The Ultimate Homebuyer’s Guide


Learn the best tips to buying a home, including hidden costs, real estate secrets, and glossary of common terms.


Ch 1. Where to Start

Congrats, you’re thinking of becoming a new homeowner! Next step? Figuring out how to buy a house. Don’t worry, it’s not as intimidating as it all seems at first – and we’re here to help.

Here are some considerations to keep top of mind as you start your search:

  • Examine your motivation.Why do you want a new home? Do you need more space? Just want a yard with more play space? Writing down your reasons for a new home will help you determine the most important elements for your search.
  • Set expectations. Uncovering your motivations can also lay groundwork for financial decisions. If you currently own a home (or as you plan for your new home), keep in mind that you should stay in that home for a minimum of five years to offset expenses like real estate fees, closing costs and moving expenses.
  • Cost of ownership. Estimate the lifetime total cost of ownership—as owning a home comes with numerous expenses outside of the monthly mortgage payment. How much will you shell out in maintenance and repairs over the years?
  • Learn how much to save. A good rule of thumb is to save at least one percent of your home purchase price for maintenance and repairs, according to The Balance. So, for a $300,000 home, prepare for a minimum of $3,000 per year for maintenance.
  • Prior to purchasing, create a mock budget for yourself to see if you can afford the home. Get a home insurance quote for the type of house you’re considering. Research property taxes online for your desired neighborhood. Estimate the increased yard care and utilities costs.
  • Start setting aside money to cover any little surprises with your new home. If a major repair is needed, or you need a security fence for the dog—you won’t have to lean on your credit cards. Add a line for “emergency savings” in your mock budget and start saving now.
  • Spend what you can afford. Determine what you can afford, and don’t let a banker talk you into more. Look back at your mock budget for the new home. Your mortgage payment, principal, interest, home insurance and property taxes combined should be between 20-35% of your monthly pre-tax income.

Purchase what you can afford and live in control of your future decisions (with the money in your budget to allow for choices like kid’s camps, additional work wardrobe, weekend getaway or whatever else you’d like the freedom to do).

Be sure to check off these to-dos:

1. Have emergency cash reserves equal to 3 months of basic living expenses

Have emergency cash reserves equal to 3 months of basic living expenses. Things happen and you don’t want to fall back on expensive credit cards or risk losing the house of your dreams.

Consider checking out our Emergency Savings Share Account by Thrivent Federal Credit Union as a dedicated place for emergency savings.

2. Know your credit score

This tells your mortgage lender how responsible you’ve been with credit in the past. Your credit score will range from 300-850, generally the higher the number the lower your loan interest rate. You can get your credit score free from creditkarma.com.

3. Request a free copy of your credit report

Yes, this is different than your credit score. You can get this free once per year from each of three major credit reporting agencies— Equifax®, Experian® and TransUnion® at AnnualCreditReport.com. It’s worth checking to be sure your identity has not been compromised.

4. Have disability insurance coverage in place.

If an accident happens and you can’t work—you’ll still need to pay the mortgage. Protect your paycheck and your family prior to increasing home costs—this insurance is much more affordable than many people think. See how much it could cost you by getting a free quote.

5. Eliminate consumer debt like credit cards and auto loans.

This is costly debt that can have a negative impact on your credit score (and freedom). Once paid off, you can put that extra money into an emergency fund.

6. Get pre-approved.

This way you’ll know if your budget is going to align with the loan amount your financial institution is willing to lend you. Do this early so you can enjoy your shopping experience.

Pro tip: Start saving early for your new home and be sure to build in a cushion for moving expenses. Download our Illuminate™ app to help you set up a budget.

Ch 2. Homebuying Glossary

20 important terms that you’ll want to reference as you research, visit and find your new roost.

