This guide is designed to help you learn how to get the most out of your first time home buying opportunity. As a member of Indiana’s largest real estate company, we have helped thousands of first time home buyers find the perfect fit for them. F.C. Tucker Company, Inc. is Indiana’s largest real estate company and no one in the Midwest has more experience than we do. With a little bit of information, this guide can help alleviate some of your concerns with your first home purchase. There’s a lot of information here and feel free to come back as often as you like.
When you own your home, you can benefit from increased stability and security to investment and tax advantages. Most homeowners also find satisfaction and a sense of pride in owning their own home.
According to a recent survey by the National Association of Realtors, almost 70 percent of homeowners and renters stated avoiding rent is an important reason to purchase a home. Since renting offers no equity, no tax benefit, and no protection from regular rent increases, it’s like watching your hard-earned money float away. For example, if you are paying $650 a month for rent and you have a yearly increase of 5 percent, you will be spending $7,800 on your first year of rent and in five years you will be spending almost $44,000 in rent!
Buying a home you can afford is generally a wise financial choice. Here are some of the benefits of owning your own home.
Unlike renting, owning a home offers the advantages of increasing equity on your investment. Homeownership also carries significant tax benefits since property taxes and the interest paid on a mortgage are tax deductible.
Compared to other alternatives, a home is a relatively stable investment. The value of a home tends to steadily increase in value while other investments can be extremely volatile.
Finally, once you own a home and have built up some equity, it is easier to move a larger home, but you have to start somewhere. Buying a home is a good investment in your future.
Working with a REALTOR®
Who Do REALTORS® Represent?
Agents working with a buyer represent the interests of the buyer and those working with a seller represent the interests of the seller. In practical terms, this means that whether you are a buyer or seller, your agent is now required to:
- Exercise reasonable skill and care in performing their duties
- Deal with you as a client honestly and fairly
- Disclose all facts which are known to the agent (or may be reasonably discovered) that affect the value or desirability of any property you are considering.
The only exception to this law is when a buyer wants to buy a home listed by his/her own agent-or by an agent affiliated with the same broker (since the listings legally belong to the broker). In this situation, the agent becomes a “limited agent,” representing the interests of both parties. This limited agency must be disclosed, and both the buyer and the seller must give their consent in writing for the transaction to move forward.
Why Should You Work With a REALTOR® When You Buy?
There are many compelling reasons to use a real estate agent when you buy a home:
- They have access to the Broker’s Listing Cooperating (BLC) which allows them to search for available homes that meet your criteria.
- They will handle the administrative details of scheduling showings for the homes you would like to see.
- They save you time by providing you with information about schools, neighborhoods, etc.
- When you find a home you think you might be interested in, they can use the BLC to find out the list prices of other homes for sale in the area as well as the sales prices of those that have recently sold. This can help you determine the fair market value of the home before you make an offer.
- They will guide you through the maze of offers and counteroffers, inspections and amendments-always looking out for your best interests. Their advice and insight in these areas can help you avoid potential pitfalls and may save you from costly errors. Your agent will know, for example, which items in the home need to be included in the purchase agreement; some items can be assumed to stay with the house while others must be specifically stipulated. If the inspection uncovers problems, your agent will help you negotiate changes with the seller. Most real estate agents will not tell you what to do, but their training, previous experiences, and professional contacts can help you make better, more informed decisions.
- They can help you find a reputable mortgage company.
- They will explain the closing process and all of the paperwork involved.
Getting Pre-qualified for a Loan
Before you progress too far into the home-buying process, it’s a good idea to talk with a lender about pre-qualifying for a loan. Pre-qualification will let you know how much money you will be able to borrow, so that you know your price range for your home search. Having a pre-qualification letter also assures sellers that you are a serious potential buyer.
Finding a Home
Above all else, the quest for your first home should be extremely exciting and a lot of fun. At the same time, however, it may be a little intimidating, especially in the struggle to narrow your search. With all of the homes on the market, how do you find the one that’s right for you?
Defining the Decision-Makers
If you’re single, this step is easy; you will undoubtedly seek advice and counsel from friends and/or family members, but ultimately the decision will be yours.
For couples, however, it may help to discuss ahead of time how you will resolve the differences that will inevitably surface throughout the home-buying process. Clarify your expectations: every home he’s ever lived in has had a workshop in the garage, and the cars have been kept outside; of course, this home will have an attached garage/workshop. She’s tired of traipsing in and out of the cold to unload groceries and can’t wait to have a garage for the car – and a formal dining room for entertaining.
