Buying a Home
Buying a home could be the biggest financial decision you make in a lifetime. The process may feel daunting and complex, but with a general understanding of what to expect and the valuable guidance of a REALTOR®, your journey to home ownership can be an enjoyable and streamlined experience.
It’s important to have experts to guide you through significant life events. When you experience a serious health issue, you seek the help of a medical professional. In the case of complicated tax issues, you seek the advice of a tax specialist. Have a legal concern? The first call is your attorney.
Real estate transactions are similarly important and complex. When making one of the largest investments of your lifetime, you need the guidance and expertise of a professional. REALTORS® stand ready to assist you every step of the way with a strategic plan of action and a commitment to protecting your best interests.
When you are ready to purchase a home, make sure that partnering with a REALTOR® is at the top of your list.
Need to find a REALTOR®? Try out our REALTOR® search tool.
Importance of your credit score
The key to financing your home purchase is your credit. Lenders rely on your credit score to determine loan eligibility. The higher your credit score, the more mortgage options and favorable interest rates are available to you.
As you consider purchasing a home, gaining insight into the details of your credit is imperative. Begin by obtaining your personal credit report. Not only will the report provide you a snapshot of your credit score, but also specific information about the factors that impact that score including debts, payment history and credit inquires.
Federal law allows you a free copy of your credit report every 12 months. You can request your free report at www.annualcreditreport.com. With your credit report in hand, closely review it for any errors. If you discover any errors, act quickly to resolve them through the credit bureau.
If your credit report reveals a poor credit score, it can make it difficult to secure a mortgage. However, there are many ways to improve your credit standing as you work toward home ownership. Here are some tips to improve your credit score:
- Payment History: Late payments and past due bills drive down your score. It’s important to become current and remain current on debts.
- Amounts Owed: High credit card balances and debt-to-credit ratios also negatively impact your scores. Work on paying down credit card balances and other loans.
- New Credit: Avoid opening new accounts and unnecessary credit inquiries such as loan or credit applications.
Credit Counseling Agencies can also help in improving your credit report. You can find a list of government-approved credit counseling agencies on the U.S. Department of Justice website.
How much can you afford?
- Down payment
- Most traditional mortgages require a down payment, a fact that can be discouraging to many prospective buyers. It’s important to note that many of the biggest concerns related to the subject of down payments are the result of misinformation. Here are a few of the biggest down payment myths.
- Myth 1: You need a 20% down payment.
- Truth: Roughly 60% of homebuyers financed their purchase using a down payment of 6% or less.
- Myth 2: You can’t qualify for low down payment programs unless you are a first-time buyer.
- Truth: Down payment programs are available to many qualified homebuyers regardless of how many homes they have purchased.
- Myth 3: It’s difficult to qualify for down payment assistance programs.
- Truth: Assistance programs are available for buyers with various income levels, credit scores and purchase histories.
- Financial assistance programs
- There are more than 2,500 homebuyer programs available across the country to help potential homeowners with their down payment. Program eligibility can be based on a wide variety of criteria. This down payment program tool [link to page with DPR widget] will help you find the financial assistance program that’s right for you.
- Programs are also available to help prospective home buyers save money for a home purchase. The Missouri First-Time Homebuyer Savings Account is a tax-deductible savings account dedicated to the purchase of a home. Annual contributions can be up to $3,200 for married couples filing a joint return and $1,600 for all other filers. Tax deductions are capped at $1,600 for married couples and $800 for all other filers.
- You can use this calculator to gain a glimpse into your potential monthly mortgage payment and the associated costs.
The financial considerations for buying a home go beyond your mortgage. Maintaining homeowner’s insurance is critical and almost always a pre-requisite of your lender in order to protect their investment. In most cases, you will pay your insurance premium through your mortgage provider, which means that your monthly insurance fees will be added to your mortgage payment. (Additional insurance could be necessary based on the specific property or lender.)
Another important factor to consider when you purchase a home is the typical cost of utilities such as water, sewer, electricity and natural gas. Your agent can inquire about typical monthly utility costs associated with the home you are interested in purchasing in order to understand the impact on your budget.
Taxes are another ongoing homeownership expense. The amount you will pay in property tax each year is based on two factors – the county tax rate and your home’s assessed value (this is a value set by the tax assessor rather than the price you paid for the property or how much you still owe on the property).
In many cases, taxes are already rolled into your monthly mortgage payment, and the funds are deposited into an escrow account. The lender then uses those funds to pay the tax bill on your behalf. Some lenders do not require this process, in which case, you would pay the annual property tax bill directly.
When considering buying a home, ask your REALTOR® about the tax history of the property to gain more perspective on what to expect for future property tax assessments.
Just like cars, homes also require regular maintenance or repairs over time. It’s always a good idea to have a plan in place to budget for potential maintenance needs after you purchase a home. Some regular maintenance requirements could be the servicing or replacement of major appliances, heater, air conditioner or roof.
