I have quite a few young friends who are starting to look into making their first home purchase. It's not a surprise that they usually come to me and say, "So what do I do first?" Well I'm glad you asked because I'm about to list everything you need to know before purchasing your first property.There are many factors that come into play and many hidden costs that people usually don't think of when starting the home buying process. This article will explain most of them so that you are better prepared before moving forward. The steps begin after selecting an agent. But selecting the right agent is an entirely separate discussion and is as a very important step. More to be posted soon about finding and working with the right agent!
STEPS TO PURCHASING YOUR FIRST HOME
Get Pre-Approved Through A Local Lender
Since you are a first time home buyer, I'm assuming that you aren't paying cash for your first purchase. If you are, congratulations you already have a jump start on most of us. But for those of us that can't purchase with cash, we will have to get pre-approved through a lender to see what they say we can afford. Now what they say you can afford and what you think you can afford are usually different, so see step two. Getting the pre-approval is a quick and usually free process where you will be asked some questions and the bank tells you what they believe they can loan you based on your credit, income and current debt. They might say you're pre-approved for $200,000 but check the numbers and see what the payment would be on that amount. You might find out that the $200,000 range is a little too pricy for you and there's nothing wrong with that. A lender approves you based on allowing you to pay out as much as 45% in your total income for your debt not including living expenses. Many first time home buyers already have in mind what monthly payment is comfortable so start by sharing that with your lender.
Now you probably noticed that I said "Local Lender." From experience, I quickly learned that lenders who know nothing about the area tend to be tougher to deal with than local lenders. I'm not saying you have to use a local company, but I will tell you that it'll save you a few headaches. The pre-approval letter they give you will need to be submitted with any offer you make on a home or condo.
Figure Out What You Can Afford
The first step when it comes to purchasing a home is knowing your price range. Remember that you'll have this mortgage for a minimum of 15 years but most likely 30 unless you sell the home during the mortgage period. Because this is a long term commitment it's important to make sure you can afford your payment with the interest. There are plenty of online tools for calculating mortgage payments including one on our website under the BUYERS tab. If you don't know the current interest rates or what your current credit situation is, it might be hard to get an accurate number. The best thing to do is speak with a Realtor or Lender and ask them to help you calculate your mortgage.
In addition to your mortgage, you will most likely have to pay PMI (Private Mortgage Insurance). PMI is required unless you either put 20% down which most first time buyers can't afford, or if you are a veteran. Veteran can get a VA loan. VA loans are some of the best loans you can get and don't require money down or PMI. If you have to pay PMI, just ask your lender what it would be depending on the loan you get and the amount. You want to get the total monthly payment which may include your escrow for taxes, insurance and private mortgage insurance.
Another monthly cost that you might have, especially in the Myrtle Beach area, is HOA fees and HOA assessments. HOA stands for Home Owners Association. They usually charge a monthly fee, depending on what neighborhood you live in, which can be from a low amount up to what may seem like a lot. That fee usually includes the maintenance of common areas and pools. It will occasionally include some of your utilities as well, especially on condos. A lot of condo HOAs will also cover your home owners insurance in the HOA fee. HOA dues are not a bad thing. For someone who likes a monthly budget a condo with an HOA fee is a great option. Home Owners Associations are there to keep your property value high and make sure all common areas are well maintained and the properties are kept consistent thru out the neighborhood.
HOA assessments are something you will want to have your Realtor check on as well. Sometimes, the HOA will make repairs to common areas or the outside of condo buildings to bring them up to modern standards or replace damages. The owners of units in that building will usually be assessed for the repairs and have to pay higher fees or installments towards the repairs over time. These assessments have to be paid at closing regardless of when they are actually due. And the buyer usually pays them. So check and see if there are any assessments before you find out too late!
Home Owners Insurance is another cost that you'll have. It is required by lenders and is smart to have even if it wasn't required. The cost of insurance varies depending on the location of your home as well as size and price. If your home is in a flood zone for example, your insurance will be much higher than in a rural area with low flood risks. Ask your Realtor, they should know the flood zones and can get you in touch with an insurance agent that can give you a quote. If you're buying a condo, ask if the HOA fee includes the home owners insurance. If it does, you don't need to worry about it because it is included in the fees you pay to the HOA. If buying a condo and the HOA includes insurance, you will still want to get H06 insurance which covers your personal belongings inside of the condo. It's usually very cheap and easy to get.
The last main cost that you'll have when purchasing a home are property taxes. In South Carolina, taxes are fairly cheap in general especially for primary residents. Ask your Realtor what the taxes are on any home that you're interested in and may consider purchasing. When buying a home in the Myrtle Beach area, the agent can pull the tax record for your quite easily. If you aren't a primary SC resident, your taxes will be slightly higher. So keep that in mind when searching for a home. Knowing some of the costs up front will help you tremendously. The lender you choose can take the figures for these items and with a little information about you, tell you the same day what your maximum budget for a home will be and what the approximate payment on that will be as well. Now you are ready to start looking to buy a home.