If children are involved, the process becomes even more complicated. They will have definite opinions about what they want in a home, and their priorities are unlikely to line up with yours. You may want to leave them out of the initial phases of the search and wait to show them the last two or three homes you are considering. This way, they can have input without bogging down the process.
Determining What You Need
By this point, you should have some idea of what you can afford to spend on a home. With that in mind, you need to begin thinking about what you want and then setting some priorities.
Once you’ve defined some of your expectations and desires, you can begin to prioritize them. Which items are negotiable and which aren’t? How much flexibility do you have?
You’ll also need to decide if you want to buy an existing home or build a new one. If you decide to buy, do you prefer an older home or a new one? And how, for that matter, do you define “old” and “new”? Talk with your REALTOR® about the advantages and disadvantages of each given your lifestyle.
Deciding Where to Buy
You may have heard that location is everything in real estate. For a homebuyer, location is very subjective; as with deciding what to buy, deciding where to buy is a matter of determining priorities. Is it important to you to be close to your work, your church, your extended family, or a particular school? Do you want to be near a recreational area? These factors will determine the area of town in which you choose to settle.
The Search Process
You will probably use several resources in your search for the right home. These may include friends, the internet, community newspapers, “catalogs” from local real estate companies, and most importantly, your real estate agent.
Making an Offer
When you have found the home that combines the best of your dreams with the realities of your financial situation, it’s time to make an offer.
While you don’t have to offer the seller’s asking price, if you put in a lower bid for the home and someone else makes a higher offer, you could lose it. Your REALTOR® can help you come to your decision, but ultimately the decision is yours.
You’ll need to consider several factors:
How much can you pay? It’s easy to be caught up in the emotion of the moment and decide that you want the home at any price. If you buy the home, however, and later lose it because you really couldn’t afford it, you’ll be in much worse shape – financially and emotionally. Review the steps you took when you pre-qualified for a loan to determine what you can really afford.
How much should you pay? Even if you can afford more than the asking price for a home, you shouldn’t pay more than the home is worth; you want to be sure that someone else will pay at least what you paid for the home when it’s time to sell. To determine the fair market value of the home, ask your real estate agent to search the BLC for sales of comparable homes in the area. Knowing what they sold for will give you some idea of what the market will bear. Sometimes, however, it may be difficult to find comparable sales (in a new development or in an area that’s being revitalized, for example). In this case, you may want to ask for an independent appraisal, and make your offer contingent on the appraised value being in line with the sales price.
How badly do you want this home? Other factors might influence your decision of when and how much to offer: How long have you been looking? What other viable options do you have? How quickly do you need to make a move? If any of these factors are weighing heavily in your decision, you may want to offer the list price (or more earnest money, but more about that in a moment) in order to speed up the process.
When you submit an offer, you must include a cash deposit, called earnest money. This deposit indicates to the seller that you are serious in your intent to purchase the home.
There is no specific required amount, but general practice says that it should be enough to discourage the buyer from defaulting, compensate the seller for taking the property off the market, and cover any expenses the seller might incur if the buyer defaults. As the buyer, on the one hand, you don’t want to put all of your savings into earnest money; you’ll need to save some for other expenses. On the other hand, if you really want the home and have reason to believe that the seller may receive other offers, a higher offer of earnest money might sway the seller in your direction. Talk with your real estate professional to determine a fair amount.
The Sales Contract
An offer to purchase spells out all of the details of the transaction. If, for example, you want to be sure that the washer and dryer are included in the sales price of the home, that intention must be specified in your original offer. A verbal agreement is not enough.
An offer to purchase typically includes:
- The buyer’s name and statement of intent to purchase the property
- The address of the property
- The purchase price and how it is to be paid (e.g., amount of earnest money, where it will be deposited, amount of down payment, amount of mortgage, terms of the loan, etc.)
- A provision for the closing of the transaction and the transfer of possession of the property to the buyer by a specific date
- A provision for title evidence
- A provision for the completion of the contract should the property be damaged or destroyed between the time of signing and the closing date
- A statement of remedies available in the event of default
- Dated signatures of all parties
- An expiration date and time (at which point the offer will no longer be valid if the seller has not responded with either an acceptance or a counteroffer)
- All contingencies (e.g., no major defects uncovered by an inspection or title problems discovered in the title search)
It may also include:
- Personal property included in the transaction (e.g., refrigerator, dining room chandelier, storage units in the garage, etc.)
- Any real property to be removed by the seller before closing (e.g., a storage shed)
- The transfer of any applicable warranties
- The identification of any leased equipment that must be transferred to the purchaser or returned to the lessor (e.g., a water softener or security system)
- Closing or settlement instructions
- The transfer or payment of any outstanding taxes or special assessments
- The buyer’s right to inspect the property shortly before closing
Any offer may be revoked at any time before it has been accepted. Once the seller acknowledges acceptance of the offer by signing it, the offer to purchase becomes a valid sales contract.
