A home is, for most of us, the biggest expenditure we will ever make. How do you figure out how much home you can afford?
New websites for homebuyers make it easy to make these calculations, once you know the key numbers to plug in. The biggest number is your gross annual income. Once you have that figured out, you will need to figure your monthly debt. Be sure to include all forms of debt like credit cards, car payments, school loans, etc. The third number you will need is the amount you can make on a down payment. If you have these three numbers, you can just plug them into a calculator, like this one from Zillow. There are quite a few such calculators available on the web. For a slightly more complex formula that includes your credit score and the zip code you’re interested in, go to Nerd Wallet.
Debt To Income Ratio
The main thing that you want to find out from these calculators is your DTI, or debt to income ratio. If you used Zillow’s calculator to figure out how much you can afford to spend on a home, you can then go to their DTI calculator and figure your overall debt to income ratio. A good DTI is considered to be 36% or lower. According to the 36% Rule, you should never let your DTI exceed 36%. In order to be considered for a Qualified Mortgage, 43% is the highest DTI that you can have. It’s important to have a Qualified Mortgage because they have better protections for borrowers, such as a limit on fees.
Another nifty tool you can play with on the Zillow site, Nerd Wallet, or other sites is a mortgage calculator. This tool can show you different interest rates for different time periods, like a 15 year mortgage versus a 30 year mortgage. Playing around with different numbers will give you a sense of how you would need to budget and what the overall cost would be for different mortgages.
Once you have a sense of how much you can spend on a home, then you will need to consider what the housing market is like in the area you want to buy. More on that to come . . .
Sources: https://www.zillow.com/home-buying-guide/can-i-afford-a-house/, https://smartasset.com/credit-cards/what-is-a-good-debt-to-income-ratio
One of the decisions you will need to make in choosing a new home is whether you want to look at pre-owned homes or new construction, either custom-built or pre-existing new construction.
It’s a matter of personal taste. Some people prefer a shiny new home that hasn’t been lived in before, while others prefer a home touched by the patina of time. There are pros and cons to purchasing a newly constructed home. Let’s explore some of the pros.
Modern Floor Plan
If you opt for custom construction, you can build your dream home with the floor plan tailored to your wants and needs. Even if you buy a pre-made new construction, you will benefit from a modern floor plan. Most new constructions feature kitchens that open up to a living room so you can cook and still be part of the action happening elsewhere in the house. In addition, new constructions typically have larger rooms and more sunlight than older houses.
Even if the house isn’t custom built, there can still be an opportunity to add custom finishes. You will just need to be in communication with the builder prior to the completion of the house. This will add on to the cost of the house, but can also be a good compromise between the expense of a custom built home and the cookie cutter quality of a non-custom build.
Newer homes feature appliances, insulation, and windows that are more energy efficient. Lower heating and cooling expenses mean a lower utility bill for owners.
New homes include “smart” technology that can allow you to automate different systems and features of the home, including alarm systems, speakers, cable, and internet.
Healthier Indoor Air
New constructions are typically made from materials that are low or zero VOC (volatile organic compound), meaning they output fewer toxic chemicals into the air.
A new home costs less to maintain, and makes monthly payments more predictable because repairs will likely be unnecessary. Warranties can provide protection for your new home for years, eliminating any up front repair costs.
Whether a new construction is an urban condo or a sprawling suburban mansion, many new constructions come with attractive amenities. Urban amenities can include parking, a pool, and security staff, while suburban locations may come with parks, pools, and other community spaces.
Buying new construction can give you more time to work on the move. For a single family home, new construction typically takes about 5 months, while condos take about 6 months. This means you don’t have to rush into buying your new home.
Reach out to me if you would like examples of new construction communities in the area, building lots, and/or builders I recommend.
When it comes to choosing a new home, it’s important to define your must-haves. These are items on your wishlist that are non-negotiable. It’s important to separate your list of must-haves from the things that you want, but which may be negotiable. There are a number of different aspects of a home to consider when coming up with your list of must-haves. Here are the most important.
First you need to determine what price range you can afford. Then you will be able to be realistic when looking at potential homes. The size of your down payment, your monthly payment, and your annual income will all affect how affordable your mortgage is.
