The Millennial’s Guide to Buying a Home (NYC Edition)
My name is Tania. I’m a 28 year old native New Yorker and a first-generation American, and I just purchased my first home.
Like many people who grew up in low-income communities in New York City, I compromised on living space and spent my entire life in tiny apartments where people lived crammed on top of one another for the privilege of residing in the greatest city in the world.
After spending time in spacious dorms during college and later moving into much bigger apartments upon graduation, I experienced first-hand the wonders of what physical space can do for your well-being — not to mention how it can positively impact the relationships you have with roommates, be it friends or family.
My family and I were fortunate enough to be ready to purchase a home in 2021 during arguably the most challenging and expensive real estate market in history, and so I embarked on this journey solo without a clue as to what I was doing.
A year later, I’m at the finish line — and with so many things I’ve learned along the way, I have decided to put together a handy guide so that others in my position can learn from my first-time home buyer journey.
Fair warning: many noob mistakes were made. Apologies in advance for the lengthy blog and for any repetition.
How To Buy a Home (for Dummies)*
(*this title might already be taken, oh well.)
STEP 1: Save.
For New York City-based buyers, these are the things you need to aggressively save for:
- Your down payment (ranging from 3% — 20% of the purchase amount. More on that in step 2)
Determine how much house you can ACTUALLY afford. That means accounting for how much down payment you’re putting in for the house, what your monthly payments will be compared to how much you’re paying in rent currently, utilities, emergency money, and your other expenses and debts.
Be very cautious with your estimates, and always round up – you never know what expenses might pop up. A common misconception is assuming that just because you get approved for a certain amount of loan, it means you can afford it. This is not the case, as everyone’s financial situation is different, and you will be paying additional fees (increased utilities, property taxes, insurance, etc) on top of your new mortgage.
2. A good real estate attorney. In NYC, an attorney is mandatory for buying a home. Don’t skip on getting a solid one, especially for your first home. A decent lawyer will have your back, but they’ll run you anywhere from $2000–$3000. Of course, you can always find lawyers for less, but beware that cutting costs on your biggest proponent can potentially hurt you in the long run.
3. Money for closing costs. Again — for any home you have your eye on, don’t assume you can afford it just based on your current expenses and down payment. Make sure to factor in closing costs, which is around 2–5% of your entire loan in ADDITION to your down payment, and goes towards your attorney, broker, title, insurance, taxes, etc.
4. Have money reserved. At the end of your purchase, when all is said and closed, hopefully you don’t have just $5 left in the bank, although purchasing a home will certainly clear out the average person’s bank account.
5. Get all your finances for the home sorted out long before you close. For instance, if you have a stack of cash sitting around somewhere that you saved over the years and you intend to use it for the purchase, be sure to add it to your bank account in advance. This is because in the final stages of purchase, the lender conducts a thorough background check of your financial history and legal documents– this is called underwriting. Any large deposits that equal to more than 50% of your monthly income will be flagged as suspicious, and you will need to provide a paper trail. However, if the money has been sitting there for months, it will be considered “seasoned” and you won’t need to provide receipts.
STEP 2: Get pre-approved for a loan (or as I like to call it, “why is everyone telling me to ‘shop around’ for a lender????”)
A MORTGAGE is the amount of money that a bank or lender is letting you borrow to purchase a house. When people advise you to start shopping around for a pre-approval, what they mean is that you need to visit the website or call the number of banks that you think might give you a solid mortgage loan offer. When you’re looking at houses, most sellers won’t take you seriously unless you’ve already been pre-approved.
For this step, I would advise getting recommendations from people you know who have recently purchased a home for a good loan officer who can assist you through the process. You can also ask for recommendations for a decent broker who can baby-sit you through it all and probably find you the best rate (that’s what I did.) Brokers don’t work for a specific lender and therefore can scan a variety of options to see what your best option is.
Fortunately, the actual application process to get a pre-approval is fairly consistent for every lender. You start an online or over-the-phone application and submit personal information – your name, address, employer, bank statements, social security number, tax statements, W2s and so on. It can be a repetitive process, but you want to make sure you have enough options to choose from. You can pick any lender just to have a pre-approval in hand so you can start looking at houses, but it doesn’t mean you have to use said lender once you’re under contract for a house.
Every time you apply for a new pre-approval, your credit score will get pulled. Don’t worry too much about it – when applying, there’s a 45-day window in which your credit score can get pulled several times without adversely affecting you.
Once you’ve been pre-approved, you should receive an email from the lender with a pre-approval letter attached detailing how much of a loan you’ve been approved for, and what your interest rate is based on the current market.