Just as you don’t have to offer the list price for the home, neither does the seller have to accept your offer. Most home sales involve a process of offers and counteroffers until both parties are satisfied with the price.
A counteroffer is a new offer, and it voids most of the terms of the original offer. The buyer may then accept or reject the counteroffer. He/she can continue the process with another counteroffer.
During this process, your real estate agent will serve as a go-between. Be careful not to reduce your negotiating power by revealing too much (e.g., how badly you want the home, how high you are willing to go, etc.)
Like the original sales contract, all counteroffers should be submitted in writing with a specified expiration date and time. They may be revoked at any time prior to the other party’s acceptance and become valid contracts when they have been signed by both parties.
Contingencies are additional conditions that must be satisfied before the contract is fully enforceable. They include:
- The actions necessary to satisfy the contingency
- The time frame within which the actions must be performed
- Who is responsible for paying any costs involved
The most common contingencies are:
- Mortgage contingency-protects the buyer’s earnest money until financing can be arranged
- Inspection contingency-the buyer may request inspections for termites, lead-based paint, structural and mechanical systems, sewage systems, and radon or other toxic materials
- Survey contingency-a survey confirms lot boundaries and reveals any zoning or code violations associated with the property (e.g, is the property in a flood plain-which will require additional insurance?)
- Property sale contingency-the buyer may make the sales contract contingent on the sale of his/her current home to ensure the availability of cash for the purchase. Likewise, the seller may accept the offer contingent on their purchase of another home.
Sometimes a seller will accept an offer with contingencies but will include an escape clause. This clause permits the seller to continue to market the property until all of the buyer’s contingencies have been removed. In this case, the buyer should retain the right to eliminate the contingencies if the seller receives a more favorable offer.
The mortgage world can look like a bowl of alphabet soup: VHA, FHA, ARM, PMI, PITI. It can be confusing and perhaps even a little unnerving.
From a legal standpoint, a mortgage is a voluntary lien on real estate. A borrower pledges the land to the lender as security, or collateral, for the debt. In practical terms, this means that when you borrow money to buy a piece of property, you voluntarily give the lender the right to take that property (foreclose) if you fail to repay the loan.
Tax and Insurance Reserves
When you borrow money to purchase real estate, the lender has a vested interest in how well you meet other financial obligations-in addition to repaying the loan-associated with the property. For example, if you fail to pay your property taxes and then default on your loan, the government will be paid first-and the lender will lose money on your loan. Similarly, if you fail to pay the premiums on your homeowner’s insurance and your home is destroyed by fire, your loan is no longer secured. For these reasons, many lenders require borrowers to provide a reserve fund to meet future real estate taxes and property insurance premiums. In Indiana this fund is called an escrow account. If your lender requires one, you will make the first deposit at your closing. It will cover any unpaid real estate taxes and a portion of the insurance premium liability. For the life of your loan, a portion of each mortgage payment will be allocated to paying off the principal, another portion will pay off interest, another portion will be escrowed for taxes, and the final portion will be escrowed for insurance. Your loan officer may refer to this as PITI: Principal, Interest, Taxes and Insurance.
The word amortize literally means “to kill off slowly, over time.” Most mortgage loans are amortized, meaning they are paid off slowly, over time-typically 15 or 30 years. Each amortized loan payment partially pays off both principal and interest. Each payment is applied first to the interest owed; the balance is applied to the principal. At the end of the term, the full amount of the principal and all of the interest due is reduced to zero.
For fully amortized loans, monthly payments remain consistent throughout the life of the loan. However, because the interest is paid first, the portion applied to repayment of the principal grows and interest due declines as the unpaid balance of the loan is reduced. Borrowers who make additional payments should instruct the lender to apply the additional funds toward repayment of the principal.
Conventional loans are viewed as the most secure loans because their loan-to-value (LTV) ratios are the lowest. The borrower generally makes a 20 percent down payment and borrows the remaining 80 percent of the value of the property. This is important because lenders needs to know that if a property goes into foreclosure, they can get out of it what they have invested in it.
Conventional Loans and Private Mortgage Insurance
It is possible obtain a conventional loan with a lower down payment investment under the private mortgage insurance (PMI) program. PMI allows borrowers to invest less up front while still protecting the interests of the lender. If your down payment investment is less than 20 percent of the purchase price of your home, you will be required to pay at least some PMI to provide additional security on your loan. This will generally add between 5 and 10 percent to your mortgage payment.