  • Adjustable Rate Mortgage (ARM): A mortgage with a fluctuating interest rate. The rate varies in accordance with US market standards. ARMs can adjust once per year or even monthly or quarterly (or longer). We generally like to steer clear of these types of mortgages because it makes your budget unpredictable.
  •  Annual Percentage Rate (APR): This is the true interest rate charged on your mortgage and it’s calculated by including all loan costs and transaction fees.
  • Appreciation: The expected increase in value of your home during the period of ownership. Appreciation is driven by the overall demand for houses in your area, how well your house is maintained and any improvements you might make along the way. Sometimes home values go down—like the period right after the financial collapse of 2008. This is a good reminder to not invest all the money you have in your house.
  • Closing Costs: Total expenses obtained when financing and buying your home. In general, these include attorney’s fees, title fee, home appraisal fee, recording fees and a loan origination fee. As closing costs typically average six percent of the sale price of the house, you should plan for these expenses up front. Work with your real estate agent to identify closing costs that the seller could pick up through a negotiated deal.
  • Contingency: Noted specific conditions that must be met in order for the sale to proceed, as stated in the purchase agreement. Some routine contingencies include an acceptable home inspection, sale of an existing house and loan approval.
  •  Counter Offer: Rejection of an offer–with delivery of a different offer that changes the terms of the original offer. Perhaps you offer $150,000 for a home, and the seller replies that she wants $185,000. This is a counter offer. If there are things you want in the house or on the property, make sure you identify them in writing as part of the offer.
  •  Credit Report: Credit reporting agency’s written record of a consumer’s credit history. Reports typically include information on bills and accounts, loans, credit cards and a record of the consumer’s employers and addresses. Make sure to check your credit report annually to ensure there are no irregularities including possible identify theft situations.
  • Disclosures: Facts about the home that a seller must provide to a buyer. Regional laws determine the required disclosures. Make sure you review these carefully with your real estate agent and/or your attorney.
  •  Down Payment: Percentage of the home purchase price that you will need to pay in cash. Your credit score and the financial institution’s requirements will determine how much money you need to put down. If you can’t put enough money down to keep your mortgage payment between 20–35% of monthly pre-tax income, you’re not ready to buy a house. Keep renting and stash more money into your down payment account. 
  • Due Diligence: Your responsibility to exercise all relevant considerations before closing on the purchase of the home. For example, checking all of the seller’s representations and exposing any other information that may not have been disclosed. Make sure there are no liens or special assessments against the property—that can be a “gotcha!”
  •  Earnest Money Deposit: A deposit showing your commitment to making the home purchase (typically made when making the purchase offer). Earnest money goes toward the down payment with the remaining balance due at closing. Work with your real estate agent to make sure you understand under what conditions the earnest money is refunded or forfeited.
  • Escrow: When a neutral third party holds funds and/or documents before closing your home sale. Once you buy the house, you will likely have to set up an escrow account at your financial institution for purposes of paying your homeowners insurance premiums and property taxes. Each time you make your mortgage payment, a portion will go into the escrow account for this purpose.
  •  FICO® Score: Collection of information by the three major credit reporting agencies and calculated by the Fair Isaac Corporation. Your FICO® score reflects your amount owed on debts, debt payment history, duration of credit history, new credit and the forms of credit you use. Between 300 and 850 is the range for FICO® score. The higher your FICO® score, the less of a credit risk you pose to lenders and the lower your likely loan interest rate. We recommend paying off any consumer debt (e.g., credit card, personal loans and auto loans) before applying for a home loan, as this will raise your FICO® score and put you in a much stronger financial position before you take on a big obligation.
  • Fixed Rate Mortgage: A fixed rate mortgage means your interest rate, and thus your mortgage payment, will remain the same over the entire period of the loan. This is the best type of mortgage because you will know the impact on your budget from day one. Of course, homeowner’s insurance premiums and property taxes can always go up, so you’ll need to stay ahead of those expenses. Consider taking out a 30-year fixed rate mortgage and then later you can make extra payments to pay off the loan faster (if you desire).
  • Homeowner’s Insurance: An insurance policy that covers both property (loss of home and included personal possessions) and liability (injury to someone at your home). The price typically depends on what it would cost to replace your house and components. Consider researching this cost as you prepare your budget for a home purchase. If you have sufficient emergency reserves, look at taking a larger deductible to save premium dollars.
  • Homeowner’s Association: Association of neighbors charged with managing the common areas of a community (condominium or subdivision). If you purchase a home with a Homeowner’s Association, you should research potential monthly dues to common areas such as garden, pool and/or parking area upkeep.
  • Mortgage: Typical legal document used to purchase a home. The mortgage warrants the house to the loan lender as security for the loan to buy the house.
  • Pre-qualification: The process to decide if you are eligible for a loan, and the total amount of money the financial institution is willing to lend you. Keep in mind that bankers are trying to maximize their profits by lending you as much money as possible. Don’t get sucked into this trap. Keep your mortgage payment between 20 – 35% of your monthly pre-tax income.
  • Private Mortgage Insurance (PMI): Insurance that reimburses a mortgage lender in the event you default on your loan and the foreclosure sale price of the home is less than the amount owed on the loan. If you make a down payment less than 20% of the total home cost, you will likely have to purchase private mortgage insurance. Your financial institution will tack this cost on to your mortgage payment.
  • Property Taxes: This is tax on your property, levied by your local government, that you are required to pay. Consider estimating your annual property tax amount and adding that amount into all expenses associated with your potential home choice. Property taxes can be claimed as a deduction on your federal income taxes, and possibly state taxes, depending on where you live.

