Previously, I have given you beginner’s guides to doing your taxes and freelancer taxes and what the different forms are and what you need to do them yourself, as well as on personal finances and building credit. I hope they have helped you!
Now, I want to focus on a huge milestone in many people’s lives: Buying their first home.
Buying a house, apartment, co-op, duplex, townhouse, any property at all is a huge deal and you should be extremely excited about it.
However, there are a lot of details. I am going to break them down here:
- Negotiating a price and getting an accepted offer
- Signing the contract
- Getting a mortgage
- Inspections, appraisals, and insurance
These are the 5 main pieces of buying a home. Now, let’s dive into each of them.
Negotiating Price & Accepted Offer
Once you find a home you like, you need to make an official offer. Sometimes it can be an informal offer via email to the seller’s real estate broker, but the broker will then follow up with a form you need to fill out. The official offer form requires you to state how much you’ll put down, how much your offer is for, and then all buyers need to sign it. You’ll email that to the broker and wait.
The brokers are required to show all offers to the sellers. They will then contact you and let you know if it is accepted, rejected, or if they offered a counter.
To get an idea if your offer (or the counter offer) is fair, do some research. Take a look at Trulia and Zillow for that specific neighborhood and immediate surrounding areas with the same filters. For example, if you are making an offer on a 3-bedroom 2-bath single family freestanding home, only look at other 3 bed, 2 bath freestanding home prices in the area. Many sites also show you what properties have recently sold at in the area, so don’t only look at what’s currently for sale. For apartments (condos and co-ops), you can research to see what other similar sized units sold for in that building.
It doesn’t matter what YOU think the property is worth, it matters what comparable homes (comps) in the same area recently sold for — that is what the property is “worth” in today’s market.
You can either accept a counteroffer or come back with your own counteroffer. Once you’ve done your research, make sure the counteroffer is in the right price range and you’re comfortable with it. Once both parties agree to the price, you are on your way!
An accepted offer is not a contract.
Before making a formal offer, you need to know what your down payment will be. This is the cash currently in your account that you can hand to the sellers. Your mortgage will be the total cost of the home minus the down payment.
If you purchase a home for $250,000 and do a down payment of 20% ($50,000), your mortgage from the bank/lender is $200,000. You are not borrowing the full price of the home.
Ideally, you want to put down 20% of the full price. If you can afford to do it, do so. It’s better for you, gets you better interest rates from mortgage lenders, makes your offer more attractive to the sellers, and most importantly: If you put down less than 20%, you’ll need to pay an additional monthly fee called Private Mortgage Insurance. PMI is paid to the mortgage lender and it insures the mortgage FOR the lender in the event that you, the buyer, default on the loan. If you can avoid it, do it. PMI is an extra expense and you shouldn’t opt for it if you can afford to put 20% down.
Signing the Contract
Once you have an accepted offer, the home is not yours yet.
I live in New York, so all home buying requires a real estate lawyer. You can ask for referrals from people you trust or look up qualified local ones. I used the real estate attorney for the building I was renting from!
The lawyer not only reviews the contract, but advises you on all of your responsibilities in the process and helps you. Our lawyer helped us with asking the right questions of the sellers and the mortgage lenders, had a company to go through the financials of the building we were buying, recommended inspectors, helped me set up the appraisal, oversaw the contract negotiations, and was at the closing taking care of everything.
Highly recommend a real estate lawyer, having one made the process easier and I was able to text or email him when I had questions.
After the lawyers negotiate the contracts (examples include are they leaving the light fixtures? Appliances? Which is our parking spot? We required a note in the contract that our pet was allowed to be there.), you sign the contract and your lawyer gives it to the seller’s lawyer. The sellers sign it, everyone gets copies.
When the contract is signed, you typically give a check for a portion of the down payment with the executed contract. It’s usually 5–10% of the total. Ours was 5% and we paid the remaining 15% at closing.
The contract typically states that you have 45 days to secure a mortgage for the contract to stay valid.
Getting a Mortgage
Ok, you have the right home, you have a contract. Now you need a mortgage.
I HIGHLY encourage you to call and speak with multiple mortgage lenders. You should 100% compare rates and you won’t get accurate ones online. You have to speak with a lender and give them your information to let them run it and tell you what your actual rate would be. If you only talk to one or two lenders, you are potentially losing thousands if not hundreds of thousands of dollars.
Most people check 3–4 places. I am extra and a bit manic and spoke with 9-10 different lenders (CitiBank, HSBC, SilverFin Capital, Quicken/Rocket, Santander, Wells Fargo, Bank of America, and a couple of others I can’t remember). Why? Because each place has different rates.
Once I narrowed it down and decided on one mortgage lender (Citi), I let the other 2 that I’d been in deeper talks with (HSBC and Quicken/Rocket) that I would not be moving forward with them. HSBC responded with a better rate in a bid to keep my business. I went back to Citi and said HSBC was offering a lower rate than them and showed them the email. Citi then offered to match HSBC’s rate and offered us lender credits (credits toward closing costs). We went with Citi.
