For first-time home buyers, the process can be completely overwhelming. There are contracts, deadlines, inspections, deposits, etc. When you outgrow that first home and decide to sell it and buy something better suited for your current situation you might think it’ll be a piece of cake because you’ve already done it once. Not so fast . . . the process will be equally overwhelming if not more due to regulations put in the place since you purchased your first home.
First, you need to sell your existing home and determining where you’ll live until you find and close on a new home. It’s possible to find a home before you’ve sold your existing residence, but it can be tricky to pull it off, so you may choose to get the first home sold before making an offer on a new one.
The equity from the sale of your first home could be used as a down payment or perhaps use it to pay off outstanding debt and increase your buying power. Run the numbers to determine which option makes the most sense; a good lender can help you with this.
Regardless of the amount of proceeds you receive from the sale of your home, you will need at least 3 to 5% of the purchase price on the new property for a down payment. Of course, the more you put down, the less you need to borrow, which means a lower monthly payment and less interest paid over the life of the loan. If you have less than a 20% down payment, you will need government insurance, such as USDA Rural Development or, if you’re eligible, a VA Guaranty in order to avoid paying private mortgage insurance (PMI). You can ask the lender to cancel PMI when you have paid down the mortgage balance to 80% of the home's original appraised value. When the balance drops to 78%, the mortgage servicer is required to eliminate PMI.
Before you start shopping for your next home it’s a good idea to meet with a lender and confirm the maximum purchase price you are eligible for and feel comfortable with. Then, consider finding a realtor to represent you as a buyer broker. Ninety percent of the time, there is no expense, as the buyer broker would receive a percentage of the commission, which is paid by the seller. However, if a listing agent reduces the share of the commission to a buyer broker, he or she may ask you to pay 1 or 2% commission, but it’s worth it to give you peace of mind that someone is looking out for you. A listing agent is looking out for the sellers’ best interest, even if you sign a dual-agency agreement.
Using a Buyer Broker is like having a personal property curator. What’s a personal property curator? It’s someone who handpicks properties that you’ll like. You can continue to look for properties on your own, and even set up a multitude of alerts, but a realtor may find out about new listings before they go online.
Wouldn’t it be great to know about a home before it’s listed? Top, well-connected agents have access to properties not yet on the market. Buyers’ agents have also been known to send letters of interest to home owners, when they had buyers who like a particular home or neighborhood.
For most people, buying a home is the single biggest purchase of their life, and negotiation can be like a poker game, with hundreds of thousands of dollars at stake. Making an offer and negotiating with a seller can be one of the most difficult and stressful parts of the home-buying process. But top buyers’ agents have gone through this many times and likely know all the tricks in the trade. Not only do they develop detailed analysis on comps (or comparables) to help you understand what similar homes are worth, they’ll also help you figure out the best bidding and negotiation strategy, so you can get the right home at the right price.
Just as when you purchased your first home, there’s a significant amount of paperwork, especially if you’re financing the home. Once you complete and sign one stack of paperwork, you’ll be asked to sign more. That part of the process doesn’t change, even if you’re buying your fifth house!
Pay close attention to all the dates in your contract. Specifically, inspections, second deposit and financing contingency dates. If you have a buyer broker, they should be on top of things, but it’s up to you to ensure everything is completed on time.
While gathering paperwork for the bank, you’ll need to obtain homeowners insurance, also known as hazard insurance, and you’ll need to pay for the first year up front. In many cases the bank will include the insurance in your monthly payment and will send a check to the insurance company once a year to renew the policy.
Regarding out-of-pocket expenses, know that in most cases you’ll need to pay for your appraisal up front. The amount can vary depending on the size of the house, but plan on about $500. You’ll also have closing costs, which can range from 3 to 5% of the loan amount. Your lender will provide you with a Good Faith Estimate at the beginning of the process, so you’ll be better prepared and aware of how much you will need to bring to the closing.
In the end, it’s a little less stressful than buying your first house, but don’t expect it to be problem-free. Every transaction has its own quirks.