Ch 3. Who is Involved?

You’ll meet all kinds of professionals in your home search. Get to know the key players with this guide:

  • Home Appraiser: Presents a qualified opinion on the home’s current market value.
  • Home Inspector: Reports physical condition of the home (including all structures and elements).
  • Home Insurance Agent: Provides options for homeowner’s insurance protection—which insures you in case of events like tornados and fires, as well as lawsuits arising from bad things happening on your property.
  • Loan Officer: Figures how much money you can borrow for your mortgage loan.
  • Loan Servicer: Oversees management of your loan (billing, questions and record-keeping).
  • Mortgage Broker: Engages mortgage borrowers and lenders.
  • Mortgage Lender: Provides the money you will use in the mortgage to purchase your home.
  • Real Estate Agent: Licensed to negotiate the purchase and sale of a home.
  • Title Company: Audits public records to ensure property rights can transfer from one owner to another.

Other people/resources that may be helpful:

  • School Administrator: School tour, academic performance record.
  • Neighbors: Resources for concerns like loose dogs, amount of kids and noise level.
  • Public records: Research crime rate.
  • Nearby parks and playgrounds
  • Access to public transportation

 

Ch 4. Hidden Costs

You’ve decided where to live and what you can afford. You’ve evaluated the total cost of ownership for your home and plan to spend no more than 20-35% of your monthly income on your mortgage payment and property taxes.

As you project the amount of money to set aside for your down payment, (tip: aim for a down payment of 20% of the home’s listing price) consider these additional costs as well:

Appraisal Fee

The assessment of a home’s value (completed to assure the mortgage lender that the home is worth as much as you’re borrowing to purchase it) will run you $350-$500.

Closing Costs

These fees, that include attorney’s fees and a loan origination fee, typically average six percent of the sale price of the house. Learn how to save for larger expenses like this.

Home Inspection

This inspection ensures that the house doesn’t have any major defects such as a leaky roof, broken furnace, electrical or plumbing problems, cracked foundation or mold. These types of problems could cost you thousands of dollars later down the road. Make sure the seller fixes any problems that are discovered prior to closing on the house (or compensates you to have them fixed). Expect to pay $350-$500 for the home inspection.

Homeowner’s Association Fees

According to Investopedia, the current average monthly fee ranges between $200 and $400 for homeowner’s association fees for upkeep of common areas in designated developments. Make sure you are aware of any special assessments that may be in consideration for the neighborhood as well, as there would be a cost associated with this. A neighborhood pool may sound enticing—until you notice your association fees are over $4,000 a year

Property Taxes

Ask your realtor and mortgage professional to help you estimate this expense based upon previous year property taxes of similar homes in the area. Property taxes vary widely. These taxes are a deductible expense for federal tax purposes, and possibly state taxes, depending on where you live.

Survey Fee

The fee to complete a survey that verifies the boundaries of the property being purchased typically costs $100-$400. (This fee may be combined with the Title Company Fee, it’s worth checking out.)

Title Company Fee

Fee charged to certify the property is free of any disputes over ownership or usage. Costs range from $150-$400.

Title Insurance

This one-time expense is paid upon closing. Costs range from $200 to $900.

If you’re using a realtor to find your home, ask her to gather the combined expense information for you. Once you have the information, use it when negotiating with the seller—asking her or him to pay for some of the costs (e.g., the home inspection or survey fee).

Remember that it’s your money, and you’ll want to be sure you’re not tying it all up in mortgage payments. Keep your financial flexibility and live your life the way you want.

Finally, keep in mind that home ownership has tax benefits. There are energy tax credits available for efficient appliances, as well as deductions for loan interest and property tax. There may even be some closing cost deductions if certain charges were paid to obtain your home mortgage. Talk to your tax advisor or visit IRS.gov for more information.