I’ve said this before and I’ll say it again: just because you’ve been pre-approved for a certain amount, does NOT mean you should be purchasing a home in that amount. Banks typically will loan you a lot of money, but you will need to factor in all the other costs associated with buying and owning a home.
It’s not too difficult to get qualified for a mortgage. However, what you’re really looking for is which lender offers you the best INTEREST RATE. Why does that matter?
Obviously, a bank won’t offer you a hefty loan for free. When you’re making your monthly mortgage payments, your interest rate affects how much you’re paying per month. For lifelong apartment-dwellers like myself, mortgage payments are essentially like paying rent to the lender (plus interest), except that money actually goes into the equity of your home and not into the pockets of your landlord. If you get a low interest rate, it means you’re making lower monthly payments, and thus able to keep more money in the bank. Everybody wins!
Hold on — how do I get a low interest rate, you ask? Well, there are a few factors: your income, your debt-to-income ratio, your FICO score, having a stable work history, and whether you’re using a conventional loan or FHA loan (there are other types of loans, such as a VA loan or USDA loan, but for the purpose of detailing my personal experience, I won’t go into those.)
Another important thing to note: if you are applying for a loan with someone else — a spouse or sibling, for example– both of you need to be on the loan application. That means submitting all the necessary materials – finances, credit score check, W2s, etc–for each person on the mortgage. Both of your employment and financial history will be taken into consideration when you are given a loan offer and interest rate, so be mindful of who you put on the application if one person has a lower credit score or less stable income.
What type of loan should I get?
A conventional loan is a loan where you typically put down around 20% of the house you are purchasing as a down payment. This is indicative that of you as a buyer being less of a risk, hence favoring you for a better interest rate.
Some loan offers allow you to put much less down – as low as 3–5% in some cases. In this event, you as a buyer will be suitable for an FHA loan (US Federal Housing Administration.) This type of loan is typical for first-time homebuyers or people who are not able to put 20% down. You can still buy a house — but to protect itself in case you default on your payments, the lender will charge a monthly PMI (private mortgage insurance.) Think of it as insurance against you in case you can no longer pay your monthly mortgage. So with an FHA loan, you’re putting less money up front, but paying a higher monthly amount because you’ll be paying mortgage + interest + PMI.
You can also apply for a conventional loan with PMI as well, which lets you put slightly less than 20% down payment. In that scenario, say you borrow money at 87% of the home (instead of 80%) — you would have to pay PMI until your loan-to-value is at 78%, without requiring refinancing.
In the past, PMI was usually removed off any loan once the owner paid enough to make up for 20%. These days, if you have an FHA loan, you’d have to refinance in order to take the PMI off. Refinancing involves re-applying for a new loan once you’ve paid off most of the home, which entails a new interest rate but having to pay closing costs a second time.
Therefore, it’s more financially sound for buyers to opt for a conventional loan if you are able to, but that doesn’t mean FHA loans aren’t a good option.
Example: Say you’re purchasing a home for $400,000.
Scenario A: You opt for a conventional loan, which means you’re putting 20% of the home price as a down payment, which equates to $80,000. That means the lender is giving you the remaining balance as a loan.
400,000–80,000=$320,000 in loan amount.
A typical mortgage is paid over a 30-year period, which means over the span of three decades, you will (hopefully) have paid off that $320,000.
But hey, that loan doesn’t come for free! An interest rate is basically a percentage of your total loan that you’re paying to the lender for giving you the loan. One of the primary reasons so many people were scrambling to buy a home during this pandemic is because interest rates were at a historic low.
Let’s say you’re purchasing this $400,000 home in 2020. With your great credit score and D-T-I ratio, you snagged an interest rate of 2.75% Woohoo!
2.75% interest rate is based off of the entire purchase amount. So with all of the above numbers, you can expect to pay around $1306 a month (excluding additional fees, which you will learn about later.)
Scenario B: You really want the home, but aren’t able to put down $20,000. So you apply for an FHA loan, which allows you to put only 5% down. Sweet! Your upfront costs will be much lower, but you’ll pay a higher monthly payment because it includes your mortgage, interest, property taxes etc, but now you have to pay PMI.
It’s a lot to take in, I know. One of the biggest things that throw off first-time homebuyers is that there are so many more hidden costs to owning a home besides initial down payment, closing, and mortgage and utilities.
You’re also on the hook for homeowner’s insurance, which is mandatory.
If you purchase a home that’s part of, say, a gated community, or a condo, there’s likely an HOA (home owner association) fee on top of the homeowner insurance. An HOA is a board that oversees the community and make sure your grass isn’t higher than a certain height, that you don’t paint your house a hideous color that will bring down the property value, and will let you use the community recreation center and pool. HOA fees can set you back a few hundred or even a thousand or more every month.
