By Michelle Higgins and Debra Kamin
Buying a home can seem like a daunting process — it just may be the most expensive and emotionally charged purchase of your life. But even during a pandemic, with careful research and determination, the keys to that dream home can be yours. We’ll help you along your path toward homeownership.
The Decision to Buy
Before taking the plunge into the buyer pool, it’s important to consider whether homeownership is right for you.
Rent vs. Buy?
When looking for a new place to live, the first question you ask yourself will help drive the rest of your decision-making. Should you rent or buy? Buying may seem appealing because you will put an end to escalating rent and can build equity. But the reality of routine home maintenance and repairs can quickly drain a bank account.
In general, whether renting or buying is better for you largely depends on your specific circumstances.
Here are some basic questions to consider when thinking about buying a home:
- How long do you plan to stay there? If you expect to relocate in just a couple of years, renting is likely a better option.
- How much home can you afford? If you can’t afford a home large enough to fit your family in a few years, it may be worth it to rent while you save a bit more.
- What’s on the market? If you can’t find a home you like, it’s likely not worth tying yourself to something you’re unhappy with.
Another factor to consider: The current housing market is one of the most competitive in decades, with record-high prices and record-low inventory.
That means buyers should be prepared to make multiple offers and be aware that they may have to pay more than a home is listed for — sometimes thousands of dollars more — in order to get their offer approved.
Still can’t decide if buying is for you? Check out The Times’s rent-versus-buy calculator to dig deeper into the difference in expenses. If both your lifestyle and the hard numbers point toward buying, the next step is to determine how much home you can afford.
Can I Afford to Buy a Home?
Buying a home is the biggest financial decision most people will make, with many factors going into that decision.
How Much House Can I Afford?
To determine how much you can spend on a home, take a close look at your budget. Review your bank statements and spending habits for the last couple of months to figure out how much you are spending on everything from cellphone bills to streaming services to your weekly restaurant takeout. The Consumer Financial Protection Bureau offers a spending tracker that can help you figure out where your money is going each month.
Because of the pandemic, homeownership is more affordable than ever. Interest rates on mortgages, near record-low territory, are around 3 percent. If you can qualify for a loan, these rates add up to significant savings over the course of a 30-year loan.
Once you have a better picture of your spending habits, determine how much you want to allocate toward a monthly home payment. This figure includes your principal, interest, tax and insurance payment, which add up to your monthly mortgage sum.
The Federal Housing Administration formula, used by many lenders, recommends allocating no more than 31 percent of your monthly income to your housing payment. This figure will change based on your amount of debt. Buyers with no other debt may be able to budget as much as 40 percent of monthly income to housing. (But remember that the rest of your budget is going to have to go toward heat, water, electricity, routine home maintenance and food.) Over all, your total debt-to-income ratio, including car payments and credit card bills, should not exceed 43 percent.
So, for example, if you make $50,000 in annual gross income, your monthly gross income is $4,167. That should leave you with $1,292, or 31 percent to devote to your monthly mortgage, provided your overall debt does not exceed $1,792 a month. Our mortgage calculator can help you determine what your monthly mortgage may be — don’t forget to adjust the slider to match current interest rates, which can be checked here.
But remember that besides the mortgage, buying a home includes additional one-time payments that can quickly add up, including closing costs, legal fees and other expenses associated with buying, such as a house inspection. And don’t forget about moving fees or home improvements.
The pandemic is also raising the financial stakes on these costs for new homeowners: Because the housing market is so competitive, many buyers, in a bid to get a leg up, are now choosing to waive contingencies in order to have their offers accepted. Contingencies offer buyers an out if something unforeseen arises. They allow you to cancel a purchase if an inspector finds the need for significant home repairs, and to cancel or renegotiate deals if an independent home appraiser deems the home value to be significantly less than the purchase price. A mortgage contingency gives buyers the option of pulling out of the deal if they can’t obtain financing within a reasonable amount of time. And if you need to sell your current home to afford the new one, you should make your offer contingent on the sale of your own home.
By waiving them, buyers may get a leg up in the market but are also vulnerable to extra costs after the sale is completed. So proceed with extreme caution.
Organize Your Finances
It’s time to assess your spending, clean up your credit and figure out what you can afford.
Count Your Pennies
Have you decided to buy? Before you jump into the world of combing online home listings, attending open houses and vetting real estate agents, take the time to get your finances in order. It will help you once it’s time to apply for the mortgage. It will also help you get some financial perspective before you fall in love with that perfect center-hall colonial or the studio with views of the park.