Federal Housing Administration (FHA) Loans
FHA loans are insured by the Federal Housing Administration and must be made at FHA-approved lending institutions. As with PMI, FHA insurance provides the lender with additional security against borrower default.
Veterans Affairs (VA) Loans
The Department of Veterans Affairs provides guarantees for loans for eligible veterans and their spouses. Under this program, the VA does not actually lend the money; rather, it guarantees loans made by approved institutions.
These loans are available with little or no down payments and at comparatively low interest rates.
An adjustable-rate mortgage will be originated at one rate of interest and then adjusted up or down during the life of the loan based on some objective economic indicator. Because the interest rate may change, the borrower’s monthly payment amount may also change. Details of how and when the interest rate will be adjusted are specified in the mortgage note.
Your lender may want to sell your loan to investors. To make the sale more attractive to the investors, the lender may charge you “discount points.” A point equals one percent of the amount being borrowed. So, if you are borrowing $100,000 and the mortgage company you are considering will charge you three discount points, that’s an additional $3000. Sometimes this amount is financed as part of the total loan amount, and sometimes it must be paid in cash at closing. Before you finalize your financing, be sure you understand the lender’s requirements.
If you repay your loan before the end of the specified term, your lender will not collect as much interest/profit as anticipated. For this reason, some mortgage notes contain a prepayment clause which requires the borrower to pay a penalty on any payments made ahead of schedule. Ask potential lenders about prepayment penalties before finalizing your financing. Lenders can not charge prepayment penalties on mortgage loans insured or guaranteed by the federal government.
Choosing a Lender
Mortgage interest rates are based off of the prime rate (the amount the Federal Reserve charges to banks). For this reason, you’re probably not going to find a huge difference in the rate you’ll pay from one lender to another (though some lenders will try to hide this fact by publishing a lower interest rate and then charging discount points to make up for it). You may find a slight variation in the loan origination fee charged by each lender, but it probably won’t be enough to sway you from one lender to another. So what considerations are important in choosing a lender?
Ultimately, it comes down to your convenience. If you have a solid credit rating, a good mortgage loan officer should be able to tell you, within minutes, what documents you need to turn over to him/her for processing and have you approved for a loan within a couple of hours of receiving your application.
So your primary questions for a potential lender are:
- Do you have a comprehensive selection of loan packages?
- Can you provide quick, efficient service?
With those criteria in mind, we would strongly encourage you to consider Tucker Mortgage. Each of Tucker’s metropolitan Indianapolis sales offices houses a loan officer from Tucker Mortgage. They have a full range of loan packages available, and their automated approval system can usually provide an answer for you within an hour. And since they’re located in your REALTOR®’s office, you don’t have to make any extra stops.
Having just signed a sales contract on a home, you may be feeling some financial pressure, wondering how it’s all going to come together: the down payment, the closing costs, the mortgage insurance payment, the loan payment, the move-in expenses, the initial repairs, etc. In the face of this pressure, you may be tempted to skip the home inspection. Don’t. It may be vital to your personal and financial safety.
Any home is bound to have defects. Maybe the furnace was replaced just last winter. How do you know it was installed properly? Maybe the door frame that’s slanting slightly in the older home you’re planning to buy is just part of its charm; or, perhaps it’s evidence that termites have hollowed out a supporting girder. What if there’s a crack in the chimney? Since the current homeowners never use the fireplace, they may not know the crack is there, but the first time you build a fire, you could be setting your roof on fire. Even if the home is brand new, are you willing to take the builder’s word that he/she did everything as promised? The potential problems are endless, and the cost of ignoring them could be astronomical.
Following the inspection, the inspector will generate a report which can be used to write a repair addendum if necessary.
An appraisal is a written report comparing the condition and features of a particular property with others of a similar nature. Its purpose is to produce a professional estimate of the market value of the property. Virtually every mortgage lender requires an appraisal performed by a licensed appraiser. The property must appraise for at least the amount of the purchase price, or the lender will not extend financing. When you apply for a mortgage, your loan officer will immediately want to see a copy of your signed purchase agreement, and then he/she will order an appraisal.
A location survey is a professional drawing showing the boundaries of the property you are purchasing. It will be required for closing unless you are purchasing a condominium or other home that does not include property. If there is any question about property lines, however, you may want to order a stake survey (where a surveyor actually comes to the property, measures, and sets stakes around the perimeter) prior to the closing. This is expensive, but it will be worth it to avoid problems later.