Type of Homes
Homes come in a variety of types and it’s important to consider what type is right for you. Detached, single-family homes generally offer the most privacy and freedom. However, you will be solely responsible for all repairs and up-keep. Townhomes, and condominiums are other options in housing. They offer less privacy but can be more affordable. In a townhome, you will be sharing walls with other people. In the case of a condominium, you will own the unit you live in and have a stake in the whole building as well. There are pros and cons with each option.
Sometimes, your first house is a great stepping stone to build equity or to build your investment portfolio. If you have questions about what type of home you can afford in today's market, contact me here.
The neighborhood that surrounds your home is just as important as the home itself. It will become your community. Getting to know the neighborhood that a potential home is located in is an important step. The state of the neighborhood and how it may change in the future will affect the future value of your home. Spend some time hanging out in the neighborhood and consider how important the following aspects of a neighborhood are:
For those who have or are planning to have children, the local schools are an important part of the equation. Even if you do not have or plan to have children, good schools can be a sign of a thriving neighborhood and can make it easier to sell your house in the future.
Some aspects of a school to research and consider are:
Other aspects of the home
Some other aspects of a home to consider in determining what you really want are:
Determining your must-haves for a home in the following areas will help you narrow down your search and ensure that your dream home is also a practical home that meets your needs.
If you are looking for a new home, there are many real estate professionals out there who will want to work with you. How do you select the right real estate agent to be on your team?
Real Estate Agent, Realtor, or Broker?
First, let’s clarify some of the terminology around real estate professionals, which can be confusing. A real estate agent is someone who acts as a guide or counselor in the process of buying or selling property. Real estate agents are required to have a license in the U.S. and are trained to handle the legal aspect of buying and selling property, including homes. Some agents specialize in either buying or selling, while other agents assist with both transactions.
A broker is also licensed and must have been a real estate agent prior to becoming a broker.
Legally, a real estate agent must be managed by a broker, who takes legal responsibility for the agent’s actions. A broker may manage a firm of real estate agents, work as a sole proprietor, or work under another broker.
A Realtor is a real estate agent or broker who is part of the National Association of Realtors, or NAR. NAR members pay dues and are held to a certain standard of ethics.
Although all real estate agents must be licensed to ensure a certain level of expertise, that doesn’t mean all agents are right for you. It’s important to find an agent who is the right fit for your situation.
A real estate agent will be guiding you through what may be the most significant financial transaction of your life. Some important qualities to look for in an agent are responsiveness,
knowledge of the local area and market, expertise and negotiation skills.
Referrals are a good source of information on whether a potential real estate agent has these qualities. It’s a good idea to ask people you know about real estate agents they’ve worked with in the past. Another resource is the Better Business Bureau ratings.
Looking at a potential agent’s listings is also a valuable way to see if they are a good fit for you. If most of their listings are different in location or type from what you are looking for, the chances are they aren’t the right agent for you.
Questions to Ask
It’s very important to meet an agent in person before you decide on whether you want to work with them. You can get a better sense of your compatibility with an agent in person.
The National Association of Exclusive Buyer Agents has compiled a list of questions to ask a potential real estate agent.
I'm happy to answer these questions or any others you may have. Let's grab coffee or meet up at my office. Feel free to email me here or call or text me at 540 246-9067.
Buying a new home doesn’t have to be complicated. Here are 10 Simple Steps to follow to buy your first home.
1. Credit Score
Find out your credit score before you start talking to lenders, find out your credit score and get a free report from
Annualcreditreport.com. Credit scores range from 350 to 850. The higher your credit rating is, the lower the interest rate on your mortgage will be. Several factors determine your credit score:
A good credit score is considered to be 720 or higher, but you can usually get an FHA loan if your credit is at least 580.
Calculate what you can afford to spend. Try online tools like Nerd Wallet. You also need to consider how much you want to spend. You may not want to make a large monthly payment, even if you are approved for a large mortgage. To get a sense of what you can afford in your area, start attending open houses and doing research online for houses that are on the market.
