t finalize the home sale in time.
As a renter, purchasing renter’s insurance is optional. Homeowners insurance is mandatory if you have a mortgage, and it can add a significant amount of money to your mortgage payment.
Helping You Make a Decision
Being able to afford your monthly payment – whether it be a rent payment or a mortgage payment – is something you must consider before buying a home. Your monthly rent is (usually) a fixed amount that you can plan for on a monthly basis. Your mortgage payment can be a fixed amount too, but you also have to account for surprise expenses like plumbing issues, a new roof or a new furnace. After all, you are your own landlord when you own your home.
Section 2: How Much Home Can I Afford?
Before you start looking for the perfect home, make sure your expectations aren’t bigger than your pocketbook. Buying a home should be a comfortable investment, not a financial burden.
When deciding how much you can afford, a good place to start is with this calculator from CNN Money, which allows you to plug in your annual income, down payment and monthly debts to see how much you can spend on a house. However, no one says you have to spend the maximum amount. In fact, depending on your financial situation, it may make sense to spend much less.
Vocab to Know: Debt-to-Income Ratio
Knowing how much you can afford has a lot to do with your debt-to-income ratio (DTI). This refers to the percentage of your gross income that goes toward paying debt. For example, let’s say that your household makes a gross monthly income of $5,200 and that you pay $1,200 in debt payments each month. Divide your monthly debt by the amount of your monthly gross income to find your DTI:
$1,200/$5,200 = .23
This means that your DTI is 23%.
The lower your DTI, the better chance you have of receiving an approval and having a greater variety of loan options available to you. For this reason, the Consumer Financial Protection Bureau recommends that you keep your DTI at 43% or below.
You should also consider all of your other expenses, such as utilities, transportation, groceries and other living costs. You will be in over your head if you’re living beyond your means. You should always have a budget in place before moving forward with any kind of loan. Whether you’re comfortable budgeting with pencil and paper or budgeting software like Mint.com, make sure you have a well-thought-out plan.
Section 3: Understanding Mortgage Options
Let’s begin with the basics. A mortgage is a legal agreement in which a person borrows money to buy property, like a house or other real estate. A mortgage allows you to buy a home even if you don’t have all that money tucked away in your bank account or under your mattress. Let’s talk about some of the most common mortgages available.
If your mortgage lender refers to your loan as “conventional,” it simply means that it follows guidelines set by Fannie Mae or Freddie Mac, two government-sponsored enterprises that invest in loans to allow lenders to lend more money. Because of this, the qualifications for conventional loans are stricter than they are for many other loans.
The basic requirements for conventional loans are a minimum credit score of 620, a debt-to-income ratio not exceeding 36%, and a loan amount not exceeding $417,000.
FHA mortgages are insured by the Federal Housing Association. FHA loans require a lower down payment than other types of mortgage programs, and you don’t have to have rock star credit to qualify for one. An FHA loan is an excellent option for first-time home buyers.
VA mortgages are insured by the Department of Veterans Affairs and are only available to veterans, National Guard members, active-duty personnel and eligible surviving spouses. There are many benefits to a VA loan, but the most notable is that a down payment is not required. If you think you might be eligible for a VA loan, review this article to learn more about the program.
Section 4: Rate Types
When you get a mortgage, you pay interest to your lender each month. You can’t choose your rate, but you can choose what type of rate you get.
“Fixed” refers to the fact that the rate won’t change over time. If you lock in a 4.5% interest rate on a 30-year loan, you will keep that same interest rate for the life of the loan – no matter how the market changes. The only exception to this would be if you refinanced your loan.
The biggest perk of a fixed-rate mortgage is the consistency. You don’t have to worry about your rate skyrocketing. Your monthly principal and interest payment will always be the same.
An adjustable rate mortgage (ARM) includes an initial fixed interest rate period that lasts five, seven or ten years depending on the loan you choose. After the fixed interest rate period, your rate will adjust up or down once per year depending on market conditions.