1. Check Your Credit Score
Lenders use credit scores, also known as FICO scores, to evaluate the potential risk of lending to you. The higher the number, which runs from 300 to 850, the better your score. The best mortgage rates go to borrowers with credit scores in the mid- to high-700s or above, according to the Consumer Financial Protection Bureau.
To find out where you stand, go to annualcreditreport.com, which offers a free report annually. Be aware that the three major credit-reporting bureaus, Equifax, Experian and TransUnion, generate their own FICO scores based on the data they collect; you’ll be able to find out all three here.
Is your FICO score low? You can improve your score by paying down high credit card debt, and by cleaning up any financial mistakes, like errors resulting from identity theft or mixed-up files belonging to another person with the same or similar name. Be aware that it takes time for these changes to be reflected in your credit score, from months for an inaccurate bill to years if you’ve had tax liens or bankruptcies. But if you can clear up your credit, it can make a big difference in your mortgage rate.
2. Decide if You Want to Go Digital or Analog
Digital lending platforms like Better.com, Rocket Mortgage and LendingTree are growing rapidly in popularity, and for good reason: They not only allow potential buyers to apply for loans from home and on their own schedules, but also have the potential to remove biases from the loan industry. But applicants with spotty employment history, credit issues or those relying on a gift for their down payments might run into issues online, where their applications could trigger a more thorough inspection. In these cases, working with a traditional human lender might provide a smoother experience.
3. Get a Mortgage Preapproval
A preapproval letter is a written estimate from a lender of how much you will likely be able to borrow from them. This letter will help you determine how much you can afford, and help demonstrate that you can secure a home loan when you are ready to make an offer on a house. Getting preapproved for a mortgage is different from getting prequalified for a loan, which is essentially a back-of-the envelope calculation of how much of a loan you may qualify for based on unverified information. The preapproval application for a mortgage often requires submitting pay stubs, bank statements, tax returns and other financial documents. Take the time to get one now, so you’re ready to make an offer as soon as you find a home you love.
How Do Down Payments Work?
There’s a reason why people talk about saving to buy a house. Your savings will go into your down payment.
4. Line Up Cash
The more cash you can pay up front toward your home, the less you will have to borrow. A bigger down payment means your monthly payments will be lower and you will pay less interest over the course of your mortgage. If you can afford to put down 20 percent or more of the total home price, you typically won’t have to pay for mortgage insurance, a premium that protects the lender in case you default on the loan. But don’t use all your money toward a hefty down payment. Lenders will want to see that you have some reserves in the bank. Closing costs typically add up to thousands of dollars, according to Bankrate.com, which conducts a survey of closing costs nationwide and offers a . You’ll also need cash on hand for moving, renovations and other incidentals.
The Search for a New Home
Now that you have a better sense of your budget, figure out where you want to live.
1. Choose a Neighborhood
What makes a good neighborhood? The answer to that question is going to be different for everyone. But you can quickly narrow your choices by focusing on some key factors:
- Where can you afford a home?
- Are you working from home or commuting?
- Do you want to be near good schools?
Talk to friends and co-workers about where they live. Then, spend some time in the neighborhoods you’re considering, checking out shops, restaurants and public spaces to get a better feel for the place. If you’re still unsure, consider taking a quiz or two: Apps and online tools are available that tap into smart algorithms to help you choose the neighborhood that best fits your needs.
2. Comparison Shop
Chances are that even before you’ve officially started your home search, you’ll have spent a little time browsing websites like nytimes.com/realestate, Realtor.com and Zillow to see the homes available in that area. Now it’s time to home in on what you truly want. Eliminate sections of your chosen town that don’t have the style or size home you want at the price you can afford. Setting up alerts on these sites based on your criteria can help automate some of the work. Many search sites show how long a given listing has been on the market, if the price has been raised or lowered, past sales, and other useful data that can help determine if a listing is overpriced or has been languishing on the market. From there, figure out which homes you want to take a closer look at.
3. Time to Tour
Open houses can help you get a sense of the housing stock in the area, and what is meant by a dog-trot house or a railroad flat.
But during the pandemic, most open houses have been canceled and replaced by private appointment-only showings in order to keep buyers and brokers safe. And many home buyers are choosing to forgo visiting in person entirely, relying instead on the newly bolstered 3-D videos that accompany online listings, and sending an agent or proxy into the home to tour it for them while they watch on a video call. Virtual tours, which include everything from slick, professionally produced videos to shaky cellphone videos, can sometimes hide flaws like creaky floors or low light, so make sure to ask for measurements and don’t hesitate to bring up questions.
