Buying Your Dream Home FAQs
1. Should I rent or buy a home?
If you’ve heard it once, you’ve heard it a million times: Buying a home is the smartest financial decision you can make! The old cliché is absolutely true. In almost every situation, you’ll get more bang for your buck if you buy a home.
Unless your rent is extremely low or you plan to move in less than three years, buying is probably the best choice. Why? First of all, home owners enjoy some valuable tax benefits. Secondly, if you lock in your monthly mortgage with a fixed rate loan, you’ll take comfort knowing that your housing expenses will not skyrocket in the future. Renters rarely have that advantage because their monthly rent could increase at any time. Thirdly, a home is smart investment that could yield a substantial profit when you decide to sell it down the road. That’s because the value of your home will likely increase over time.
Lastly, a home allows you to accumulate wealth and boost your overall net worth. Studies show that there is a gigantic gap between the average net worth of home owners versus that of renters. According to the Federal Reserves’ Survey of Consumer Finances, home owners with an annual income of $50,000 to $79,999 have an average net worth of $194,610. However, renters in that same income bracket have an average net worth of only $25,000. The numbers don’t lie—homeowners are typically wealthier than renters.
2. Why do I need a loan preapproval?
Every home buyer should get preapproved for a loan before they start shopping around for a home. Not only will it assure that you’ll be able to secure a loan when you find your dream home, but it will also give you negotiating leverage. If a seller knows you’ve already been approved for a loan, they’ll be more likely to take your offer seriously. Plus, if you’ve already been preapproved or prequalified for a certain amount, you won’t be tempted to buy a house you can’t realistically afford.
Not only does a preapproval make you more attractive to sellers, but you’ll also save loads of time during the closing process. Because your lender will complete the verification and underwriting steps during the preapproval process, you won’t have to go through those steps again at closing.
3. What’s the difference between the list price, the sales price and the appraisal value of a home?
The list price, or “advertised price,” is the amount the seller is asking for the house. Sellers often ask for more than what they actually hope to get—and sometimes, they ask for less. But for the most part, the list price is pretty close to what the seller wants. If you think the list price seems too high, take a look at comparable sales prices in the community. This will help you reach a fair price.
The sales price is the amount of money a buyer would realistically pay for a property. This price is often affected by market fluctuations and other factors.
On the other hand, the appraisal value is how much the property is worth according to a certified appraiser. An appraiser takes many factors into consideration, including the condition of the property, comparable sales in the area, projections for future value, any extra upgrades or additions the home may offer.
4. How can I make a strong offer on my dream home?
Making an offer on a home can be confusing, stressful and downright terrifying. However, with a knowledgeable real estate agent at your side, it is possible to make a strong offer that fits your budget.
Although you may be tempted to make a low-ball offer, it’s important to be realistic. Do some research, and work with your real estate agent to come up with a reasonable figure. Take a look at recent sale prices of other homes in the area. If local homes are selling very slowly and sitting on the market for months at a time, you should be able to offer less than the listed price. On the other hand, if homes are selling like hotcakes in the neighborhood, you’ll want to make a competitive offer to increase the likelihood that you’ll get the home. In this kind of scenario, you may even find yourself in a bidding war with other potential buyers.
If you’ve been pre-approved for home loan, include that information in the financing terms of your house offer. That way, the seller knows that you are a serious buyer who has the funds to back up a house purchase. This gives you a leg up on other potential buyers who have not have been pre- approved.
You should also include a property inspection clause in your home offer. Let’s say your offer is accepted, but upon inspection you find out that the house is infested with termites or the roof needs major repairs. Who will pay the thousands of dollars for repairs? With this clause in the contract, you will be able to reopen negotiations with the seller if you learn that the house needs work after inspection.
5. Why do I need a home inspection?
You can’t judge a book by its cover. This old saying holds true for houses, too. Even an incredibly beautiful house that appears to be in mint condition could be hiding some serious cracks in the foundation. That’s why before you purchase any home, you should hire a professional home inspector to meticulously examine the property. Buying a home is the biggest purchase most consumers ever face. As with any other major investment, you should know every tiny detail about the product you plan to buy before you sign on the dotted line.