Getting pre-approved for a mortgage
- Finding a lender
- Mortgages are available from a wide variety of sources, including mortgage companies, commercial banks and other financial institutions. Your REALTOR® is likely to have information about who to work with to get a mortgage in your area. You could also get a recommendation from friends, relatives or colleagues about who they worked with when financing their home purchase.
- Pre-qualification vs. pre-approval
- It’s important to work with your lender to get an estimate of the loan amount you could be approved for, which indicates to buyers that you are a qualified potential buyer of their home. While similar, there are also important differences between mortgage pre-qualification and pre-approval.
- Pre-qualification serves as only an estimate of how much you may be able to borrow based on general financial review by a lender. Pre-approval is a more formal process that involves submission of a loan application and a more extensive review of financial records to provide you a statement of the amount, type and terms of the mortgage a lender is willing to offer. For that reason, pre-approval is recommended over general pre-qualification.
- Loan types and interest rates
- Choosing the right mortgage is a very important step in the home buying process. A mortgage is a legal agreement between you and your lender for repayment of the loan under specific conditions and timeframes, so it’s prudent to examine your options. Here is a breakdown of some of the common mortgage types:
- Fixed-Rate Mortgages: These are the most popular type and offer an interest rate that remains constant for the duration of the loan.
- Adjustable-Rate Mortgages (ARM): These come with an interest rate that will adjust from time to time to keep pace with changing market rates. If you consider an ARM, be careful to understand the terms and conditions as well as how much and when it adjusts.
- Low and No Down Payment options: These may waive the down payment requirement entirely, or require as little as 3% or even 0.5% down, depending on your credit.
- Special Financing Mortgages: Some programs are created for people in certain occupations, such as police officers or public school teachers. Others seek to assist those with low or moderate incomes, disabilities, etc. See our Home Program section for a list of programs available in your area.
- You should know the interest rate and keep the quoted rates in mind when shopping for a mortgage loan. Ask your lender if interest rates are likely to increase during the time that your loan is being processed. If so, it may be a good idea to lock in the current rate. Ask your lender for more information about that option.
- If you choose a fixed-rate mortgage to lock the interest rate, make sure the starting and ending dates of the lock are clearly disclosed in writing and cover the time needed to close the loan.
- The lender is required by law, within three days of applying for the loan, to provide you with a good-faith estimate of the closing costs you’ll be responsible for paying. You should also receive a government publication called Shopping for Your Home Loan, HUD’s Settlement Cost Booklet, explaining any and all expenses you may pay upon the loan closing.
Identifying your ideal home
What kind of home do you want to buy? New or old? Do you want a detached single family home, a townhouse or a condominium? You’ll quickly find out that there are many types of homes to choose from. Try to figure out what characteristics in a home are best for you.
Where do you want to live? How close to schools, your job, a grocery store or public transportation do you want to be? Do you want a yard, or would you prefer not to have a lawn to take care of? Do you have any special requirements, such as parking, access to bus service, air conditioning or wheelchair accessibility? Knowing the answers to these questions will help you and your REALTOR® narrow your search for a home.
Before looking at homes, you may want to put together a list of what is “required” and what you would prefer. Then, when you see a home, you can make a note of what you liked and disliked, and what requirements were met and not met.
Searching for Properties
Using the information you provided about your ideal home and budget, your REALTOR® will begin searching for properties that best match your needs. The Multiple Listing Service (MLS), a database of listings and property data, is an essential resource for the home search. Through the MLS, your REALTOR® has access to the most complete and accurate property information that is not available through most public home search sites. When a new home that meets your criteria is entered into the MLS, your REALTOR® has immediate access to that information, providing you the opportunity to be among the first to see it.
Once your REALTOR® has identified a home(s) that you might be interested in, they will set up showings of those properties where you and your REALTOR® will tour the home. This is a great opportunity to identify pros and cons, ask questions and generally get a sense of whether or not you have interest in making an offer.
When visiting the property, take a look at details such as possible repair or update needs, age of heating and cooling systems, plumbing, roof and other structural components and how these factors can impact your budget in the short or long term. Many buyers include a contingency in the sales contract that calls for a professional home inspection. This can provide you with the peace of mind of knowing that your potential home has been inspected for structural flaws and that all electrical, plumbing, heating and cooling, and other systems work properly. Getting an inspection can help protect you from purchasing a home that needs expensive repairs.
You might find the right home quickly in your home search, or it could take some time. Remember, this is an important decision, so it’s perfectly normal to view many homes before identifying the one you want to make an offer on.
Making an offer
One you find a home you want to purchase, your REALTOR® and you will prepare a purchase and sale agreement. This offer will be submitted for consideration by the seller.
