The Home Buying Process
Whether you just started to consider buying a home or you are already house hunting and along your way, you’ve come to the right place to equip yourself with information and tips to make the process easier.
Remember: Every transaction is different. Some may require that you do more or fewer tasks than those listed above. Consult a REALTOR® about what steps you need to take.
Examine your finances
It’s important to consider your income and the total of your other debt payments (like credit card debt or car payments) when deciding if you can afford to purchase your own home. Think about how much money you can use for a down payment.
*REAL Story Tip – Many financial experts recommend spending no more than 28 percent of gross monthly income on your mortgage, property insurance and taxes, but each person’s situation is unique.*
Use an affordability calculator to get an idea of how much you can afford.
It is important to check your credit score and fix any errors that may appear before starting the loan approval process. Lenders often look at credit scores as one factor in determining whether or not to approve a loan. Your score may also affect the interest you can get. The NATIONAL ASSOCIATION OF REALTORS® offers more information on how FICO scores are calculated and how long negative information will remain on your report.
Consult with a mortgage lender about how much you can realistically afford.
*Real Story Tip- When looking at your finances, consider how you will pay the mortgage if you or your co-borrower becomes unemployed.
Find a REALTOR®
REALTORS® provide expertise on market trends, property conditions, and many other aspects of a real estate transaction. By working with a REALTOR®, you will be able to see comparable homes for sale, track sale prices in the desired neighborhood and gain insight on many other aspects of a real estate purchase.
A REALTOR® is a real estate professional who is a member of the NATIONAL ASSOCIATION OF REALTORS®. These professionals abide by a Code of Ethics, which sets forth standards of practice that includes honest and ethical treatment for all parties in transaction-related matters. REALTORS® may be identified by the REALTOR® "R" logo on a business card, website or other marketing and sales materials.
*Real Story Tip- Ask for referrals from family, friends and co-workers who have recently had successful experiences buying or selling a home.*
Use the NJAR® REALTOR® Search to locate a REALTOR® in your area.
Interview several professionals to ensure that the REALTOR® you choose works with prospective buyers and is knowledgeable about the area in which you want to purchase. Make sure the professional you select is someone with whom you are comfortable sharing personal information.
Shop for a mortgage
After determining a ballpark figure of how much you can afford start talking to different lenders to get their insight and to start requesting quotes. Check with your REALTOR® for a list of lenders in your area. You should talk to several lenders so that you can compare costs and interest rates for your loan and be able to negotiate a better deal.
*Real Story Tip- Consider obtaining a loan pre-approval, which can require providing proof of income, reviewing outstanding debts, and running a credit check. A pre-approval signals to a seller that you are in a strong financial position when making an offer.*
Here is a list of questions you should consider asking the lenders you meet with:
• What is the interest rate? How long is that rate available?
• Are the rates fixed or adjustable?
• What is the length of the loan?
• If it is adjustable, how will the rate and loan payment vary?
• Can you quote points in a dollar amount?
• Points are fees paid to the lender that are linked to your interest rate, and can usually lower the rate if you pay more points. Finding out this amount in dollar figures will help you make an informed decision.
• What fees are there? What does each of these fees include?
• What are your requirements for down payments? Are there any special programs available?
• Is PMI (private mortgage insurance) required? What would the total cost be?
More information that can help you make smart financing choices is available from the NATIONAL ASSOCIATION OF REALTORS®.
Understanding the Good Faith Estimate (GFE)
Within three business days of filing your loan application, your mortgage lender or broker will provide you with a Good Faith Estimate (GFE). This document, required by law, itemizes the fees and costs associated with the loan.
The GFE form has been recently updated by the U.S. Department of Housing and Urban Development (HUD). Many lenders are currently using the form, however, the new form is mandatory on January 1, 2010.
Here is a quick breakdown of the form.
• The first page contains basic information about the loan product, applicable deadlines, and escrow requirements.
• The important dates section states the deadlines after which the loan terms contained in the GFE are no longer available
• The loan summary details the specific terms of your mortgage.
• The second page is a list of settlement service charges such as loan origination charges, title services, transfer taxes, etc.
*Real Story Tip- Homes sold for more than $1 million in New Jersey are subject to a transfer fee that must be paid by the buyer. All other transfer taxes are usually paid by the seller. Calculate the New Jersey Realty Transfer Fee here.*
• These services are broken down into three categories: zero tolerance, 10 percent tolerance, and no tolerance
• The last page summarizes the tolerance categories and gives you information on the loan options the lender may offer that will lower either the closing costs or the interest rate.
Understanding Tolerance Categories
On the GFE, you’ll see costs categorized by tolerance. Tolerance categories indicate how definitive the estimates are, and which ones might change from the GFE to the HUD-1 form.
• Zero tolerance category – The actual charges at settlement may not exceed the amounts on the GFE.
• 10 percent tolerance category – The sum of the actual charges at the time of settlement may not be greater than 10 percent of the cost on the GFE
• No tolerance category – The amounts charged for all other settlement services on the GFE may change at settlement because these items are usually obtained by the borrower, separate from the lender.
Finding your home and making the offer
A REALTOR® can help you research the area where you want to live to learn about home prices, taxes, local amenities, etc.
Decide which home features you feel are essential and which are optional, such as a backyard, basement, number of bedrooms/bathrooms, etc.
*REAL Story Tip – Your REALTOR® will guide you in the house hunting process, but it will be helpful for you to create a wish list – what you feel like you need to have in a home, what you’d like to have, and what you’d like to stay away from. The Department of Housing and Urban Development (HUD) offers a useful wish list that you can work from and share with your REALTOR®.