3. Contact a REALTOR®
Find the right real estate agent. Your real estate agent will be your guide, counselor, and confidant through this sometimes challenging process. It's important to choose a REALTOR® who will look out for your best interest and has high ethical standards. Researching the agent's firm, reading their reviews, and interviewing agents are all good steps before agreeing to work with someone long term.
4. Get Pre-Approved
Get pre-approved for a loan before you fall in love with a home, you want to know that you’ll actually be able to buy it. Find a lender first and get pre-approved for a loan before you start house-shopping. I highly recommend you use a local lender because they have more accountability than online lenders you can't see face to face.
In pre-approval, a lender obtains your credit information and then decides how much money they would be willing to lend you. They will give you an official letter stating this. It’s smart to do this because if you end up in a bidding war, this may give you an advantage because the seller will see you’ve already been approved for a loan.
Getting pre-approved does not mean you have to ultimately get a loan from the lender who approves you. You are still free to look at different lenders and compare them.
Contact me for recommended lenders:
5. Start Looking at Homes
Start the shopping process. Talk to your agent and identify your must-haves and your wants. Also nail down your price range and the neighborhoods you want to look in. Your realtor will assist you with finding houses online and touring them. You may be surprised by the opportunities that you find!
To get custom alerts of houses that meet your criteria, fill out this simple form!
6. Make an Offer
Make an offer on the home. This is often the part that makes people nervous. Don’t worry! Working with a great agent will ensure that you make the best possible offer on your dream home. Your agent will be able to advise you whether your offer should be at the asking price or perhaps above or below, depending on the local market. Your agent will also help you with details such as whether there are any contingencies to your offer, or if you will want a home inspection. Once you make an offer, you may get a “yes”, a “no”, or a counter offer. Rely on your agent to guide you through this process.
7. Use a Licensed Inspector
Do a home inspection. If you decided you want a home inspection as part of your offer, this is the next step. I recommend you be present for the inspection if at all possible. A home inspector will thoroughly examine the home and provide a report about the house. The report can be useful as it will often have more information about your house than you need for the negotiation process.
When negotiating repairs, the contract calls us to focus on material defects and not updates or maintenance items. This often comes up when exploring heating and cooling systems (HVAC). If the HVAC is older than it's statistical life but working properly, replacing it would be an upgrade/update as it is not a material defect (not working properly).
The home inspection is also an opportunity for you to spend time in your new home envisioning what you want it to look like. Enjoy this exciting time!
Contact me for my recommended inspectors:
8. Insurance and Utilities
Unless you are already a homeowner, you will need to find an insurance agent and purchase homeowner’s insurance. This will be required by your lender. If you owned a home to begin with, just tell your insurance agent you’re buying a new home and they will make a new policy for you. Homeownership is necessary to protect your investment even if you don’t have a mortgage.
It’s also important that you contact your utility companies to set up services so they begin the day of settlement. You’ll want to move into a new home with climate control and running water!
9. Close on the House
Closing day is a very exciting day! There will be a lot of paper signing, but don’t let it wear you out. You’re almost done!
You will need to bring a photo ID to settlement and the funds you need to close on the house. If you plan on wiring money, beware of Wire Fraud. More information here...
10. Move Into Your New Home!
Yay! You’re finally done! Get the keys from the former owner and move in. The move in day will vary based on your contract, so it may be on the same day that you sign the closing papers, or it may be a few days later. Either way, you are now officially a homeowner and can start this exciting new chapter in your life. Congratulations!
Owning one’s own home is truly part of the American dream. Home ownership means many different things, being rooted and grounded in a community, having the freedom of one’s own space, establishing a legacy to pass down to future generations, and building wealth are a few of the key benefits of home ownership.
Buying a house is not just a matter of material ownership, of owning a piece of land with a structure on it, but it is also a matter of emotional groundedness, putting down roots in a certain place and calling it your home. Being rooted in a place enriches the community at large as well as the individuals who own the home. Having roots in a home kicks off a legacy that can last for many generations as the home is passed down. A well-made house can last much longer than any other material possession that the modern person owns.
