The journey to becoming a first-time homeowner is certainly not an easy one, but it’s a rewarding experience nonetheless. People will doubt you and lenders now a days are very selective on who they give out money to. However, the peace of mind you get of owning a condo/home is simply unmatched. Knowing that you're making an investment that can potentially payoff in the future instead of virtually throwing money away each month is one of the best feelings in the world. It's currently a buyer's market and it's an excellent time to be a homeowner with interest rates being so low. The purpose of this article is to provide you with some of the steps you must take in order to become a homeowner.
Step 1: The Credit Score
This goes without saying and there's a reason why I have an article dedicated solely to this topic titled "The Art of Credit." You have to have a fairly decent credit score in order to get approved for a mortgage. The actual score you need depends on many factors including the type of loan you need, your debt-to-income ratio (to be discussed later), and the purchase price of the home. When I bought my first condo, my score was in the mid-700s. I believe this was a huge reason why I got approved for my mortgage (loan). I would aim for somewhere in the 700s, but then again I know some lenders that would approve someone in the 600s. So it's best to start building your credit score if you haven't already and if you have, continue to take good care of it. Please check out the article referred above if you would like to have more details about how to build your credit score. A decent credit score is a must-have to get approved for a mortgage as well as a favorable interest rate.
Step 2: The Debt-to-Income Ratio
Something probably every lender looks at before they give you a loan for your home. The debt-to-income ratio is simply how much debt you have compared to your income (on a monthly basis). If you have credit card debt, be sure to clear those before you apply for a mortgage. If you have student loan debt, don't be too concerned. Almost everyone has them and lenders understand this so they might cut you some slack when calculating your debt-to-income ratio. Basically every debt you have gets factored into the numerator and your denominator is simply your income. The higher your debt means the higher your debt-to-income ratio which also means the higher your risk level which ultimately means the lower chance you have of getting approved for a mortgage. So before you apply for a loan, be sure to evaluate your debt-to-income ratio and see if it makes sense to continue to apply. In no event will you get approved for a mortgage if your debt-to-income ratio is above 100% (i.e. your debt is greater than your income). My debt-to-income ratio was 0% when I got approved for my mortgage because I had no loans at the time I applied.
Step 3: The Realtor
A realtor is the person that helps you with several things through your home purchase including finding the home based on your preferences, providing you with the disclosures of the home you desire (i.e. top secret information that only certain people such as realtors have access to), finding you certain important people such as a lender and a lawyer, and taking care of some of the paperwork required to purchase the home. Very important to know that the realtor is 100% free for the buyer. You don't pay a dime to the realtor. It's the seller that pays a commission (normally 5-6% total, 2.5-3% each way) to both the buyer's realtor and the seller's realtor. So why wouldn't you take advantage of this free resource? Normally good things in life aren't free, but a realtor is one of very few good things in life that are completely free. Be sure to pick out a good realtor and check their ratings. If you need a good realtor, I have one for you.
Step 4: Pre-Approval
Once you've evaluated your credit score, your debt-to-income ratio, found a superhero realtor that'll help you acquire the home of your dreams, it's time to get pre-approved for a loan. This is an extremely important step as it tells you how much you can actually afford. For example, if you get pre-approved for a $200,000 condo, it means you can acquire a condo with a price tag up to $200,000 (excluding any down payments). Some lenders are lenient enough to let you go higher than what they approve you for (i.e. they probably wouldn't turn you down for a condo that costs $205,000). They'll set up a call with you to get some information such as your income that they plug into a magical spreadsheet/formula to see if/how much you'll get approved for. Once you get pre-approved, you can proceed with your search process and finally start scheduling some viewings. Note: pre-approval is not a required step, but is highly recommended. The worst thing you can do is find a condo you really want, but you simply can't afford. If you need a good lender, I have one for you.
Step 5: The Selection
Up to this point, we haven't even talked about the home itself so as you can tell, a lot of due diligence is required before we even get to the home. This part is everyone's favorite, yet one of the worse parts. A home is an investment. It's something that potentially grows in value where you can keep it, sell it, or rent it out. With that being said, it's essential to choose the right home and this is where your realtor really comes in handy. All you have to do is provide your realtor with your preferences such as your desired location, number of bedrooms/bathrooms wanted, whether the place you want has parking or not, the ability to rent it out in the future if that's what you want to do, any amenities that are included, and anything else you prefer. Not so simple right? This is actually a pretty difficult step, but remember it's you that'll be living in the home and you must be as specific as possible. You don't want to buy a home that you'll end up hating. And remember you've done your due diligence in getting pre-approved so price is not really a question since you know what you can afford. Remember: don't just buy a condo because you found a lower price compared to something that's a bit pricey, but the potential value is far greater than its price. The investment philosophy of price vs. value applies in this scenario too. Just be sure to stay within your pre-approved loan amount and pick a home that you'll love. I would recommend using external sources as well such as Redfin and Trulia to maximize your search results. I ultimately was the person that found the condo that I live in now. Your realtor will show you different options based on your preferences and you get to pick which ones you like and which ones you don't like. Of course they’ll give you some general advice on what you might want to avoid, but it's your ultimate call.