ARMs are a popular choice for home buyers because they typically offer lower interest rates than other loan options. The advantage of the ARM is that you’ll enjoy a lower monthly payment during the fixed period. For this reason, an ARM can be a great option if you plan on moving or refinancing within a few years.
The term is the period of time over which you pay off your mortgage. Here are the most common terms for a mortgage.
A 30-year term stretches out your monthly payment, so it gives you a lower payment than you’d get from a mortgage with a shorter term. The long term also means that you’ll be paying interest for twice as long, which will definitely add up.
The biggest perk of a 15-year term is that you’ll pay off the loan faster – and you’ll save thousands in interest over the life of your loan. However, the shorter term also means you’ll be paying higher monthly payments.
Many lenders offer terms in five-year increments, but if you’re looking to customize your term to fit your budget, a Quicken Loans YOURgage® may be a better choice for you. With a YOURgage, you can pay off your mortgage in any time frame you choose, from 8 to 30 years.
Section 5: The Mortgage Process
Before agreeing to lend you money, your mortgage company has to weigh the risks. They’ll dive into your credit history, your debts, your income sources, the property you’re purchasing, and so much more. Let’s take a look at the path of a mortgage.
When shopping for a home, it’s easy to put applying for a mortgage on the back burner. Your mind tends to go from “I need a house” to “I should look for a house” to “I think I want that house.” There’s a problem with this mindset: You’re looking for a home before you’ve been preapproved for a loan, and that could make you miss out on the house you want.
Instead, when you begin to entertain the idea of buying a home, go to your mortgage lender and ask to be preapproved. A preapproval determines how much money you’re eligible to borrow before you actually get a loan.
To get you preapproved, your lender will verify your income and assets, which include your bank accounts, investments, retirement funds and any real estate you might have. You’ll be asked for copies of pay stubs, W-2s and bank statements. Your lender will also consider your credit and debt-to-income ratio (DTI). If you have all your information in order, preapproval is a speedy process and can be done in just a phone call. Rocket Mortgage® by Quicken Loans can make this process even faster, allowing you to get preapproved in minutes online.
Preapproval is also a great opportunity for you and your lender to chat about your mortgage options. Discussing your goals with your lender will help you find the best possible mortgage option for you.
Once you’re preapproved, you’ll receive an official letter showing the amount you’ve been preapproved for. You can use your preapproval letter to show the seller that you’re serious about your offer.
During the application process, your lender will request some basic financial information, such as your name, income, estimated property value, etc. From this information, they will prepare a document called a Loan Estimate, which they’re legally required to provide to you within three business days of your application. Your Loan Estimate will include preliminary numbers for the loan you’re requesting, including the interest rate, monthly payment, closing costs and taxes and insurance. A Loan Estimate helps you better understand the terms of the mortgage you’re applying for.
Be Interested in Interest Rates
An interest rate tells you how much your lender charges for letting you use their money. Interest is paid by you, the client, to your lender. A lower interest rate means you’ll have a lower monthly payment.
Vocab to Know: Interest Rate vs. Annual Percentage Rate
When you’re looking for the right mortgage, you must also consider the annual percentage rate (APR), which includes your interest rate plus any additional costs, like prepaid interest and private mortgage insurance. It’s the total package of costs wrapped into one.
When looking for lenders, make sure to look at the APR rather than the interest rate alone. Your monthly interest rate may be 3.625%, but when you factor in all of the other costs, your overall rate (APR) may be 3.829%. That extra .204% may not seem like a lot on paper, but it could translate to thousands of dollars in costs over the course of your loan. Knowing the APR on identical interest rates from multiple lenders is a great way for you to compare lenders. The higher the APR, the higher the fees that lender is charging.
Section 6:The Lowdown on Down Payments
The next step to think about is your down payment. You pay the down payment at closing to show your mortgage lender that you have a vested interest in paying back the loan.
Does every buyer need money for a down payment?
The only mortgage you can get that doesn’t require a down payment is a VA loan. Those are limited to eligible active-duty service members, veterans and their surviving spouses.