Home ownership is also synonymous with freedom. When you own a property, you are at liberty to renovate, to add on, to change, to transform in the way you choose. In your own home, you have a sanctuary where you are able to truly be yourself and express yourself. From renovation to decoration, a home is an expression of the individuality of its owners. Owning a home gives you a space where you can do your own thing freely, whether that’s playing the tuba, dancing the tango, or making sculptures out of toothpicks.
Owning a home has multiple financial benefits as well. A homeowner’s monthly contribution to their mortgage goes toward building something of permanent value, as opposed to rent, which is only temporary. In some cases, a mortgage may actually be less expensive than paying rent. A well-kept home will also appreciate in value over time, so home owners who keep their homes in good shape over the long haul will end up owning something worth more than the price they paid for it.
There are many idioms about home- a man’s home is his castle, home is where the heart is, there’s no place like home, make yourself at home, homesick, etc. This all points to the primacy of home, and home ownership, in our collective hearts and minds. A home is a wise investment on so many levels, financial, material, and emotional.
There are a plethora of misconceptions and myths concerning real estate agents in our society today. While these do hold true for some unethical agents, these myths are incorrect and not reflective of the business practices we employ here at Harrisonburg Homeowner.
Agents will do or say anything to make a sale.
While there are some agents that make the sale of the home their utmost, and singular goal, that is not our intention here at Harrisonburg Homeowner. Reputation, and client satisfaction is far more important to us than ensuring the sale of the home by any means necessary. In a small town like Harrisonburg, building a reputation for honesty, transparency, and ethical practices, is far more important for organic growth of a business than one commission check and a disgruntled client. If we do not feel that an offer is in the best interest for you we will let you know, although the ultimate decision is always up to you, the client.
You want to go with the agent that offers the lowest commission.
To save the most money from the sale of a home, wouldn’t you want to go with the agent that charges the least? In short, no. You get what you pay for. If an agent is able to charge that little for their commission it is likely because they will do the bare minimum to sell your home. They will push the sale through by any means possible and may skirt marketing, accurate comparables, adequate home inspections, or employ other unethical tactics. With all of the costs of marketing, client interaction, showings, and more, top agents earn their commission.
Go with the agent that offers the best listing price.
There are certain agents that attempt to entice clients by offering a listing price far above market predictions. They do this in order to ensure that the client signs a brokerage agreement with them. Even though these agents know they likely will not be able to sell the home, they now represent the client for the timeframe set forth in the brokerage agreement. Eventually the client will become frustrated by the lack of offers and lower the listing price to what it should have been initially. And in the end, these unethical agents still get a commission even though they steered the client wrong in the beginning. It is far better to go with an agent that will be able to show you comparables, and explain how they came to their conclusion for their listing price. This will likely result in your home being on the market for a shorter period of time and you should receive more offers.
FSBOs (For Sale By Owner) will save you money.
A lot of people think that they are capable of selling their home without a real estate agent. For some, this may be true; however, most people simply do not have the time and the resources to adequately see a sale through. They don’t have access to a vast network of other agents, they don’t have access to the MLS, they are unsure of effective marketing practices, and they are unfamiliar with writing contracts. For most people, the purchase or sale of a house is the largest financial decision of their lives, do you really want to wing it? This could result in you being sued, or taken advantage of which may end up costing you more financially, and certainly more emotionally, than if you had hired an ethical real estate agent from the start.
Agents should tell you about crime, school, and ethnic makeup of neighborhoods you are interested in.
Due to federal fair housing laws, agents are not allowed to discuss certain classes with their clients. This prevents the agent from being allowed to discuss things related to these protected classes like neighborhood racial and religious makeup, crime statistics, and even information about the school district. What the agent can do is point you in the right direction so that you can research these statistics and facts individually.
We all hear stories of bidding wars on houses. In some markets, houses sell for above asking price consistently. If you do a little online research, you may find a lot of advice like waiving inspections or getting your family members involved so you can pay in all cash. All these factors could be necessary to win a competitive house in some markets, but how about Harrisonburg and Rockingham? Let's break down the different factors.
Is Cash King?