Unfortunately, too many homebuyers think they can simply inspect the property themselves. When they don’t find any obvious issues with the property, they go ahead and purchase the house. A month or so down the road, many of these homeowners discover a major leak in the basement or termites in the attic. At this point, it’s too late. After all, you can’t return the home to the store. That’s why it’s critical to hire a professional home inspector. It takes a trained eye to spot these potential problems—and that’s exactly what a home inspector does.
6. How do I find a trustworthy home inspector?
Unfortunately, most states do not license home inspectors—which means you’ll have to do some homework to find a top-notch inspector. Ask family members, friends, colleagues or your realtor for recommendations.
Before hiring an inspector, you should also ask if they are a member of the American Society of Home Inspectors (ASHI). This national organization enforces a strict code of conduct and specific practice standards. ASHI also tests applicants and requires that all members have a certain amount of experience.
A good home inspector should be intimately familiar about construction practices in the area. They should also know which designs are built to last and which ones may fall apart at any moment. Plus, an inspector can pinpoint seemingly insignificant problems that could cause major headaches down the road.
7. How can I find an experienced real estate agent?
Ask your friends, family member and colleagues if they can recommend an excellent real estate agent. Be sure to ask them if they would work with the agent again. If the answer is yes, then you may have found your ideal realtor. You may also want to call a few highly regarded real estate firms and ask if they can recommend agents who work in the area where you want to buy.
8. Do I have to pay for my buyer agent’s services?
As a buyer, you typically do not have to pay for an agent’s services. Your agent will probably receive a percentage of the proceeds of the house sale. This means that your agent is technically a subagent of the seller.
However in some states, it’s legal for an agent to represent the buyer exclusively in the transaction and still receive a commission from the sellers. You also can hire and pay for a buyer’s broker. A buyer’s broker is an agent who legally and exclusively represents you.
9. How can I prepare financially to buy a home?
Before you dive into house-hunting, you should take a few steps to ensure that you’re financially prepared to buy. Here are three important financial tips for home buyers:
Check your credit score: Your credit score will determine whether or not you get approved for a loan and what kind of interest rate you receive. That’s why you should order a credit report before you start house-hunting. If you notice any errors on your report, be sure to notify the major credit bureaus and ask them to make corrections. If your credit score is low, now is the time to give it a boost. The fastest way to do that is to pay down your credit card debt.
Start saving: Before you start shopping around for a home, try to save up for a sizeable down payment. The goal is put down at least 20 percent so you can avoid paying mortgage insurance. Even if you have to cut way back on your spending or take on a second job, it will be well worth the effort. The higher your down payment is, the lower your house payments will be.
Budget wisely: Before you even start talking with mortgage lenders, you should carefully calculate your home buying budget. Ask yourself these questions: How much can I qualify for on a home loan? How much can I realistically afford to pay? If I were to face a family emergency, would I have enough money to cover it and the mortgage payments? Once you’ve determined your budget, you should shop around for a mortgage to see what various lenders can offer you.
10. Why do I need homeowners insurance?
Because your home is probably the biggest investment you’ll ever make, you’ll want to take measures to safeguard that valuable investment. The best way to protect your home investment is through homeowners insurance.
However, you shouldn’t settle for just any insurance policy. The type and amount of insurance you need depends on your specific home, what’s in it and your personal requirements.
Before you purchase a homeowners insurance policy, read all the fine print so you know exactly what the policy covers. Homeowners insurance generally covers damages to your home and “other structures” on your property, such as a shed, detached garage, gazebo or pool. A standard homeowners policy typically protects against fire, lightning, wind, storms, hail, explosions, riots, aircraft wrecks, vehicle crashes, smoke, vandalism, theft, breaking glass, falling objects, weight of snow or sleet, collapsing buildings, freezing of plumbing fixtures, electrical damage and water damage from plumbing, heating or air conditioning systems.