If a survey is required, it will be drawn by a licensed engineer and will depict the property boundaries, the location of the residence and any other improvements on the property, and the existence of any easements. (An easement grants someone else the right to use your land. Public utilities may require easements, for example, or your neighbor may have an easement on your property if his/her property would otherwise be inaccessible.)
Use the survey to be certain that you are buying all of the land you think you are buying. Look for shared or encroaching driveways and fences. With new construction, make sure that your home does not violate zoning restrictions such as set-back lines (the distance required between your home and your property boundaries).
Ownership of land can be passed from one person to another in several ways. A landowner can be granted full ownership for a pre-determined period of time (e.g., his own or someone else’s lifetime); he/she can be given the land with certain conditions (e.g., no gambling can ever take place on the land, or, it must always be used for church purposes); or he/she can be granted full ownership for an indefinite amount of time, complete with the right to pass the land on to his/her heirs.
Ownership is evidenced through a document called a title, and for every piece of property there should be a consistent chain of title showing who owned the land at all times. Before your lender will extend credit for your mortgage, he/she is going to want to know the history of the title to your property. It may be that there are gaps in the chain – a period where no title seems to have existed for the land. If that’s the case, someone else could come along later, produce a valid title, and claim the land you now “own.” Or, there may be a condition on the land that makes it illegal for you to have your home there. Or, the property owner thirty years ago may have defaulted on his taxes so that the government really owns the land you’re trying to buy. Obviously, you, and your lender, need to know up front exactly what you’re getting when you buy this land – if you really can buy it.
To this end, once you have a loan commitment, your lender will order a title search from a title company. (The seller pays for the search in his/her closing costs.) The title company will research public records to trace the title back 40-60 years (considered the “root” of the title). If your title is marketable – it has no serious defects, doesn’t expose you as the buyer to the possibility of future litigation, and can be transferred at your discretion – the title company will produce a certificate of title which certifies the results of the search. This does not guarantee your ownership, however; problems could still surface later.
Your mortgage company has a vested interest in making sure that you have insurance for your new home. They need to know that their investment has been safeguarded so that if your home is destroyed by fire six months after the closing, you will be able to either rebuild or repay the loan. For this reason, you will have to provide them with proof of insurance prior to your closing.
Homeowner’s policies insure your home and other structures on your property (e.g., a detached garage, shed, etc.) against loss or damage. This does not apply to structures used for business purposes (e.g., a garage used as a body shop) or rented to other parties. The policies also protect personal property in your home, although items of special value (e.g., expensive jewelry or furs) may require additional “riders” in order to be covered.
Your homeowner’s policy will also include liability insurance. If a friend falls down your stairs and breaks his leg, your liability insurance will cover the medical expenses and any legal liability you incur for bodily injury (up to the limits of the policy).
Like other insurance policies, your homeowner’s policy will have a deductible (the amount you have to pay before you insurance coverage will begin). The lower your deductible, the higher your premiums will be.
General real estate taxes are the taxes levied on real estate by various governmental agencies and municipalities (e.g., states, counties, cities, school districts, etc.) to fund the operations of the agency. They are “ad valorem” taxes, which means that they are based on the value of the property being taxed.
Real estate is valued for tax purposes by county or township assessors. The valuation process is called “assessment,” and the property’s assessed value is generally based on the sales price of comparable properties. Property owners who feel that their assessment is too high relative to other properties may appeal to a local board of appeal. If an agreement can not be reached, the case could ultimately go to court.
Tax rates are determined by each taxing body separately. They project operating expenses for the coming year and divide the monies needed by the total assessments within their jurisdiction. A property owner’s tax bill is determined by multiplying their assessed value by the tax rate.
Closing is the consummation of the real estate transaction, and your REALTOR® will be an invaluable asset in helping you prepare for it.
The closing process varies from state to state. In Indiana, closing is done face-to-face; that is, the buyer and seller sit down at the same table to complete the sale. A face-to-face closing involves the resolution of two issues; first, the promises made in the sales contract are fulfilled, and second, the buyer’s loan is finalized, and mortgage lender disburses the loan funds. It may be conducted at the title company or lender’s office or at some other mutually agreeable location.
When all parties are satisfied that everything is in order, the exchange is made. All pertinent documents must be recorded in the correct order to ensure continuity of title. For example, if the seller is paying off an existing loan and the buyer is obtaining a new one, the seller’s mortgage must be satisfied and recorded before the buyer’s since the buyer cannot pledge the property as security for the loan until he/she owns it.
You may or may not take possession of the home on the day that you close; those details will have been specified in your purchase agreement. Either way, be sure to take the time to celebrate your closing and welcome to the American dream!