When you begin to consider purchasing a home it can be hard to feel prepared. According to the national association of realtors, over 92% of potential home buyers do research online whether it is to gather more information about purchasing or to locate available properties. The biggest issue when using the internet to find the information you need is the validity of the information you find. There is a lot of outdated or inaccurate information about what you need to know. In order to help you feel better prepared we spoke with a real estate attorney on JustAnswer.
The first step to take when buying a home is to meet with a lender to get pre-approved. The pre-approval process will look at your credit score and report to determine how much money you will be qualified to borrow and at what specific interest rate. The amount of money you are approved for will be conditional based on property appraisal and other potential requirements the lender could establish. The pre-approval rate will help you establish the price range of homes you should consider if planning to get a mortgage.
Once you have found the home you want to purchase, you should determine the fair market value (FMV) of the home. The FMV if used by lenders to calculate home equity loans, insurers to set insurance premiums as well as tax assessors to determine your municipal property taxes. Calculating the FMV will help ensure that you do not end up underwater on your mortgage.
While there is no set formula for calculating FMV, there are a couple ways to look at it:
Research comparable homes in the area. Location is one of the biggest factors in home prices so make sure you are only comparing homes in the same neighborhood.
If there are no comparable homes in the area, calculate the amount of money needed to replace the home. To do this you will need to determine the land value and then add on the cost of building a comparable home on top of it. Look for empty plots that are for sale in the area and calculate the cost per square foot of the lots. Don’t forget to include the cost of fixtures and final details.
Once you have located the home and feel comfortable on the established Fair Market Value, you need to hire someone to do a home inspection. The home inspection process should help alert you to any plumbing issues, mold and/or water damage, termite infestations, and electrical issues. Identifying these potential issues allows you to negotiate the home price, avoid major repairs and make you aware of the possible issues you may need address once you close on the home.
If you are comfortable with the home inspection results, you should work with your lender to select the appropriate type of mortgage. There are a number of options you will need to finalize from the down payment amount, time frame which can range from 7 to 30 years, whether the rate will be fixed or adjustable, as well as lender fees that may be included. Typically, there is no one size fits all solution so work with your lender to determine the best rate for your situation.
Finally, work to negotiate your final costs. In addition to the home price you should be prepared for closing costs, which are typically 2-5% of the purchase price. Closing costs are fees charged by lenders and third parties in relation to the purchase price of the home. You will need to factor in additional cash for these fees as they are not covered by the mortgage or down payment. Typically the homebuyer pays the closing costs but depending on the loan the seller can sometimes pay a portion. You can calculate closing cost estimates using this calculator.
Hopefully this quick guide helps you to feel more confident in your future home buying decisions. If you have additional questions you can always speak to a real estate attorney on JustAnswer >