With Quicken Loans, well-qualified buyers can get a mortgage by putting 1% down while gaining 3% equity on a conventional loan.* For instance, if you wanted to purchase a $100,000 house, the down payment on a conventional loan would be $1,000.
For FHA loans, the minimum down payment is 3.5%. You can qualify for an FHA loan with a credit score as low as 580.
Tips and Tricks: Advantage of Going Above and Beyond
Although you can make the minimum down payment, there are some real pluses to contributing more if you can afford it. For starters, contributing more to your down payment lowers the amount of interest you will have to pay, saving you money over the life of your loan.
Your Loan-to-Value Ratio
Your loan-to-value ratio (LTV) describes how much money you owe on the home compared to how much your home is worth. You can find your LTV by dividing the amount of your mortgage by the appraised value of the home (we’ll talk more about the appraised value in a moment).
For example, let’s say you’re purchasing a home worth $100,000. If your down payment is 8% ($8,000), the mortgage company will have to pay the remaining $92,000. Therefore, your LTV is 92%.
The first advantage of a higher down payment is that it allows you to get a lower interest rate because you’re less risky to your lender. They won’t need to loan you as much money, and you’ll be less likely to walk away from the home because your money is in it.
The second advantage to putting more down is that you could avoid paying private mortgage insurance (PMI). Down payments of 20% or higher get you out of paying PMI, a monthly fee that could add hundreds of dollars to your mortgage payment. Putting 20% down may be beyond the means of many people, but even if you can’t fork over 20%, there are still benefits to putting down more than the minimum. Mortgage insurance rates are based on your LTV, so the higher your LTV, the more expensive your mortgage insurance payment will be.
In many cases, PMI will fall off once you reach 80% LTV, so you’re not stuck with PMI forever if you can’t afford a 20% down payment on a conventional loan.
Mortgage insurance premiums (MIP) on FHA loans stick around for the life of the mortgage. That being said, assuming you meet the stricter credit standards, you can always ditch the mortgage insurance payment by refinancing into a conventional loan once you reach 20% equity.
If you don’t want to pay PMI at all, you could opt for lender-paid mortgage insurance (LPMI) on a conventional loan to avoid the monthly insurance payment. In this case, you would get a slightly higher rate than you would if you chose to pay PMI on a monthly basis.
Gift Down Payments
Although you may not have the money for a 20% down payment, the good news is the money doesn’t have to come only from you. If you have a wealthy aunt who wants to help get you on your financial feet, she can use one of two types of gift transactions to help with your down payment: a straightforward cash gift or a gift of equity.
Cash Gift: A cash gift occurs when a person cuts you a check to help pay for your down payment or closing costs. To use a cash gift for your mortgage, you’ll need the giver to provide you with a gift letter stating that the funds don’t have to be paid back.
Gift of Equity: A gift of equity occurs when a close relative gives you a discount on the sale of their house. The difference between your sale price and the actual market value gets contributed to your down payment.
With an FHA mortgage, the gift of equity can come from any of the following sources:
• Immediate family, grandparents, aunts or uncles
• A close friend who wants to see you do well
• An employer
• A labor union
• A government agency
• A public entity, such as a nonprofit, that provides homeownership to families of low-to-moderate income and first-time home buyers
You can use this search engine to find nonprofits that provide FHA assistance in your area.
Warnings and Wisdom
• If you’re getting a conventional loan and your total down payment is less than 20%, you may have to contribute 5% of the down payment from your personal funds
• If you’re getting a jumbo loan, you must always contribute 5% of the down payment
• If you’re getting an FHA loan and your credit score is lower than 620, 3.5% of the down payment must come from your personal funds.
• You can use gift down payments – but not gifts of equity – on VA and jumbo loans
Gift funds can also cover mortgage discount points and closing costs.
That covers the down payment. Now let’s move on to making sure the roof doesn’t cave in.
*The payment on a $200,000, 30-year fixed-rate loan at 4.875% (5.349 % APR) with an LTV of 97% is $1,058.42 and mortgage insurance of $103.33. Taxes and homeowners insurance not included. Restrictions may apply.