Don’t forget — there’s no landlord to call when your toilet backs up, your fridge malfunctions or something worse. Oh, and if you’ve been renting this whole time, you’ve most likely been responsible for just your gas and electric utilities. Welcome to your new heat and water bill.
TL;DR: now that you know some of the extra hidden costs when it comes to selecting a loan and weighing your options, make sure you save accordingly and keep a separate savings account for these particular expenses handy.
STEP 3: Find a solid realtor to work with and start looking at homes.
Spending hours on Zillow idly browsing for your dream home is always fun –until it’s time to stop daydreaming and actually endure the house-hunting process.
House hunting during the pandemic has been a particularly cruel and unusual experience. Federal interest rates dropped to historic lows, while housing supply dwindled and led to a skyrocketing demand in homes — and of course, absurdly high home prices.
Enter millennials into the housing market, desperate to buy a home and willing to do what it takes – including forgoing many essential steps to home purchasing such as inspections or buying homes with all-cash to evade potential competition.
Personally, I asked everyone I knew and trusted that had gone through the home-buying process for advice and referrals. I highly recommend you do the same; don’t be an idiot like me and casually begin the process by entering your email address into the first house you like on Zillow or Trulia, lest you wish to be absolutely bombarded with texts, emails, and phone calls from random agents, attorneys and bankers with promises to help you close within weeks.
Still wincing from that experience.
If you’re a complete beginner and have few resources or people to help guide you through the process, start by finding a real estate agent. Realtors are generally regarded with an air of suspicion — that’s because the industry is flooded with agents, many with seemingly little to no experience or who don’t appear genuinely invested in what will likely be the most expensive purchase of your life. If you don’t trust someone to help you along the way, then is it worth it?
Technically speaking, you don’t need a real estate agent to purchase a home. However, if you are a first-time homebuyer, this is definitely someone you should actively pursue. Don’t be afraid to take your time with realtors – they get a pretty penny out of your purchase, after all.
Also, remember that at this point you should already have a few pre-approval letters from lenders. Sellers usually require a pre-approval letter in order to view their home because it affirms that you are a serious buyer.
STEP 4: Make an offer. Or two. Or ten.
So you found a house that caught your eye. You set up an appointment with the listing agent or attended an open house, toured the home, and now your heart is set on it. The home is within your budget and meets most of the criteria for what you were looking for.
You’ve discussed it with your agent and you’re prepared to submit an offer.
But what does submitting an offer entail?
I was under the impression that for something as significant as a home purchase, an offer needed to be written on parchment paper, using a single quill born of phoenix feather and inked with a newborn’s blood, mailed to the sellers by raven at the stroke of midnight.
Um, no. Turns out all you need to do is write an email that details your offer and contingencies. You send the document to your real estate agent and they prepare a deal sheet and forward it to the seller and their agent, along with any other necessary materials.
This is what I wrote in my offer, verbatim:
My family and I are interested in purchasing the property at (redacted)
We would like to extend our offer of (redacted dollars) contingent on a mortgage and appraisal.
We are prepared to put a down payment of 20%, with 5% at contract signing and the balance at closing. We would like an inspection conducted within 7 business days. We are ready to close whenever the homeowners are ready.
Look forward to hearing from you. Thanks!
Some things to note:
In order to for your offer to stand out, you usually have to find a way to sweeten the deal. Some people waive contingencies, which are stipulations that a home must pass, such as an inspection and mortgage appraisal, in order for the deal to move forward. If it doesn’t pass – for example, if the home doesn’t appraise for the price you offered– you’re free to walk away without penalty. Note that I mentioned I would be paying 5% of the 20% down payment (called earnest deposit) at contract signing aspect and conduct a home inspection within the week to indicate that this was a serious offer.
There is also a practice called a love letter, which is pretty much self-explanatory: penning a personalized letter to the sellers about why you love their home. In some states, writing love letters is illegal, but if you feel genuinely passionate about a home, sometimes it can truly reflect in a written letter. I wrote one for the sellers of the home we bought because I felt deeply connected to both the home and the community; the neighborhood was very familiar to me, and the home was at the very top of my list.
Now, all you do is wait for the sellers to accept the offer and you’re one step closer to closing, right?
There’s a reason why everyone from your realtor and your broker to your family and friends warn you not to get too attached to a home before getting your offer accepted.
Here is a list of potential roadblocks that could get in the way:
- Bidding wars. This is when a listing agent deliberately prices a house on Zillow for way less than it should be to incite a bidding war among interested buyers.
