8 easy steps for Millennials
Buying a home can be stressful but exciting. There are certain prudent steps you can take to minimize the frustration and ensure that you end up with the home you want.
- Save up your down payment
The first thing you need to do when you’re thinking about buying a home is to make sure you have enough cash to put down on the house. While it’s prudent to put at least 20% of the home’s value down, there are many programs available that allow you to put much less down. But be wary of putting too little down, if the value of your home drops and you have little or no equity (because you had a small down payment) you’ll end up “underwater” on your home. Being underwater on your home is just a metaphorical way of saying you owe more on your home than it’s worth. It’s not a fun position to be in. As an example, if you put $1,000 down against a $100,000 house, and the value of the house drops to $90,000, you’re still on the hook for $99,000. Contrast that with had you put 20% down, in which case you would owe $80,000. In this scenario, if the value of your home drops 10% to 90,000 you are still able to sell the home and walk away with 10,000 in cash (ignoring transaction costs, taxes, etc.)
If you already own a home, consider tapping the existing equity in your home as a source for a down payment on the home you may or may not have picked out. One way to do this is through a bridge loan, whereby you refinance your existing mortgage to pull the equity out of your home to apply to a mortgage on another home. Alternatively you can wait until you have sold your home and have cash in hand before applying it to a new mortgage although there are obvious downsides to this approach; namely, where will you live in between the selling of your house and the purchasing of the next house.
2. Get prequalified
There really should be no reason to ask to view a house if you aren’t even sure roughly how much it’s going to cost you or whether a bank will lend money to you. Indeed, many Realtors won’t even show a house to a person who has not received at least a prequalification for a mortgage loan. Getting pre-qualification or qualification for a loan shows that you as a buyer are serious about your intention. The process will also help you decide how much of a mortgage you can truly afford.
3. Hire a Realtor
People often try to skip the commission checks that get split between participating Realtors by attempting to buy or sell their house on their own without the help of a Realtor. While their efforts are noble, you should be very wary of this approach. There are many legal requirements that need to happen for a transaction of property to take place. There are contracts and disclosures that need to be made and if any step in the process isn’t documented appropriately, you may be setting yourself up for a giant liability down the road. Realtors can also assist in appropriately pricing your house. Most people only buy a few houses in their lifetime, Realtors assist people to buy and sell as much as several dozen houses a year. Don’t hop over a dollar to save a dime, hire a Realtor.
4. Make your offer!
Any Realtor worth his/her salt should walk you through the offer/counter-offer process. You should obviously avoid insultingly low offers. But you should also know that most sellers are planning on offers that come in below-asking price and as such have padded the asking price. That may not be the case in a really hot real estate market where offers routinely exceed the asking price, but you’ll probably be aware of such a hot market should it exist.
An accepted offer will require the buyer to put down “earnest money” which shows the seller that you are serious about your offer. If you walk away without an acceptable reason you will lose your deposit. Acceptable reasons include any unresolved issues that arise in the inspection or the buyer failing to qualify for financing. But don’t worry because if the deal goes through as you intend, you will be credited that money toward your down payment at closing.
5. Get an inspection
Whether it’s required or not, you should absolutely get an inspection. The few hundred dollars that it costs you could save you big money down the road. Here’s the thing with inspections, they literally always turn up something. Generally speaking, you are given a chance to review the inspection report and ask that the seller make the most important fixes. For example, the first house I purchased needed a new slab poured in the garage and a wall to be stabilized. The sellers ended up forking over $20,000 for that fix, which is a fix I would have been on the hook for had I not had the inspection. In fact, the seller wasn’t even aware of the problem because he had purchased the property with no inspection.
6. Negotiate fixes in the inspection response
Don’t worry about scaring the seller out of a deal. A good Realtor will let the seller know that certain issues may arise in the inspection and encourage the seller to have a contingency plan in place were they asked to make certain fixes. When my wife and I went to sell the house mentioned in the point above, we knew there were issues that could come up in the inspection. We set aside what we thought an appropriate amount for fixes might be. We got lucky in a few places (the buyer didn’t ask for payment) and unlucky in a few (the buyer asked for a little more than we planned) but overall it averaged out to what we had budgeted. The point is, these are fixes that you can have somebody else pay to make. You’d be silly not to.
7. Do a final walkthrough
After the seller has claimed to have fixed all of the things in the inspection response, you will want to do a final walkthrough to ensure that those things have indeed been fixed. It’s important to hold the seller to their word, especially when you may be dealing with a flip company whose primary incentive is to offload the property as quickly and profitably as possible.
Make sure you stretch your dominant hand before the closing day because you are going to be signing A LOT of papers. But this is the final step! Typically the sellers will either hand over the keys at closing or will request a short time frame to allow for moving. You can breathe a sigh of relief because all the uncertainty around the deal has now settled. Here you will be required to pay for Title Insurance which is just an insurance policy you pay for that insures the title of the house remains in your name. You pay a one-time title insurance premium and the title company will verify that the title is clear of any unknown claims of ownership. Also, be sure to carefully read the closing disclosure. This document will detail the exact mortgage payments, the interest rate you will be paying, how long you will be paying for and any additional closing costs.
Erik Goodge is the owner of uVest Advisory Group, LLC in Evansville, Indiana which specializes in subscription-based financial planning for millennials. He holds a B.S. in Economics and Cognitive Science from the University of Evansville.