Many buyers are considering homes that are undergoing a distressed sale due to financial hardship. If you are considering the purchase of a short sale, bank-owned property or foreclosure be advised that these transactions often take longer because a third party must approve the sale. Frequently these homes are also sold “as is” and may need repairs.
More information on short sales and foreclosures can be found at njar.com.
It’s important to keep an open mind when visiting properties your REALTOR® feels may work well for you, just as it’s also vital to be upfront and honest with your REALTOR® about your preferences and financial situation to ensure that you purchase the best home for your needs.
After you find a home that you are serious about buying, work with your REALTOR® to come up with an appropriate offer. Be mindful of your financial circumstances, down payment amount and closing costs when negotiating the sale price.
Once the buyer and seller come to agreement, a contract of sale will be drawn up. The buyer or seller may choose to have an attorney study the sale contract before it is finalized – in New Jersey this is known as attorney review. If an attorney is consulted, the attorney must complete his or her review within a three-day period. The contract will then be legally binding at the end of the three-day period unless the attorney disapproves of it. In some cases, the buyer and seller may choose to extend the three-day period.
Shopping for homeowner’s insurance
Just as you shopped around for a loan, it is important to do the same for homeowner’s insurance. As soon as you have signed a contract for your home purchase, you should begin shopping for homeowner’s insurance. Buyers should obtain appropriate casualty and liability insurance for the property. Your mortgage lender will require that such insurance be in place at the time of closing. Occasionally there are issues and delays in obtaining insurance.
*Real Story Tip- A “binder” is only a temporary commitment to provide insurance coverage and is not an insurance policy. *
It’s important to note that most homeowner’s insurance policies don’t cover flooding. Only a flood insurance policy will cover flood damage. Your insurance agent can tell you more about the benefits of flood insurance and in most cases, you can purchase flood insurance coverage from the insurance agent who sells your homeowner’s policy. The National Flood Insurance Program has a website to help you prepare and learn more about floods and flood insurance. To learn about your flooding risk and how to protect yourself and your property visit www.floodsmart.gov.
Floodsmart.gov is an interactive website. You can enter your property information to find out your flood risk. Please note that FEMA is in the process of updating and digitizing the floodplain maps and some property information may not be available.
Learn more about insuring your home in New Jersey with information provided by the New Jersey Department of Banking and Insurance.
Getting a home inspection
After signing a contract of sale, you may want to consider paying for a home inspection, which will identify any physical defects or environmental conditions. The contract of sale typically gives buyers a certain number of days to have an inspection. Depending on the circumstances of the transaction note that if you are purchasing a short sale or foreclosure that is to be sold in “as is” condition, you may be unable to perform a home inspection, or have any items identified during an inspection repaired.
Here are some questions you may ask the home inspector:
• What does the inspection cover?
- A good inspection should cover structure, exterior, roofing, plumbing, electrical, heating, air conditioning, interiors, and ventilation.
• How long have you been inspecting residential buildings?
- Make sure the inspector has experience working with homes, and not just commercial properties.
• Can I attend the inspection?
- An inspector should allow you to be present for the inspection. If they don’t, consider it a red flag.
• How long does the inspection take? How long will it take to produce the report?
Closing the Transaction
After finding the home of your dreams, making the offer, securing a mortgage, and taking care of insurance and the inspection, you’ll be ready for the closing. At this stage of the home buying process, you will sign all mortgage documents and any other paperwork needed to complete the transaction. The title of the home, in the form of a deed, will also be transferred to you at this time.
As the buyer, you have the right to select a settlement provider who will aid in the closing of the transaction. In some cases, you may save money by shopping for a settlement agent, which can be your lender, a title insurance company, your real estate broker or attorney or an escrow company. You may have to clear the firm or company that you choose to conduct the settlement with your lender.
Understanding the Settlement Statement (the HUD-1 form)
At the closing, your mortgage lender will provide you with a settlement statement known as the HUD-1 form. This form was also recently updated. All lenders are required to use the form starting January 1, 2010. The document gives you a complete list of the funds that will change hands during the closing. This includes fees that are associated with the transaction but that are paid prior to the closing (denoted at “POC,” Paid Outside of Closing).
*REAL Story Tip – The HUD-1 form is itemized using the same numbers as the GFE to make it easy to compare the two charges.*
The form itself might look confusing, but it is important to go through it with your REALTOR® and closing agent to make sure everything is accurate. Here’s a quick breakdown of what to look for:
Section J - Summary of a Borrower’s Transaction
• This is where you’ll see the contract sales prices, listing your earnest money deposit and all of your real estate taxes. In the area titled, “Amounts paid by or on behalf of the borrower,” you’ll see the list of items that total the amount of money you’ll need to close.
Section L – Settlement Charges
• Here, you’ll see the details of the closing costs for both you and the seller. This will include your home inspection or appraisal fees (if they are to be paid at the closing) all of your loan charges, transfer taxes, recording fees, title company charges and escrow agent closing fees. Check and double-check these fees, and be sure to consult with your REALTOR® or lender if you see anything that is questionable.
• The final page of the HUD-1 shows a comparison between the Good Faith Estimate and the HUD-1 broken down into the tolerance categories. A summary of the loan terms and provisions completes the third page.
After these steps, you will have achieved the American dream of homeownership! Now get to packing, and start checking out some of the great benefits of becoming a homeowner.