11. What’s the difference between the “market value” and the “replacement cost” of a home?
While you may be tempted to purchase just enough homeowners insurance to cover the market or resale value of your home, this may not be enough. While the market value may be enough coverage for some homeowners, that’s typically not the case.
Your home’s market value is not the same thing as what’s known as its “replacement cost.” The replacement cost of your home is the amount of money you would need to rebuild your home to its previous condition if a loss were to occur. This amount is different from your home’s market value, purchase price or the outstanding amount of your mortgage loan.
When property values are low, the market value of your home is probably much lower than its replacement value. Therefore, you should not always use the market value to determine how much insurance coverage you need.
Your homeowners insurance company can calculate the replacement cost of your home based on the following:
- Square footage of your home
- Type and quality of your home’s construction
- Any updates, special features or add-ons to your home
- Quality and cost of materials used in your home
As you shop around for homeowners insurance, ask each insurance company for a policy quote that includes the full replacement cost of your home.
12. Do I need to purchase additional homeowners insurance?
If you have particularly valuable jewelry, artwork or collectibles in your home, you may want to opt for additional homeowners insurance protection. You may assume your valuables are fully covered by your homeowners insurance, but that’s not always the case. It all comes down to what’s called the “sublimit”—this is the limit on the amount the insurance company will pay for specific types of personal property. Although your policy’s total personal property limit may be $75,000, the sublimit for jewelry may be as low as $1,500.
Read through your contract and find your policy’s sublimit for artwork, jewelry and collectibles. If your valuables are worth more than the sublimit, you may want to purchase additional insurance to cover it. You can purchase what’s called a “floater” and have this worked into your homeowners policy. Insurance floaters typically cover one specific item, so if you have multiple valuables, you may need to purchase floaters for each item you want to insure.
Most homeowners policies also include personal liability and medical expense coverage. Generally, your homeowners insurance company will pay up to $100,000 on a legitimate civil claim against you for an injury that occurred on your property. However, this still may not be enough to cover a major lawsuit.
You might consider purchasing a personal umbrella liability policy, which can offer additional protection. This type of policy offers a higher level of liability coverage and ensures that you and your family’s assets will be protected if someone sues you for damages. Umbrella policies typically pay up to a predetermined limit, which is usually $1 million, for liability claims made against you and your family.
13. What is a foreclosure?
When a homeowner is behind on their mortgage payments, the bank will record a notice of default against the property. If the owner still fails to pay, the bank holds a trustee sale, and the property is sold to the highest bidder. The financial institution will usually set the price of the foreclosure at the loan amount.
While homebuyers can score an incredible deal on a foreclosure, buying a foreclosure property can be extremely complicated, risky and frustrating. Typically, you have to buy a foreclosure “as is,” which means there is no warranty on the condition of the property. If you find serious issues with the home, you cannot request repairs from the seller.
14. How much home can I afford?
During the mortgage preapproval process, your lender will contact your bank, your employer, the credit bureaus and other financial institutions to verify your income, assets, debts and credit history. Based on this and other information, they will estimate how much mortgage you can afford. If everything checks out and the lender sees you as a low risk, they will issue you a letter stating that the loan of a certain amount is approved for a specified amount of time.
Generally, lenders don’t want you to spend more than 28 percent of your gross monthly income on a mortgage payment. Lenders will also look at the housing expense-to-income ratio, which is determined by calculating your projected monthly mortgage cost, property taxes, hazard insurance and HOA dues. Your expense-to-income ratio should fall somewhere between 28 and 33 percent. If it’s much higher, you probably cannot afford the house.
15. How much will I have to pay in closing costs?
Closing costs can vary widely depending on a number of factors. These costs can quickly add up and push you way over-budget on your home purchase. That’s why you should find out ahead of time how much you’ll have to pay.
Ask your mortgage lender for a good-faith estimate. Lenders are required to provide one of these closing costs estimates within three days of receiving your mortgage application. However, do not accept a verbal estimate—insist that they send it in writing.