CH. 5 Real Estate Secrets

One of the most important decisions you will make in your home buying journey is selecting a real estate agent.

A real estate agent can be extremely helpful with your purchase–as he or she knows the ins and outs of purchase agreements, stays updated on the current market offerings and has experience negotiating with both sellers and buyers.

Still, it’s best to understand what motivates an agent so you can find someone who keeps a steady balance of their business needs with yours.

What Motivates an Agent?

Agents are paid on commissions. Typically, the selling and purchasing agents split a commission that is 6% of the home price.

While your agent likely will spend a large amount of time finding you listings and showing you homes, they also rely on you for completing a sale. After all, they don’t get paid unless you purchase a home.

Agents also don’t generally want to deal with hassles that could delay sales (e.g., many rounds of negotiation or contingency offers). They want current deals to close, so they can move onto the next sale.

Hopefully, the drive to complete your sale will push your agent to show you homes that specifically match your requirements (as he/she can’t afford to waste time!).

A Word on Broker Agreements

Do your research before jumping into an exclusive Buyer Agency/Broker Agreement. Once signed, you can’t hire another agent until the contract with your current agent expires.

You could be on the hook for your agent’s commission even if you happen to find your new home on your own, so make sure you always work through your agent.

This contract can be terminated if either party is not living up to the agreement. Many agents require the Buyer Agency/Broker Agreement—so be sure you understand the terms up front.

Think twice if your agent tries to show you houses where he or she is also the selling agent. This is called a double-ended deal, as she does not have to split the commission with another agent.

This is a conflict of interest and your agent is not keeping your needs at the forefront of the search.

When you’re ready to close on your new home, keep in mind that your agent may want you to offer a price as close to listing price as possible in order to keep the sale moving fast, and earn that commission.

Be wary of guidance like the following:

  • “You’ll insult the buyers or selling agent if you offer too low.”
  • “Another party is extremely interested in the home and is looking at it today.”
  • “Are you willing to lose this house for $X amount or $X amount per month?”
  • “The market is really hot. You should act quickly.”
  • “You should split the difference on a counter offer.”

Smart Takeaways

Follow these guidelines and you’ll be on your way to a smart financial purchase.

  • It’s OK to sign the exclusive Buyer Agency/Broker Agreement. However, when you do, secure a 30-day contract. Then you can find a new agent if this one doesn’t meet your needs. Don’t worry about the commission rate because the seller will be paying this. Require clear language in the termination clause—know your rights!
  • When touring a home, ask who the listing agent is and steer clear of double-ended deals. With a double-ended deal, you’ll end up paying more for the home and correspondingly higher mortgage payments.
  • Take your time when making an offer. Ask your agent to do her homework and bring you comparable sales in that area so you can structure a good offer. Re-evaluate your monthly budget with your estimated mortgage payment added, and be sure you have enough wiggle room for unforeseen living costs.
  • Make a reasonable offer, but don’t be afraid that it’s too low. A seller will likely counter your offer rather than turn you down completely. You never know what a seller’s true motivation for selling might be, so you could get a heck of a deal.
  • If you receive a counter offer, make your subsequent offer(s) in small increments rather than jumping to “meet halfway.” The goal here is to save money on your home purchase so you have money available month-to-month. Use this money to build a cash reserve—so you can avoid going into debt to cover emergency expenses.
  • Move quickly if the market is hot, but don’t panic. Take time to research. Try to avoid getting into a bidding war that will result in mortgage payments you can’t afford.

Find the Right Agent

There are plenty of good agents, and the best ones have your interests first in place. You should review their background. Have they been successful? How many homes have they sold in the past year? Have they received any awards? Look for number of years in business and ascertain their knowledge of your potential home’s location.

Work with one who communicates well with you and your style (e.g., do you prefer phone calls or meeting in person, or is text the best way to alert you of something new on the market?). Be sure to get references for your agent and watch out for those with limited success.

Ready to Move?

Knowing what motivates a real estate agent is a good foundation for your search. Realizing how agents are paid and taking note of potential red flags helps you be in control. It’s your money, and you’ll want the flexibility to actually live in your home after you purchase it.

It’s your home. Your family. You be the one in the driver’s seat. Blessings on your home-buying journey!

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