Figure Out What Type Of Property You Want (condo vs. home, price range, areas you prefer, etc..)
This step I'll leave short because it's fairly straightforward. Figure out if you want a home, condo or town home first. You need to figure out what price range you want to stay within based on the information your lender gives you. Most of that will be figured out between step one and two. You also need to research the different areas and see what areas you'd want to live in such as Little River, North Myrtle Beach, Myrtle Beach, etc. Keep in mind if you're looking for a home on an acre or two of land with no HOA fees, you may not wish to look in Myrtle and North Myrtle Beach as they are not rural areas and land costs more so you won't get much home if you have a large lot. You won't find very many homes in those two cities with an acre of land and when you do, it is costly compared other areas. You'd have a better chance looking in Conway or Loris and Longs as well.
Figure out how much square footage you want and if you're not sure, just let your agent know how many bedrooms and bathrooms you want and you can figure out the square footage you like as you look. If you're not sure whether you want to go the condo or home route, let your agent guide you. He or she can tell you the pros and cons of each one. There are many cost differences and you need to weigh them out before deciding on which type of property you'd like to pursue.
Go Over Closing Costs Before Making Any Offers
Many people have no idea of the costs that go into purchasing a home before you can even call it your own. Closing costs are what you have to pay at closing for the property to be switched from the seller to the buyer's possession. Closing costs also include a reserve amount your lender will require. Most lenders will want 2-3 months of taxes, insurance and PMI paid at closing to put into an account to be sure they have enough funds to cover your first year of escrow. You will also have a lender fee which is the fee the lender charges to originate your loan. Other closing costs include title abstracting, title insurance and attorney fee. There are costs both on the seller's and buyer's side and you need to be aware of what they are. The costs vary but depending on the lender you have and the home you are looking to buy, the costs can be estimated fairly close to what they will actually be. Lenders all have to provide you with a good faith estimate and they have a guide they must follow and be pretty accurate in their estimates.
The next expense will be an earnest money deposit. This is money that you put down in good faith so that if you backed out of the contract for an unjustified reason, the sellers would have something for you wasting their time. The rule here is to never make an offer if you aren't 100% sure about the home or you can lose that earnest money if the deal falls through on your behalf. Typically, I collect $1,000 in earnest money up front but the numbers vary. There is no set amount for what you have to put down. At closing, that $1,000 will go towards the purchase of the property. This isn't collected usually until an offer is accepted. But sometimes an agent will ask for it so they can send a copy with the offer to show how serious the buyer is in making the offer. There are contingencies that your realtor can put in an offer that will allow a refund of the earnest money should certain things happen such as your loan isn't approved, the home inspection comes back that the home has structural damage the seller is unwilling to repair. Talk to your agent. He or she can give you the items that will go into the contract to best protect your earnest money. The goal is to introduce a buyer to a seller and have a closing at the end, not keeping your earnest money for no reason.
The next expense after an offer is accepted would be your home inspection and CL 100 report. The CL 100 is the form used during a termite inspection. It is usually required and costs around $100. The home inspection is a very important step and is recommended before purchasing any property. The home inspection cost depends on the size of the home you're buying but usually runs between $250-$500. If there are any structural damages or any safety hazards, the home inspector will find it. Sometimes, the same company can do both inspections but usually, they are done by two separate companies. A termite inspection is required by most lenders, but not always. A home inspection is recommended but not required. A good agent will always tell you to spend that extra money to be sure the home you are looking to buy has no major damage.
If anything is found wrong that is of significance like a roof leak, HVAC issues, floor damage or any foundation and structural issues, the buyer can request repairs. The seller can agree to repair, but can refuse. If it is a major expense and the seller refuses to repair or negotiate the price, the buyer can then choose to rescind the contract and request a refund of the earnest money.
The final costs that you will have is your attorney fees. South Carolina closings are handled by real estate attorneys. There are many attorneys to choose from and all of their fees differ slightly. Most of their fees involve doing the title work and making sure the title to the property is clean as well as getting you title insurance, binder fees, currier fees and the attorneys personal fee for handling your closing. Most realtors have a preferred attorney list they can provide to you which will help you in deciding which attorney would best suit your needs.
I won't put any exact estimates in the article but you can contact your Realtor to get an accurate number. The purpose of this article isn't to explain how much the fees will be, but to make first time home buyers aware of what fees exist. These are the main costs that are considered "Closing Costs" but there are other costs involved such as your down payment, any repairs you have to make, and any HOA dues that are required to be paid up front. Any Realtor will be able to get these costs for you so you're aware of how much money you'll be spending at your closing. Buying a home is a giant step, but it can be very rewarding and not to mention will get you out of the rental world and give you something to show for your money.