Section 7: Finding a Real Estate Professional
Now that you’re preapproved, it’s time to reel in a real estate agent. This is the person who sets up appointments on your behalf and gives you information on the houses that may be of interest to you. Choosing the right agent can really affect the house hunting experience. You want someone who knows the neighborhood or the area that you’re looking at – schools, crime rates, transportation and places to buy toothpaste at 8:00 p.m. on a Sunday – and knows what a fair market price looks like for the area. Also, you’ll need a real estate agent to help you negotiate the price and create a purchase agreement.
Warnings and Wisdom
Real estate agents are everywhere, but you should make sure they have ample experience before asking them to represent you. If you’re not sure where to start, you could always ask your lender for a recommendation.
Typically, there are two agents involved when you’re purchasing a home. The seller’s agent represents the seller of the house, and the buyer’s agent represents you, the buyer.
It’s important to vet an agent before committing to work with them. Here are eight questions you should consider before shaking hands:
1. Is this your full-time job?
2. How long have you been an agent?
3. How many sales have you closed in my preferred location?
4. What do your services cover? Are there any fees I have to pay?
5. How often will you contact me or show me properties?
6. How do you handle short-notice showings? How fast can you show a property?
7. What makes you different/better than another agent?
8. Do you have references (past clients) that I can contact?
How Do Real Estate Professionals Make Their Money?
Real estate agents earn a commission on the selling price of the house after it’s sold. If you’re the buyer in the transaction, this is great news: The seller pays the commission of your agent and their agent. Much like the lender, the real estate agent doesn’t get paid until the job is done, so they’re going to be working alongside you to seal the deal.
Section 8: Finding the Right Home for You
House hunting gives you the opportunity to dive into the fascinating world of real estate. Using helpful online services such as My Perfect Home is an excellent way to simplify the house hunting process.
When looking for houses, here are some things you should consider:
1. The neighborhood: Make sure the home you’re looking for is in a community that suits you. If you’re trying to get away from the hustle and bustle, search for a house in a quiet neighborhood. If you’re passionate about discovering new things, research homes that are in up-and-coming parts of town. Don’t just focus on the house. Make sure the location is right for you.
2. The school district: If you have kids or plan to have kids, think about the local schools. You want to make sure you’re providing your children with the best possible education, and your location may have a lot to do with that. And even if you don’t have kids, buying a home in a good school district can make it easier to sell when you’re ready to.
3. The commute: Carefully consider the time it would take you to get from your potential house to your job. Your dream house will quickly become a headache if you’re driving an extra two hours a day.
4. The age of the property: Who doesn’t love an old house? It’s easy to get carried away by old wooden doors and custom-made windows. But older houses often come with surprise expenses that don’t necessarily exist in newer homes. If you’re looking for “a project,” make sure you have the funds and the right expectations.
5. The space: The layout matters, but so does the amount of space available. How much room does your family need? Do you frequently have guests? Considering your lifestyle can help you figure out how much space you really need.
Above all else, take time to really look at the house you’re interested in. Consider necessary improvements or problem areas, as well as whether the overall value of the neighborhood is projected to go up or down. And don’t forget to take advantage of your agent during this process. A good agent will not let you settle for a bad home. They’ll give you helpful hints on the area and advice about the pricing of houses. If they’re not doing their job, shake them off and find a new one.
Taxes and Insurance
When you search for homes, you need to consider the monthly cost of taxes and homeowners insurance. The cost will differ from state to state, town to town and neighborhood to neighborhood, so talk to your real estate agent about these expenses. It’s always a letdown when you find out an affordable house has not-so affordable taxes. Zillow.com is a good place to start to look up taxes and estimate insurance costs on your own.
Vocab to Know: Escrow
If you’re worried about remembering to pay all of these monthly expenses after you buy, you should ask for an escrow account on your loan. (Most lenders will include this automatically.) If you have an escrow account on your loan, your lender collects your mortgage payment, your taxes and your homeowners insurance premiums in monthly installments that are included in your mortgage payment. It’s a big relief for people who don’t want to deal with paying a large amount of money once or twice per year when taxes and insurance premiums are due.
