Buying a home is a great achievement, and is a large financial undertaking. Most buyers have a lot of questions about the finances, process, and timeline of purchasing a property. Below are ten of the most common home buying questions that I am asked, as well as my answers. Once you have a thorough understanding of the process, buying a home will seem much less intimidating. If you have questions beyond these ten, feel free to contact me and I will be happy to assist.
How do I set my budget?
Answer: If you are paying cash, you are the only one that can decide what your budget is. If you are getting a mortgage, your pre-approval will help you set your budget. You are approved to buy a home in the amount of the pre-approval or below. However, just because you are pre-approved for a certain amount does not mean that you have to spend that much. Look at the monthly payments on the pre-approval letter to see if they are appropriate for you. If not, consider spending less on a home than the amount you were pre-approved for. Feel free to play around with the mortgage calculator on my site. I can't stress this enough--set your budget BEFORE you start to search for homes!
What are my loan options?
Answer: There are three main financing options: Conventional, FHA, and VA loans. Conventional loans have the strictest borrower requirements, but have less (and sometimes no) mortgage insurance, making them cheaper loans. FHA loans allow for more flexibility with down payment, income, and credit score. VA loans are for active or former military personnel, and are also flexible with down payment, income, and credit score. FHA and VA loans are government programs. Your lender will be able to guide you though deciding which loan program is right for you. My dad, a lender for almost 30 years, briefly explains the different loan programs below:
How much cash do I need for a down payment?
Answer: For a conventional loan, there is an awesome new 3% down program. You no longer need 20% down to qualify for a conventional loan. For an FHA loan, the minimum down payment is 3.5%. For a VA loan, there is no down payment required. In general, the more money you put down, the less mortgage insurance you will have to pay. In the lender's eyes, since you have a greater amount of your own equity in the home, you will be more likely to continue to make the monthly payments.
What is the minimum credit score required to get a loan?
Answer: 620 for a conventional loan, and 600 for FHA and VA loans.
How much will I pay my Realtor?
Answer: None. In California, the commission of the buyer's agent is paid by the seller. When a seller signs a listing agreement, he works with the listing agent to determine the commission of the listing agent as well as that of the buyer's agent (the person who brings you, the buyer, to come make an offer). I strongly advise using a Realtor as a buyer because there is no cost to you to make sure your interests are protected. Take a look at my article "Why Use a Realtor."
Besides the down payment, what other fees will I be paying?
Answer: Besides the down payment, your closing costs are the second largest expense. Closing costs cover items such as lender fees, escrow, and title insurance. A good estimate for closing costs is 1-2% of the purchase price of the home. You will also incur expenses such as a home inspection ($250-$350 is typical in San Diego) and the costs associated with moving. It is important to note that you will be submitting an Earnest Money Deposit upon opening Escrow. This deposit is usually 1% of the purchase price of the home, and is credited back to the buyer upon closing. This money lets the seller know that you are serious about the purchase, and your Earnest Money Deposit is refundable to you if you cancel the contract before your contingency period expires. It is the job of your Realtor to protect your Earnest Money Deposit.
How long does it take to buy a home?
Answer: About 1 month. It usually takes a day or two for a lender to provide a pre-approval once they have all of your documents. Then, you'll use the pre-approval to finalize your budget, and send the pre-approval letter to your Realtor. Your Realtor will set up a handful of showings, and you will go see the homes together. You'll then put an offer on your favorite home. Negotiating can take a week or so. Once the contract is fully executed, Escrow will open. The average length of an Escrow is 30 days. Once Escrow closes, you'll get your keys!
Should I continue renting?
Answer: This is a personal question that only you know the answer to. Owning a home has consistently been viewed as a good investment, provided you buy at the right time. Home ownership also provides stability because there is no landlord involved, as well as freedom to do what you like to the home. Renting, on the other hand, is a great choice for those who don't know if they'll live in the same area long term. Many people are surprised to find that their monthly mortgage for a home is similar to what they are already paying in rent! For more information, read my article "Are You Ready to Buy a House?"
Should I sell my current house before buying a new one?
Answer: There are two main ways to go about selling a house to buy a new one. The first is to sell your house BEFORE you buy the new one. The benefit to this is mostly financial; you (and your lender) will know exactly how much money your home sold for. This will allow you to set an appropriate budget for the new home. The negatives are that you'll have to find somewhere to live in between the sale of your house and the purchase of the new one, and you will have people coming to view your home while you are still living in it. The second option is to sell your house AFTER you buy the new one. The benefit to this is that the move is pretty seamless; you will simply move your things from one house to the other, because you will own them both. The other benefit is that by the time you sell your first home, it will be vacant so you will not have to do showings while living there. The cons are that you will not know how much the house will sell for before buying the new house, which leaves some uncertainty in the budget. This can be a large problem when getting a loan on the new house. The other issue is that if your house takes some time to sell, you will be paying for two houses for a period. So, the jury's out on this one. You can speak with your Realtor about your particular situation and figure out which option will be a better fit.
What happens at closing?
Answer: During closing, you will need to sign your closing documents. This must be done in the presence of a Notary Public. The loan docs you sign will be sent back to your lender, and at that point, your loan will fund. Escrow can then transfer title into your name, and you can get your keys. The process of signing closing documents usually takes about an hour. However, the funding of the loan sometimes does not happen until the next business day. So, it is advisable to make sure you have a few days of buffer time between the signing of your loan documents and the day you want to move in.
Your Realtor will walk you through every step of the home buying process, so you'll always know what's coming next. Be sure to ask every question you have, and you'll be a home buying champ in no time.