Making An Offer
So you've figured out what you can afford, you know about how much your closing expenses will be. You've found the property you like, now it's time to place an offer. This part is very easy and is handled mostly by your Realtor. They can type up the offer and send it to you or you can sign in person. The offer will contain all of the information about the property you are purchasing as well as what amount you are offering. It's an 8 page document that you need to read carefully before signing.
Have your Realtor go over it step by step with you so you understand everything in the contract. Now I want to answer a question I believe a few people will have when getting to this part of the article. "If for some reason the deal falls through because I can't get financed, do I lose my earnest money?" No, there is a financing contingency in SC contracts that states if the deal falls through because the bank ends up not loaning you the money, you aren't held accountable. There is, however, a due diligence time frame period for you finding out whether or not you can get a loan. The timeframe allowed can be put into a contract. This is why having the right, experienced buyers' agent is so important. It is his or her job to protect you with the right contingencies and timeframes written into the contract.
There are also contingencies on the home inspection and appraisal of the home that allow you to rescind the contract without the risk of losing your earnest money. Ask your Realtor about all of the contingencies so that you completely understand the contract. Once you understand your offer and place it, usually the agent will submit it. The listing agent representing the seller will review the offer with their client and either decline, accept or counter offer. Once there is an agreement on the offer, you have a ratified contract. Congratulations, now the real fun begins.
My Offer Has Been Accepted, Now What
Now that you have a ratified contract, it's time for the Lender, Attorney, and Realtor to get to work. The lender will be in contact with you constantly asking for every document you could ever think of. It's insane the amount of information they will ask for, so be prepared and don't try to lie about anything. The banks will find out everything anyway so send them what they need so they can start processing your loan. Be patient and know you are not the only one they ask to give them everything except your first born child. What would you ask to see if you were loaning someone hundreds of thousands of dollars?
During this time, you'll be hiring a closing attorney. Once you have them hired, their work will begin. They will stay in contact with the lender while doing your title work and getting everything prepared for closing. They will get the sellers' information and type up a document known (up until this year) as the HUD Statement. It's now called a settlement statement but it just lists all of the costs for both sides and where all of the money is going. They will also order your title insurance and make sure everything is set to close on time.
While the attorney and lender are doing their job, your agent will be in charge of making sure the home inspection is done on time, the termite inspection and any other items that need to be completed. They will negotiate any repairs and make changes to the contract if needed. They will also be keeping in touch with the lender and attorney daily to insure a smooth closing and that everything is done on time. You will be updated mostly by your lender and your realtor thru out the process until closing day.
During this time, you'll be talking with your loan processor so much that you'll almost forget that two other people are working for you. The most important thing that you can do as a buyer is to get the bank anything they need quickly when they ask for it so there are no delays. Once you get everything to them, just keep in contact with your Realtor and wait for the bank to issue a closing date. The closing period usually takes about 45 days from the date of the accepted offer. It's much quicker with cash for obvious reasons.
So everything has been worked out, the attorney and lender have issued a closing date, now what do I do? Well the hard part is finally over. The bank should have called you and let you know that your loan has made it through final approval. The attorney will usually send you the settlement statement three days or more prior to closing. It is now a requirement that if you are obtaining a loan, a three day period must be given for you to review all costs and closing information before the attorney can close the loan. The only exception would be a cash sale. There will be a box showing how much money you need to bring to closing. Whatever amount you have to bring will need to be certified funds in a cashiers check. Attorneys will not accept personal checks for closing costs or down payment. Just talk to your bank, they can give you a certified bank check no problem.
The closing process usually takes about an hour or so depending on how quick the attorney is and the questions you may have thru out the closing. They will go over your loan with you as well as all of your expenses. The attorney will also give you advice on making extra payments to save money on interest and other important nuggets that you need to absorb. Usually the day of closing, you will do a walkthrough of the home to make sure everything looks the way it's supposed to before attending closing.
The seller by the way the SC contract is written has to leave all utilities on until after the walkthrough unless there was other arrangements made. In some situations you may have the power turned on in your name prior to closing such as with foreclosures and bankruptcy sales. If the power and utilities are not switched before closing date, you will need to change the utilities over into your name the day of or day before closing. Your Realtor will give you the contact for all of the utility companies. Once you sign everything, your part is done but you still have to wait on the seller to sign their documents. You also have to wait until the deed records at the court house in Conway before the home is actually yours. Sometimes the deed won't record until the following day so keep that in mind. The agent will NOT and CANNOT give you keys to your home until the attorney calls and says the deed is recorded.
And that just about sums it up....
Although issues may arise and change the flow of the deal, this is typically the steps to buying a home. Each sale is different and I've never had two deals with the same exact outcome and costs. So use this information as a guide but not as the exact way the process always works. The most important thing you can do is to ask questions. Ask your Realtor, Lender, and Attorney. They will be there to guide you along the way.
If you have any questions or comments, please use the comment box and I or someone in our office will answer your questions as soon as possible. Thank you for taking the time to read my article and check back periodically for new information!