Your mortgage servicer will estimate the amount you owe for your property tax and homeowners insurance bills. The estimated annual payment is then divided by 12 to determine the amount of the monthly payment, and that amount is added to your mortgage payment.
It’s important to note that escrow accounts typically do not cover homeowners association fees, personal property insurance, special or added tax assessments or other fees.
Section 9: Making the Offer
You’ve been searching – maybe for months – and finally, after much consideration, you and your real state agent have found the perfect place. Now is the time to make an offer on the house.
Prepare an Offer for the Home
Making an offer entails looking at the value of recently sold houses in the area to make sure your offer is in line with what other people are paying. You should also review your budget to make sure that the offer is on target with your finances.
Here are some of the factors that go into the offer:
• How much house can you afford?
• How badly does the current owner want to sell the house?
• How does this house compare to other houses in the area?
• Is anyone else interested in buying the house?
• How much work needs to be done on the house?
Your written offer will include the following:
• The address of the property
• The names of the potential buyers
• The amount you’re offering
• Any contingencies (conditions that must be met before the deal can close, such as a successful home inspection)
• Items that will be included in the sale, such as appliances, window coverings, etc.
• The amount of your earnest money deposit, which shows that you’re committed to closing the deal
• The deadline to respond to your offer
You may also be able to take advantage of seller concessions, which are expenses paid by the seller on behalf of the buyer. You may be able to negotiate with the sellers to pay for certain fees associated with closing the loan. The seller can’t do things like help with your down payment, however.
The amount of demands that you can make will be affected by how much competition you have.
Once again, this is where having a good agent comes in handy. They’ll be able to give you some pointers to make the most of your offer. They’ll also talk to the seller’s agent to get a feel for the seller’s expectations.
Did They Accept the Offer?
If the seller accepted your offer, you can move on to the next step. If the seller comes back with a counteroffer, it may be time for negotiation.
At this point, you can accept their counteroffer or make a new offer. And it may go on like this until you finally find middle ground. Negotiating with the seller to lower the price can lower the down payment you have to bring to the table.
The key to this dance is knowing where you stand. If you don’t want to spend more than $140,000, don’t slip into a deal with a $200,000 home. If you become emotionally attached to the home, you may want to throw caution to the wind. But this is not the time to be romantic. If the seller isn’t willing to budge, you may need to shrug your shoulders and keep looking. There will be other homes. Remember that a home is a major investment – not an impulse buy.
Section 10: Underwriting
Once your offer has been accepted, the lender will do a deep dive on various items to make sure you’re in good shape to pay back the loan. You provided some initial documentation to get your preapproval. Now your lender just has to make sure everything checks out.
What Is Underwriting?
Underwriting is the process of evaluating the risk of lending money. The underwriter will verify the documentation you’ve provided to see that you have the ability to repay the loan. There are four basic areas that underwriters attempt to verify when they review your documentation.
1. Income: Your employment and income history
2. Property: The type of property and its value
3. Assets: Your bank balances and the sources of any deposits
4. Credit: Your credit score as reported by the three major credit reporting agencies
Basic Documents You’ll Need
There are many important documents needed for a mortgage. In order to make the process go smoothly, we recommend you have each of the following items ready:
• Two recent pay stubs
• Two years of W-2s
• Two recent bank statements
Additional information may be required depending on how you earn your income and the type of loan you’re applying for.
While we’re verifying your information, you can start shopping for your homeowners insurance. Depending on the location of your home, your lender might require additional insurance, such as hazard insurance, to protect you and your home from natural disasters like floods, fire, earthquakes and more.
The underwriter has to make the final decision on whether a loan can go forward. Once they’ve approved it, you’re ready to go to the closing table.