Some of the things your REALTOR® will include on the purchase and sale agreement are:
- The type of financing you are seeking
- The price you are offering to pay
- The amount of earnest money & down payment
- A legal description of the property
- The closing date & occupancy date
- Personal property to be conveyed in the home
- Expiration date for your offer
- Contingencies such as home repairs, environmental concerns, home inspections or appraisals
Negotiations and contracts
Your REALTOR® will advise you of the seller’s response after you’ve made an offer. The seller may accept your offer, reject it or make a counteroffer. If your offer is rejected, you will need to decide if you can, and wish to, make a higher offer. If the seller makes a counteroffer, you will need to make the same determination. Can you afford the new price? Will you need additional mortgage financing?
Other negotiations among the seller, you and your REALTOR® may also take place. Before making a counteroffer of your own, or agreeing to go ahead with the purchase, be sure to carefully examine every aspect of the counteroffer.
Inspections and appraisals
Hire a professional inspector to do a home inspection that includes everything from plumbing and electrical systems to heating and cooling. If the inspection identifies problems, the seller may be willing to adjust the contract terms or purchase price in anticipation of your future repair costs. If problems appear to be severe, you may decide not the purchase the home after all.
There are two types of inspections commonly performed: mechanical and structural. It’s a good idea to get both. Some home inspection companies provide both types of inspections.
Your REALTOR® will likely be able to refer you to a qualified home inspector with experience and knowledge. You can also search for home inspectors using our service provider search.
A home warranty may usually be purchased prior to closing, but paid for during the closing process. Occasionally warranties are provided by the seller or can be negotiated with the offer to purchase. Home warranties typically cover the mechanical components of your new home for a full year after purchase. The home warranty can help provide the comfort that you won’t be facing bill expenses for heating, cooling, water heater replacement, etc. right after you move in. Ask your REALTOR® about obtaining a home warranty and the full advantages.
The Closing Process
Before closing, your REALTOR® will be able to assist you in completing a pre-closing checklist that includes items such as property surveys, title searches and additional inspections as requested by your lender.
A closing agent with the title company will work with you to handle disbursement of funds, preparing and recording closing documents and all other closing activities. They will also be able to give you an overview of associated closing fees. Once your lender has given final approval of your loan application, the final closing date will be scheduled.
Either during or shortly after your closing, you should receive several original copies: the deed, which transfers ownership from the seller to you; itemized funds, which will be paid by the seller and the buyer at closing; and a promissory note, sometimes referred to simply as Note, with the detailed terms of the loan and your promise to repay it, including the address and agreed-upon dates for making your payments.
Keep a copy of everything you sign in a safe place, including homeowner’s insurance policy and title insurance records. When it comes time to file your taxes, you’ll need the settlement form, which lists loan discount points and real estate taxes you paid at closing. Some of these may be tax-deductible.
Discriminatory activity in the sale or rental of property is not permitted. In fact, a number federal and state laws exist to protect you from discriminatory behavior.
- Civil Rights Act of 1866: The Civil Rights Act of 1866 prohibits all racial discrimination in the sale or rental of property.
- Fair Housing Act: The Fair Housing Act declares a national policy of fair housing throughout the United States. The law makes illegal any discrimination in the sale, lease or rental of housing, or making housing otherwise unavailable, because of race, color, religion, sex, handicap, familial status or national origin.
- Americans with Disabilities Act: Title III of the Americans with Disabilities Act prohibits discrimination against persons with disabilities in places of public accommodations and commercial facilities.
- Equal Credit Opportunity Act: The Equal Credit Opportunity Act makes discrimination unlawful with respect to any aspect of a credit application on the basis of race, color, religion, national origin, sex, marital status, age or because all or part of the applicant’s income derives from any public assistance program.
- State and Local Laws: State and local laws often provide broader coverage and prohibit discrimination based on additional classes not covered by federal law.
Complaints alleging discrimination in housing may be filed with the nearest office of the United States Department of Housing and Urban Development (HUD) or by contacting them at http://www.hud.gov.
The REALTOR® Code of Ethics:
Article 10 of the National Association of REALTORS® Code of Ethics provides that, “REALTORS® shall not deny equal professional services to any person for reasons of race, color, religion, sex, handicap, familial status, national origin, sexual orientation, or gender identity. REALTORS® shall not be parties to any plan or agreement to discriminate against a person or persons on the basis of race, color, religion, sex, handicap, familial status, national origin, sexual orientation, or gender identity. REALTORS®, in their real estate employment practices, shall not discriminate against any person or persons on the basis of race, color, religion, sex, handicap, familial status, national origin, sexual orientation, or gender identity.”
A REALTOR® pledges to conduct business in keeping with the spirit and letter of the Code of Ethics. Article 10 imposes obligations upon REALTORS® and is also a firm statement of support for equal opportunity in housing.
If you suspect discrimination, call the local Board of REALTORS®. Local Boards of REALTORS® will accept complaints alleging violations of the Code of Ethics filed by a home seeker who alleges discriminatory treatment in the availability, purchase or rental of housing. Local Boards of REALTORS® have a responsibility to enforce the Code of Ethics through professional standards procedures and corrective action in cases where a violation of the Code of Ethics is proven to have occurred.