A private showing with a real estate agent, scheduled by appointment, will allow you to take a closer look at a property and will reveal things that video simply can’t.
During your showing:
- Open the closets to check the storage space.
- Pull back the curtains to consider the view.
- Walk through the backyard and consider the maintenance needed to keep it in shape.
- Ask a lot of questions: How far is the home from trains and buses? If you are working from home, what is the daytime noise level? Why do the sellers want to move? When were the last improvements? How much do utilities cost? Have any offers already been made?
Open houses can also be a good way to meet real estate agents with whom you might consider working.
4. Find a Real Estate Broker
You can find homes for sale on your own, but a good broker can help you make sound decisions and guide you through the home buying process. A broker can also help you get access to homes as soon as they hit the market, before they may be listed online.
To find the right broker for you, talk to friends and family members who have bought or sold recently in your area. Look for a broker who has a track record working with buyers in your situation, and who will get back to you promptly. Keep in mind that your broker’s commission, typically 5 to 6 percent split with the seller’s broker, will ultimately come out of the sale proceeds — although this fee structure is starting to be challenged, and some brokerages will split their commission with buyers or charge less. So even though you may not be paying your agent directly, you can expect that fee to be accounted for in the list price. And remember: Your broker works for you but doesn’t get paid unless you buy a home.
Making an Offer
Once you find a home you want to make an offer on, don’t delay.
Finding “The One”
Did you walk into a private showing and get goose bumps? Did you dive into a 3-D virtual tour and realize you finally found the home that has everything you’re looking for? Did you sit down and weigh the pros and cons of three homes? However you came to a decision on the home you want to buy, the next steps you take are crucial.
1. Analyze Your Market
Look for comparable homes of a similar size that have recently sold nearby to help determine a fair offer. A good real estate agent will pull such “comps” for you, talk through pricing and market dynamics, and work with you to come up with an offer strategy with room for negotiation.
If the home you fall in love with happens to be listed with your real estate agent, he or she may offer to cut the commission and represent both parties. While such dual agency arrangements can work out fine, there is the potential for a conflict of interest. Negotiating involves lots of give and take, and this can get tricky if your agent is also representing the seller. For peace of mind, it’s O.K. to find another agent to represent you.
2. Be Willing to Negotiate
Understand that making an offer on a home is sometimes the start of a psychological game. You likely want to get the home for as little as you can without losing the house outright. The seller wants to maximize the selling price of the home without scaring you away. Where should you start with your first offer? Conventional wisdom says to begin at 5 percent below the asking price, but market conditions will largely determine how much wiggle room you have. The more competitive the market, the more likely you are to face multiple bidders. In a soft market, where listings have been sitting unsold, you will have more negotiating power. In a rising market, prime listings will command the full asking price or more, and sometimes offering just a few thousand dollars above listing price can help your offer stand out. Either way, keep your budget in mind when you make your first offer and set a cap of how high you are truly willing to go.
3. Be Prepared for a Bidding War
In a highly competitive market, where attractive listings are scarce, you can forget about getting a deal. While the highest offer often wins out, being the first to make a solid offer can give you an edge in a bidding war.
Things that can help you stand out to a seller:
- Raise your down payment.
- Be flexible about the closing date.
- Be willing to waive contingencies.
4. Make a Formal Offer
Once you and the seller agree on a price, your agent will draw up a formal offer for you to review and send it to the seller’s agent for review. If the offer is accepted, a cash deposit, also known as “earnest money,” is often required to show good faith. (This money will be held in an escrow account until closing, and will ultimately go toward your down payment.)
While the specific process and legal requirements vary in different parts of the country, the formal offer should explain terms and conditions of the purchase, including how you plan to pay for the place along with any contingencies (as long as they haven’t been waived).
5. Hire a Real Estate Lawyer
You will need a real estate lawyer to help you at this point until closing. He or she will help to negotiate any issues that come up over the course of a home inspection or securing a mortgage. Look for a lawyer who has a track record working with buyers in your situation, and who will get back to you promptly. If you are gravitating toward a New York City co-op apartment, for instance, you want a lawyer who understands the accounting methods used by co-ops and is able to mine the minutes of its board meetings for red flags.
6. Don’t Fall in Love
This may be the hardest step in the process of buying a home. Be prepared for disappointment. Counteroffers are common. So is rejection. Keep in mind that even if the seller has orally accepted your offer, he or she may still be able to entertain and accept other offers (it may depend on your state). And even after you have a signed contract, issues can arise. If you’re buying in a co-op for example, the co-op board could decide to .
