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Home Buying 101
Step 1 - Make sure your financial house is in order. Prior to applying for a mortgage, be sure to payoff as many minor bills as possible. All credit card or other bills which are under $500 should be paid off in order to help you get the best mortgage rate.
Tip: Don't make any major purchases (especially a car) for at least 6 months prior to beginning your home search. Similarly, don't open any new lines of credit, such as credit cards prior to your home search.
Step 2 - Determine how much house you can afford. The standard formula for mortgages is called PITI (principal, interest, taxes, and insurance). This formula neglects to add in PMI (private mortgage insurance) which you're also going to have to pay if you put down less than 20% on the property. PMI rates vary but can add up to 1% monthly ($200 on a 200K loan), so be sure to find out from your loan officer how much the PMI is on your loan and be sure they've added it into the monthly payment.
On the positive side, Delaware has very low property taxes compared to the surrounding states. You're building EQUITY instead of just simply flushing tax money away every month.
Once you've figured out how much house you can afford, get pre-approved (not pre-qualified) from your lender. You should be provided with a pre-approval letter which you will need once you decide to make an offer on a house.
Note: Your loan officer will probably want to see copies of your taxes for the last 2 years, current pay stubs, bank statements, and any IRA or 401K account statements. So be prepared and have your paperwork ready when applying for a mortgage.
Closing costs - Be prepared for a really big number when you see what the closing costs for the loan are going to be. Transfer taxes are 1.5% of the sale price. There are also mortgage company fees, recording fees, home insurance pre-payment fees, title insurance fees, current year tax fees, and the difference between your escrow deposit and the percentage loan to value (LTV) that you chose. In other words, if you made a $5,000 deposit on a $200,000 house, you put down 2.5%. If your mortgage is a 95% LTV loan, you will need to add another $5,000 at closing. There is also a fee for the attorney of around $400-500. Home buyers in Delaware must have an attorney for closing.
Step 3 - Determine where you want to live. You've probably heard the old real estate adage "location, location, location." Personally, I think that's only partly right. In my opinion, it would be more appropriate to say location, square footage, and price.
Determining where you want to want to live is up to you. Please don't ask your agent, "What's the neighborhood like?" The reason I say that is because we can't tell you. It's not that we don't know, it's simply that talking to clients about neighborhoods is a violation of the Federal Fair Housing Act and the fines for violations start at $10,000 the last time I checked. All we can tell you realistically are the following things:
1) Knock on some doors and talk to the neighbors
2) Be observant. Drive around and look at the other houses in the neighborhood. Is the grass a foot high? Are the driveways in need of repair? Is the paint peeling off the exteriors? Or are the properties well maintained and show pride of ownership? It's your decision.
3) Check the crime statistics. And you can do it right here. Under the "Other Useful Information" section of my website is a link that says, "NCC Crime Mapping." Click on the link and enter the address of the house you are considering buying.
When determining the location where you want to live, the amount of time you want to spend commuting to work is definitely a consideration. Additionally, for families, schools can be equally important. You can check the local school system ratings by clicking on the link titled "Local School Info" which is located on the left side of this page.
Step 4 - Determine the lifestyle you want to live. Basically, once you've determined where you want to live, it boils down to what type of lifestyle you want to live. Does it bother you to cut grass and shovel snow? If it does, a condominium might be a better choice than a single family home. Similarly, if you're very busy and don't have time to rake leaves or do landscaping, a condo might be a good choice. Be aware, though, that like most things in life, there are positives and negatives to every decision. Condominiums have a monthly Home Owner's Association (HOA) fee above and beyond your mortgage payment that must be paid every month. The typical HOA fee includes trash pick-up, all exterior maintenance (including roof), sewer, grass cutting, snow shoveling, and common area maintenance. Some may also include heat. Typical HOA fees in northern New Castle County are in the $225-$300 range. High rise condos which include all utilities along with basic cable may run $600/month or more.
Step 5 - Once you get an accepted offer. What you need to do is make three phone calls. First, call your attorney and tell him or her that you are buying a house (your agent will fax over the paperwork). Second, call your mortgage company representative and inform him or her that you've found a house. Third, call a home inspector and schedule a convenient time for the inspection. When you call the home inspection company tell them that you want a home inspection and a termite inspection (also known as WDI for Wood Destroying Insects which includes more than termites).
Important: For your own protection, and especially if there are going to be children in the house, I VERY STRONGLY SUGGEST that you get a radon test done. The home inspection company should be able to do this as well. Radon tests are relatively inexpensive (approx. $125) and can provide important information about a serious area of concern or give valuable peace of mind as you become a homeowner. The only negative is that it takes about 3 days to get the results.
Step 6 - Don't take anything for granted. In other words, don't automatically assume that everyone is doing their job the way it's supposed to be done. Phone your lawyer, real estate agent, and loan officer at least every 7-10 days and get an update. Ask them if there's anything else you should be doing at the current time. If you stay on top of everything and everyone, it will help to minimize problems and assure that the closing will happen on time and with minimal problems.