Vocab to Know: Collateral
Collateral refers to assets you offer the lender in case you default on a loan. In the case of a mortgage, the house itself is the collateral. If you stop making monthly mortgage payments, your lender has the right to take possession of the home (called foreclosure). As long as you uphold the terms of your mortgage, the lender cannot take possession of the home.
Section 11: The Importance of a (Good) Home Inspection
A quality home inspection during the home buying process can save you from big problems down the line.
Even if you have a new home, no construction is entirely without fault. Whether the issues are big or small, having an inspection done will open your eyes to potential problems.
According to the Department of Housing and Urban Development, a typical home inspection can cost anywhere from $300 – $500. With the amount you’re spending on the house, this can be a small price to pay for peace of mind.
Check for Qualifications
Home inspectors aren’t necessarily required to be licensed in every state. To ensure that your inspector has the proper training and experience, check to see what organizations recognize him or her. Organizations like the American Society of Home Inspectors (ASHI) provide education for their certified inspectors. ASHI also gives trainings and tests for certification to make sure that inspectors are keeping their skills sharp. Using a certified home inspector will give you confidence that their reports are right.
What Should Be Included?
If you’re getting a general inspection, some of the things that should be covered are electrical, plumbing, insulation and roofing. When checking the plumbing, the inspector might look to make sure the pipes are fitted properly and that everything is flowing correctly, while an electrical inspection might flag exposed wire or something that can be a safety hazard if it shorts.
It’s important to get a write-up from the inspector about what will be included in the inspection. If there are specific areas you want looked at, make sure to bring them up beforehand. This will set appropriate expectations for the report provided.
Other types of inspections that can be done include chimney, foundation and insect checks. If the house is hooked up to well water, an inspection of that system can be important as well. These inspections are typically paid for separately from the initial inspection and often require a different inspector with specialized training.
Tips and Tricks: Go to the Inspection
You should use your inspection as an educational opportunity. You’re probably not going to have many chances to go through your home with an expert. Use this time to ask questions. If you need something repaired, you’ll want to understand the type of work that needs to be done.
Section 12: Why Do I Need an Appraisal?
After the offer’s been accepted, your mortgage lender will require an appraisal of the property you’re trying to purchase.
Vocab to Know: Appraisal
An appraisal is a professional appraiser’s opinion of value. The appraiser will visit the property to check the size, condition, function and quality of the home. Then, he or she will research comparable homes that have recently sold in the area and compare them to the home you want to buy to determine a fair market value.
Basically, a real estate appraisal helps establish a property’s market value – the likely sales price it would bring if offered in an open and competitive real estate market. The appraisal protects you from overpaying for a home. The appraisal also protects your lender by making sure that the house is worth at least as much money as they’re lending you in case you default on the loan.
While lenders often order the appraisal for you, it’s important to note that the appraiser is completely independent from your mortgage company. This way, you can rest assured that the numbers won’t be biased. The average home appraisal costs between $300 and $400, according to the National Association of REALTORS, and it may be paid for as part of your deposit when you apply for your mortgage.
What to Do After a Low Home Appraisal
If your appraisal came back lower than you were expecting, there may still be some hope. Here are a few things you can do if you received a low appraisal but you still want the house.
Appeal the Appraisal
If you think the appraiser made a mistake, you could appeal the appraisal to see if you can get the home re-evaluated.
To make an appeal, you need to provide your lender with a reason you think the appraisal report is wrong. Perhaps there are factual errors in the appraiser’s report. Did he or she note the square footage or number of bedrooms wrong? Another mistake could be that the comparable properties used in the report weren’t similar enough. For example, did the appraiser compare your single-family home to a nearby duplex?
Negotiate with the Sellers
If you don’t think you have a shot at changing the appraisal value, you can try to negotiate with the sellers. If the gap between the offer price and the appraised value is not too large, you may be able to meet somewhere in the middle.
Keep Your Eye on the House
If a deal falls through because of appraisal issues, the homeowners might have a hard time getting another buyer – so they might be willing to negotiate. Keep looking for other homes, but keep in mind that the deal could still work out if the sellers don’t get any more offers.