Now it's time for me to tell you what you might want to avoid. You don't want a basement/garden unit (any unit number that has the letter G) because of the elevated risk of flooding. You don't want a high rise because the association dues may be a bit high not just now, but in the future. Taller buildings require more maintenance. Association dues are simply dues you pay each month for things such as heat, gas, interior insurance, lawn care, snow removal, etc. You might want to avoid any association dues greater than $400 a month. You don't want a building that's too old as it'll probably require more maintenance. I bought my condo in the Lakeview area so this is an issue that I had to deal with as most of the buildings in Lakeview are pretty old. You also should get a condo that includes heat, gas, and as many other amenities as possible as although dues for an association might be low, it might not include anything worthy. Remember price vs. value? Those are a few of the things you should watch out for, but there's certainly more that are out there and your realtor should be able to walk you through that.
Once you've chosen the homes you want to see, your realtor will schedule the viewings. You go and view the places, pick the ones that you think are worthy, and ultimately pick the home of your dreams. Sounds easy right? Not so fast. You have to make an offer which is the next step.
Step 6: The Offer
Can you imagine going through all of this madness and then some rich guy claims your home by outbidding you. When it comes to bidding, you have to know how to negotiate, but don't be a low baller. A few people I know and I lost out on several good condos because of this. We found the home of our dreams, made an offer lower than the price tag, only to find out someone else really wanted the home and ultimately made a better bid. Rule of thumb: if you find a home you absolutely want, make a strong bid at or slightly below the ask price. You may even have to go above if it's a "highest and best offer," which I lost out on another great condo because someone brought in a higher offer. Remember, this is the home of your dreams and you can't afford to lose it to some rich guy. Some places might offer more flexibility and you might be able to low ball it. However, if you want a condo in an area such as where I bought mine, you'll end up a very sad person if you think low balling is a good strategy. The time of the year also plays a role in your negotiability as the market tends to get hot around spring time. Ultimately though, you make an offer, the seller most likely will make a counteroffer, you accept the counteroffer (or decline and ultimately accept a later offer), and then you get the home of your dreams. Now it's time for arguably the most difficult part of the home buying process: closing.
Step 7: Closing
Man oh man. I had the worst experience with this and lost out on a condo because the closing went very bad. Can you imagine going through all the previous steps only to ultimately have to drop the deal? I lost out on a condo because I later found out that they (the lender) wanted a 20% down payment because some rich guy owns over 50% of the building, which lenders absolutely hate to see. I had to ultimately drop the deal, revisit steps 5 and 6, and finally got the condo that I ultimately loved and ended up buying with a 5% down payment.
Closing is where the real work comes in. You have to send your lender a million documents including your pay stubs, W-2 forms, tax returns, investment statements (if any), and the other million things they need before they ultimately approve you for the loan. But wait, I thought I was already approved? Not so fast. Pre-approval does not always mean full approval. It just means you met the initial criteria. You'll most likely get fully approved, however, if you co-operate. Just be patient please. This process takes a lot of patience. It took me about six months to fully go through all of these steps and actually move in. Be sure to have enough money in the bank to cover your closing costs and your down payment, which your lender will tell you all about. These closing costs include the lender’s fees, title fees, etc. Please don’t borrow money from someone while going through this process as it will damage your chances of getting fully approved. Certain gifts (money/donations), however, are acceptable. Just be sure to discuss the gift with your lender first. Note: the lawyer was hardly ever mentioned, but is a very important party to the process and they handle a lot of the behind the scenes work, including reviewing your loan documents. If you need a good lawyer, I have one for you. To almost every (residential) real estate transaction is the buyer (you), the buyer's realtor, the buyer's lawyer, the buyer's lender, the buyer's appraiser, the seller, the seller's realtor, the seller's lawyer, and the lender's appraiser. That's nine people already! But back to closing.
The closing process can take a while to complete and at minimum, it's about a month. The first thing that happens is you schedule an inspection of the home, which you have to pay for. If you need a good inspector, I have one for you. If the inspector finds any flaws, which you don't want to hear, they'll let you know and ultimately, the seller fixes those flaws or hands you a check in the amount of the cost of those flaws. Your lender will then order an appraisal, which you also have to pay for. Unlike the other parties to this agreement, you have no say on who the appraiser is going to be. If you could, you would probably choose a friend that'll tell the lender how great your home is and how much more the home is worth compared to the loan amount. An appraisal simply helps determine the (current) value of the home using different methods and you will rarely get fully approved for the loan if the loan amount is greater than the value of the home. As a matter of fact, you don't get fully approved for the loan until they hand you the keys and you wonder off in “la la land” to the home of your dreams. Hopefully your appraisal goes well and once it does, you sign the final loan documents, schedule a closing meeting with your lawyer and the other parties, and boom! They hand you the keys and you can finally move into that home you've always wanted!
The home buying process is not easy at all. It takes a lot of patience and you will be tested several times. This process taught me how patient I can truly be. From literally losing a condo I really wanted in the last phase to having to sell some of my stocks, this process was stressful. Ultimately, I ended up moving into the condo of my dreams and now have peace of mind. My condo has since gone up in value and I plan to be here for a long time (I really don't ever want to move again from this place). I might turn it into rental property in the future if the future woman of my dreams wants to move, but we'll see. The decision on whether to buy a home or not depends on many different factors such as your personal and financial goals, the difference between your current rent and your potential mortgage, etc. We will discuss more about this in a later article, but once you decide it’s a great idea to buy a home, these are the steps you must take. Remember, this article is for those who have already made that decision.
If you have any questions, please feel free to reach out. I hope you'll join me someday in the future as a homeowner.
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