Here is why people say cash is king. If you pay for a house in cash, you don't need to follow the bank's guidelines to buy a house. In really hot markets, houses sell for more than asking price and the appraisals can't keep up to the market demand. So, by offering a seller a deal in cash (with no appraisal contingency added), the sellers know that you will be able to buy the house at what you are offering.
Another big factor is financing takes longer than cash deals. You can close on a house in two weeks with cash deals. Most of the time, getting a mortgage will take 30-45 days.
So, do you need to bring cash to close on a competitive house in our market? Most of the time, no. It's not unheard of to have cash deals in the area, but prices are not going drastically above appraised value, therefore, waiving appraisal contingencies is not common practice.
So How Do You Win Your Dream House?
For the most part, the highest price will win. The best way to secure the house and not give too high of an offer is by doing an escalation clause. An example of an escalation clause looks like this: John Smith offers $200,000 on 1234 Main St but John is willing to go $10k above the seller's offer price.
In the event of multiple contract presentations for the property located at 1234 Main St, John's offer increases by $500 above any alternative offer, providing that the maximum purchase price shall not exceed $210,000. If Seller receives an offer from a third party which is higher than the offer contained in this contract, Seller will provide John (likely via his agent) with a copy of that higher third party offer. Seller reserves the right to delete the name of the third party offeror to protect privacy. Seller represents and warrants that the third party offer is bona fide.
Aside from purchase price, there are other factors that can greatly help you win a competitive house.
The more money you put towards a down payment, the more secure of a buyer you are in the eyes of the seller. The loan programs that let you put little to no money down are excellent programs, but they can often come with difficult stipulations. For example, you can't have cracked windows on a house if you use an FHA loan. Also, having a full down payment can be an indication that you are financially secure and there won't be any insurmountable surprises with your credit.
Another factor that ties into financing is how long will it take you to get the loan.
If your offer is the same as someone else's but you are able to close faster, you may win the bid. Being flexible on timing is important because if the seller has to find another house to move into, a fast closing will only stress them out. On a vacant house, faster is generally better and the main factor is getting the mortgage. In a pinch, I can get you financing faster than 30 days. Contact me directly to talk more about how to get the fastest financing possible.
The less contingencies you have the stronger the offer will be. This mainly refers to the home inspection contingency since we already addressed the appraisal. That being said, if you are not an expert, I do not recommend you waive your home inspection contingency. In this market, it is very common to get a home inspection and this will likely not cost you the bid.
Offering higher amounts of earnest money helps show how serious you are about the house. In some markets, people offer $60k as earnest money. In our market, $500-$2,000 is more common. If you want a full description on earnest money and how I would help you protect it, click here.
If you have any other questions about how to compete in a bidding war, call or email me.
Avoid Changing your Financial Profile
If you have your house under contract, this probably means that you have gotten a pre-approval/qualification letter. Your lender will now make a formal loan application. This application is based on your finances at that point. It is vital that you don't make significant changes to you finances until after you close. Problems can occur if you buy a car, open new lines of credit, change jobs, acquire other significant debt, etc. It is a good idea to talk to your lender before making significant purchases that would out you into debt. You also don't want to spend your down payment/ closing costs.
From there, you will have a number of items to complete before closing. See the check list below.
Contract to Closing Check List
Most people who dream of buying a house usually will begin by scouring sites like Zillow for their dream home. If one comes up that they are interested in enough, people often call the listing agent, or another agent they know, to go see the house. Is this the best way to begin the home buying process?
This is certainly not a bad way to start the process. However, if you find your dream home on the internet and then fall in love with it in person, it can be somewhat devastating to learn that you may not be comfortable with or able to make the monthly payment. With this in mind, I would urge everyone to speak with a bank before getting too invested in the search process.
Furthermore, you will need to have a pre-approval letter from a bank to make an offer on a property. In Harrisonburg/Rockingham's current market, desirable houses that are priced well do not last long. Should your perfect house come on the market, you will want to have the ability move quickly. For perspective, I have recently sold two houses before they hit the market. So, having your pre-approval letter ready to go is vital.
If you or someone you know is looking to star the home buying process, contact me for recommendations on lenders and next steps: Phone or email.