Sometimes, deals just fall through. You might not be willing to pay more out of pocket to buy a home that’s overpriced. There will always be another home.
Section 13:Closing Your Loan
The appraisal and inspection have come back, all your paperwork is in, and you’re ready to close your loan. The finish line is fast approaching.
Closing is about more than signing the paperwork though. You often have to bring money to the table so the deal can be finalized.
What kinds of costs are involved at closing? How can you make sure those costs match what you initially agreed upon? How do you keep costs down? Don’t worry – we’ll walk you through it!
When you close your loan, you usually have to lay out a certain amount of money upfront. Here are some costs you’ll likely have to pay at closing.
The down payment is probably the biggest cost you’ll have to pay at closing. This is your assurance to your lender that you’re serious about this transaction.
Odds and Ends
Here are some other costs you’ll have to cover at the time of closing:
• Escrow: You may be required to prepay a certain amount of taxes and insurance costs so your lender can pay these bills when they’re due.
• Homeowners association dues: Many homeowners associations require a year’s worth of dues when you move in.
• Prepaid interest: If you purchased any prepaid interest (discount points) to buy your way to a lower interest rate, you’ll pay for this at closing.
• Third-party fees: These are fees that cover costs incurred by third-party services that your lender uses to complete the transaction. For instance, you’ll have to pay for the appraisal and title insurance at closing. You might also pay a closing fee, a courier fee and a credit report fee. The charges may vary depending on the lender and the transaction.
There may be other things to pay for at closing as well, but that covers the basics.
Just before you close, you’ll get a document called a Closing Disclosure. The Closing Disclosure gives you a summary of the final costs associated with your loan.
It’s important that you read your Closing Disclosure to make sure the amounts closely correlate with the Loan Estimate your lender gave you at the time of application. Lenders are tightly regulated in terms of how much the cost can change between the Loan Estimate and the final Closing Disclosure. However, third-party fees can go up as much as 10% between the estimate and closing.
Section 14: Moving Tips
It’s easy to think that buying your home is the last step. Unfortunately, the craziness has just moved into its next phase, but it’ll all be over soon, and we’re here to help.
So let’s dive in together and deal with that big hairy monster that is the move. There’s a lot to think about. Take a deep breath and remember to take one step at a time.
Packing can seem overwhelming. So. Much. Stuff.
But there’s one thing you can do to make the packing (and unpacking) process a bit easier: Get rid of whatever you don’t really need or want anymore. By the time you get around to putting things in boxes, there will be a lot less work to do. And getting a jump on the sorting process will give you time to label your items and make unpacking less hectic.
Change Your Address
The next thing to worry about before you move is updating your address with the Secretary of State. You should make sure that your ID is correct and that you can vote in your new location. Once that’s taken care of, here’s a short list of people and entities that need to know about your move:
• Electricity and gas providers
• Water and sewage treatment providers
• Cable, internet and phone providers
• Medical and dental providers
• Insurance providers (auto, home, health, life)
• Banks and credit card companies
• Lawn care, landscaping and snow removal providers
• Your alarm company
• Your children’s school
• Your place of employment
• Magazines, newspapers and other subscription providers
If the house is brand new or has been vacant for a while, you’ll have to call and make sure your basic utilities, including power, water and gas, are turned on when you get there.
Comfort Furry Friends
Moving with your pets can be stressful for them. If you’re transporting your pets in a crate, make sure they spend some time in it to get acclimated before moving day. Also, make it a priority to set up a place where their bed, food and water will be kept soon after you move in.
Start the Home Improvement List
No house is ever perfect for you when you first move in. Your first priority should be to make sure everything is safe and functional. You should make sure the lights and appliances work, the furnace filters are changed, the deck doesn’t have holes in it, etc.
After that, it’s time to do everything that makes a house a home. This could be something as simple as repainting and moving in your furniture, or something a little more complex like remodeling the bathroom to suit your needs. The sooner you start making your list, the sooner you can turn your house into a place of your own.
Now that you know the process, are you ready to get started?