Getting from an accepted offer to closing requires patience and organization.
The Road to the Finish Line
Once your bid on a house is accepted, you set in motion the process that will take you to finally holding a set of keys in your hand. While you may be eager to move into your new place, it is in your best interest to do your due diligence to make sure you get a home that it is in good condition and at a good rate.
1. Apply for a Mortgage
You have several options for obtaining a mortgage:
- Approach bank lenders or mortgage companies directly to get current rates.
- Shop online via the growing number of online lenders.
- Ask people you know who have recently bought a home for their recommendations.
- Get a mortgage broker to do the work for you.
Because mortgage brokers are not tied to any one lender, they can save you time and hassle by doing the legwork for you. (Note: A broker is paid a fee set as a percentage of the loan amount, but this may be paid by the lender.) Banks may offer long term borrowers favorable rates. Whichever way you choose to go, make sure you consult with a few lenders to find the best deal.
After making the decision to buy a home and figuring out how big a down payment you will make, you need to figure out how much you’ll need to borrow and what type of mortgage you’ll want to get.
2. Get a Home Inspection
If you haven’t waived your right to this critical step in a bid to get your offer accepted in a tight market, schedule a home inspection as soon as possible. Home inspections can help you learn about any issues that may prevent you from buying. A standard home inspector’s report will cover the condition of the home from the foundation to roof, including heating, air-conditioning and plumbing, giving you the chance to reconsider or renegotiate if structural damage or needed repairs are discovered. Ask local friends, family and your real estate agent for recommendations, then ask those inspectors for references from prior customers. You can also look up the inspector with your local Better Business Bureau.
Plan to attend the inspection if it’s safe and feasible. It will allow you to see that the inspector is doing a thorough job, such as getting up on the roof rather than looking at it from the ground and turning on the heat in the middle of the summer to make sure it works. But you can also use this time to ask questions about the condition of the home and pick up some helpful information about maintenance. The inspection will typically take two to three hours. The average cost of a home inspection is around $300, with most homeowners spending between $270 and $400, according to HomeAdvisor.com. Radon and mold tests apply to all homes, while if you’re buying an older home, you may also want to check for asbestos and lead. These tests obviously add to the cost of the inspection.
3. Get an Appraisal
Before you can finalize a mortgage to buy your home, the lender will want to assess the property value to make sure it is in line with the amount you are borrowing. An appraisal considers everything from the home’s layout and square footage to what similar homes are selling for in the area to determine the home’s value. While the appraiser is chosen by the lender, a buyer can make sure his or her appraiser is licensed and familiar with the area where the property is. Ask to see the appraiser’s credentials and find out how many appraisals he or she has performed in the area. If you are not satisfied, you can ask the lender to send someone else.
Appraisal fees, which are typically paid by the buyer, vary widely depending on the scope of the work and the size of the home. (On average, a single-family home appraisal costs around $400, according to HomeAdvisor.com, but some can cost more than $1,000.)
4. Shop for Homeowner’s and Title Insurance
To protect your investment, you will want to secure a good homeowner’s policy as well as title insurance. Your lender will also typically require this as a condition of your loan. The , a trade association, offers a searchable database of .
You can compare rates for homeowner’s coverage at sites like Insure.com and NetQuote.com. You may also be able to cut your rate by buying your homeowner’s and auto insurance from the same company. For more information, Consumer Reports offers an .
5. Do a Final Walk-Through
Right before you close on your new home, it’s important to do a last-minute walk-through to make sure everything is being left in the condition outlined in the sales contract — like ceiling fixtures that the sellers agreed to leave behind or old built-ins they agreed to take with them. Go during daylight and be thorough — flipping light switches, turning on the water taps, running the appliances and flushing toilets — to make sure no new issues have cropped up. If the attic hasn’t been cleared out or a broken window is found, you can ask for a credit at the closing to pay for junk removal or repairs.
6. Close the Deal
On closing day, all parties involved — the seller, the buyer and their various representatives — will sign the papers officially sealing the deal. (Parties may not always need to be present for the official closing — DocuSign, as well as new remote notarization laws that are gaining popularity because of the pandemic, have increasingly digitized the process). Buyers must bring a check to cover closing costs, including title search fees, attorneys’ fees, transfer taxes and homeowner’s insurance. When all the documents have been signed, and all funds have been properly distributed, the deed of ownership will be transferred to you.