This is why speaking with multiple lenders is important. We went down half a percentage point — which is a LOT of money over 30 years of a mortgage.
The mortgage lender will need your life history. Just kidding, but…
They will need:
- A copy of the signed home contract
- You and your spouse/partner’s (if you have one) W2s for the past 2 years
- Both people’s previous 2 years of tax returns
- Your credit scores and credit history, the price of the home and amount of down payment(they will get this during preapproval)
- 3 months worth of pay stubs from both people
- Bank statements, including checking, savings, and investment accounts for the past 3 months
- A list of all assets you own
- To answer a bunch of income information
- A “gift letter” if you are getting the down payment or part of the down payment as help from a friend or relative.
- Whether you need the mortgage rate “locked in” for 30, 60, or 90 days. A rate lock means that even if the bank’s rates go up in the next 30–90 days, your rate will not. The days refers to the timing until closing.
You will be “pre-approved” for the mortgage first, meaning at first glance you fit all their parameters. Then the lenders spend the next several weeks reviewing your information and making sure everything checks out. Then you will get an official mortgage letter (called a “commitment letter”) stating you are approved and will be receiving a mortgage from them. Your lawyer will give this to the seller’s lawyer.
This letter of mortgage must be received within the specified time stated in your contract. Mine was 45 days. If you don’t get the mortgage approved in time, your contract can be nullified by the sellers.
Inspections & Appraisals & Homeowner’s Insurance, Oh My!
Ok, you have a contract and a mortgage. Perfect. You are about 3/4 there!
You can have the inspection once you are in contract and before you have to mortgage commitment letter. You have to find your own inspector. You can get referrals from your lawyer, your friends and relatives, or Google “NYC home inspectors” and look at reviews and pricing. That’s the one I chose.
You pay out of pocket for inspection. You will need to let the sellers know when the inspection is because they or their broker will be there to let you and the inspector in. You’re not required to be there, but it’s highly recommended that you are. You want this information, it’s important.
The inspector is looking for the general condition of the home, any water damage or other damages, the condition of the heating and cooling systems, interior plumbing and electrical, the roof, attic, windows, and doors, the foundation’s integrity and structural components. If you are purchasing an apartment, they are not looking at the building’s basement and roof.
The inspector will email you a written report with photos. You and the sellers will know if there are any issues and if there are, you can then negotiate for the sellers to fix those things before closing or even negotiate the price of the home to account for you needing to fix them.
A home cannot pass or fail an inspection. It is simply an exam of the current condition of the home.
The appraiser is selected by your bank and you pay out of pocket for it. An appraiser is there to determine the actual value of the home given the condition, location, and features, in addition to comparing it to other homes in the area. It’s all about determining value.
Most of the time (92%), the appraisal amount will have no impact on the mortgage loan. The bank has the home appraised mostly to make sure your loan qualifies for the interest rate you're getting. Interest rates are usually tied to several things, but a lot is tied to your down payment. They will sometimes use the appraised value to calculate your down payment. The reason the appraisal amount usually has no impact is that 92% of the time, the appraised value comes in as the same or higher than the contract price. If it were to come out as less than the contract price, then you will likely want to renegotiate the sale price of the home.
Once you have a commitment letter and a closing date (which you’ll get from the seller’s attorney), you must line up homeowner’s insurance to start the same day as closing.
Call your renter’s insurance or current insurance carrier to ask if they do homeowner’s, a lot of them do and you can get bundled pricing. They’ll ask questions and get you all set to be covered starting the day you close.
You made it!
Your closing date is usually set by the banks and the attorneys and you will go into the bank at like 2 pm on a Tuesday. You, your attorney, the sellers, the seller’s attorney, someone from the seller’s bank and someone from your mortgage lender will all be there.
You will sign a ton of paperwork while your lawyer patiently tells you what each one is.
You will pass each page over to your partner/spouse who ALSO signs or initials each one.
Your lawyer will have told you exactly how much money you need to bring to closing and who to make it out to. You want to bring it as a cashier’s check. This means going to your bank and having them give you a cashier’s check for the full amount. It’s one BIG check. Someone at the closing will have broken it down into all the smaller amounts and will hand out smaller checks to those who get them.
- The total owed to the sellers (to get the full 20%)
- UCC search the lawyers do during the process
- Your lawyer’s fee
- The bank’s legal fees
- Financing fees
- Homeowner’s insurance for the first month/year/however you have it set up to be paid
- The cost of any HOA or maintenance fees on your new home for the first month
So, you hand over your big check, sign a ton of paperwork, and the lawyers hand out the smaller checks. The sellers will give you your new keys, the garage clicker, and any alarm codes you need.
Then you’re done.
You spend half an hour signing your name and you own a home!
On the way home from closing, I went to my new home and just looked around at it. It was the most satisfying and terrifying feeling.
Congrats, you’re a homeowner!
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