Question: We are planning to buy a home in the DC area sometime in the next 12-24 months and want to make sure we take that time to prepare. What should we know before buying a house that we can get started with now?
Answer: Whether you’re a first-time buyer, experienced buyer relocating from out-of-state, or moving locally here’s a list of things I review and plan out with clients before getting into the full swing of house hunting:
Local Customs, Requirements, Timelines, and Contracts
The home-buying process varies greatly across and within states. I think the most important thing you can do as a buyer is take an hour at the beginning of your buying process to become educated on the process, timelines, and key contractual terms/obligations in the area(s) you plan to search. This is also a good way to meet and vet different real estate agents early on to get a feel for who is willing to spend time with you up-front on education and planning vs pushing immediately for a sale.
Choose the Right Financing, Get Pre-Approved
Not all lenders offer the same loan products so it’s important to identify a lender who not only provides high quality service, but also has access to loan products that fit your profile (down payment, credit score, job industry, etc). Real estate agents, friends, and co-workers are all great sources of recommendations.
You’ll also want to get a pre-approval from at least one lender, one that actually reviews and verifies your financial documents, income, and employment instead of just running credit and reviewing an information sheet. This will decrease the chances of you being rejected from a loan, allow the lender to provide the most accurate recommendation, increase your leverage in contract negotiations, and reduce the amount of work required of you once you’re under contract.
Don’t Forget A Monthly Budget
I find that most people qualify for more than they actually want to spend, especially dual-income buyers, so budgeting is important. The biggest mistake most buyers make is budgeting strictly around the sale price, which is often driven by the amount you have for a down payment. It’s just as important to set a monthly budget for total housing expenses including mortgage, taxes, insurance and if applicable Association fees and/or mortgage insurance. Your lender can help you project monthly expenses at different price points based on different down payment amounts.
Do You Want Representation?
Determine if you want to have a real estate agent representing you in the transaction (breaking news…I highly recommend it) and, if so, what level of service you’re looking for. In most cases, the seller pays commission to their representing broker and the buyer’s broker, so representation often comes at little or no cost to buyers.
Push Yourself on Your Criteria
It’s very easy to come up with your top 3-5 criteria for a home and rare for most couples to disagree on the short list, but push yourself/yourselves to rank your top 10-12 criteria. This list can and will change as you search for homes, but it pushes you to think about more than bedroom count, schools, commute, and an open kitchen. This is especially valuable for couples. Just because you have the same taste in music, food, and TV shows that brought you together, doesn’t mean you’re on the same page about housing criteria.
Cash Needs + Savings
You need cash savings to pay for your down payment + closing costs of 2.5-3% of the sale price (in the DMV). Within a few days of your offer being accepted, you’ll have to transfer 1-5% (negotiable) of the sale price into an escrow account as deposit to secure the sale. You’ll spend about $1,000 out-of-pocket between contract and closing on inspections and the appraisal. Don’t forget how expensive moving is either, so keep enough savings for incidental moving expenses, new furniture, painting, etc. You should aim to haver 3-6 months of emergency savings tucked away after everything is paid for.
Other Key Providers
Most buyers are familiar with the role real estate agents and lenders play in the transaction, but don’t forget about the importance of working with a quality title attorney and home inspector. Your agent should be able to make a great recommendation.
How Long Will You Live There?
This is probably the most underrated conversation for buyers to have when they’re setting a budget and determining criteria. Your home-buying strategy should look very different if you’re planning to own for 3-5 years vs 10-12 years so give it serious thought and be realistic.
Deadlines and Lease Terms
Figure out if you have any strict deadlines for the move and iuf there are direct or indirect costs of buying before or after that deadline. It can be difficult in a low-inventory market to time a purchase, so make sure you’re aware of the pros and cons of purchasing before or after your deadline. If you’re renting, make sure you find out the cost of early termination or if month-to-month leasing is an option.
Reason for Your Purchase
I still haven’t met somebody who asks for a bad investment when they buy a house, everybody wants their home purchase to be a great investment, but you have to define what a great investment means to you. Does it mean your home appreciates in value well above the market over a certain period of time? If so, you’ll likely be in under-developed areas or in a house nobody else wants. Does a great investment mean you wake up every morning so happy with your home and neighborhood that the money is a secondary concern? I often remind clients that sometimes the best investment is buying a house that allows you to live there longer and eliminates one or more real estate transactions in your lifetime. In other words, the value you get out of being in a home for 10 years vs 3 years far surpasses a small increase in your budget.
I hope this list is helpful not just for local DC Metro readers, but for anybody getting started with their home search and wondering what you should know before buying a house. These are the conversations and steps I take with my clients every day to make sure they’re prepared, educated, and have the right strategy in place before we even step foot in a house together. I’m sure I left a few things off this list, but this should get you 95% of the way there. Feel free to give me a call or send me an email at Eli@EliResidential.com for the 5% I missed.