- Competitive market. With insanely low rates and a shortage of existing homes or new builds, competition is more fierce than ever.
- Cash offers. As they say, cash is King (or Queen), and many sellers prefer cash offers to mortgages.
- Waived contingencies. A contingency is a stipulation that a buyer makes in their offer in order to move forward with the purchase. It’s basically saying that the offer comes with strings attached and is contingent on a mortgage, appraisal and inspection (these are the basics.) But because the buying landscape is so competitive these days, a lot of buyers will waive their contingencies in order to make for a more appealing offer and faster closing process for sellers. I do NOT recommend doing this: you may be more likely to get your offer accepted, but you could run into significant issues down the road and be on the hook for hundreds of thousands of dollars.
- Overbidding. Unlike in the case of an underpriced home, in today’s market a home doesn’t even need to be underpriced for a ridiculous bidding situation. In the past couple of years, many people will begin their offer at the listing price or higher, if the home or location is desirable enough.
If you’ve managed to bypass all of the above obstacles and got your offer accepted on a home you feel strongly about, congratulations! In today’s competitive market, getting an offer accepted on a decent home is no easy task, so you’re one step closer to purchasing.
STEP 5: Post-offer acceptance.
But wait, there’s more!
Not to be a party pooper, but from contract signing to closing day, a lot can go wrong that collapses the deal. I wouldn’t celebrate just yet.
During my home-buying experience, I was very superstitious about the whole journey. Although many of my friends were aware that my family and I were in the market house-hunting and preparing to make offers, I did not discuss the nitty gritty of the process to anyone until after closing.
Here are the next steps to take after your offer is accepted:
- Home Inspection. A home inspection is typically a mandatory action after an offer is accepted. I say typically because until the last couple of years, it was absolutely critical that you get an inspection done, lest your home have some serious hidden issues and you’re stuck paying for it after the fact. Now, because of the ridiculously competitive market and short supply of homes, buyers are opting to waive the inspection. I definitely do not recommend doing this if you can avoid it.
An inspection investigates the home for any major issues – foundation, outlets, roof, HVAC, exterior, etc. You can get inspector referrals from anyone you know who has purchased a home, from your realtor if you trust them, or read reviews online on Yelp or other service websites. I would ask a few different inspectors for quotes on their fees – it shouldn’t cost you more than $750. After a few days, you’ll receive a full report detailing all issues, both minor and major.
If anything really significant arises — for example, they found mold in the basement, or the boiler needs to be replaced– you have the option to request that the sellers repair all the big ticket items, negotiate the price of the home down, or simply pull out of the offer altogether. Remember that in my offer, I included an inspection contingency, which means that if major household issues were found, I could withdraw my offer at no penalty.
2. Secure an attorney. As I mentioned, in New York, a real estate attorney is mandatory to close the deal. This is the person who will draw up the purchasing contract, pore over the fine print to make sure you, the buyer, aren’t being screwed, and is basically your biggest advocate throughout the buying process. You can ask the attorney all your questions and concerns, and they will be present on closing day. Similar to an inspector, it is best to hire an attorney as soon as possible. Get referrals from homeowners you know, from your realtor, or online. Do your research on an individual before an offer is accepted, so you can send outreach emails explaining your situation and asking for fee quotes as soon as possible. A good attorney is expensive, but they will be worth your money, especially for your first home purchase.
3. Lock your loan terms and mortgage interest rate with a lender. This one caught me totally off guard in my process. Remember early in the process, when you were first shopping for mortgage pre-approvals and got your letter outlining the terms of a loan you were qualified for with a bunch of different banks? Once your offer is accepted, now is the time to decide which lender you are going with and lock. your. rate. This one is super important because the historic low interest rates is one of the driving factors of the buying frenzy during the pandemic, and you want to ensure you get a part of that, assuming that you qualify.
Rates change every day, so if you get a really good interest rate offer one day, it’s not guaranteed to be your loan rate later on unless you lock it. There’s also the option of paying points, which is essentially buying the cost of bringing the rate down. So for example, if you get approved for a 3.125 rate but you really want a 2.99, you can pay to bring it down to that, but it will run you hundreds to thousands of dollars.
STEP 6: Contract signing, process and negotiations.
If you’ve gotten this far, it means that your offer has been accepted, your attorney has sent you a deal sheet outline your terms to approve – e.g. your offer and your contingencies – and you’ve signed a contract. At contract signing, you review the legal terms with your attorney, sign a bunch of documents along with anyone else who is on the mortgage application or house title, and review the estimated closing costs.
Remember when I mentioned earlier how a home purchase can easily be derailed by hidden or unanticipated fees? Purchasing a home in New York City is a special kind of hell: that’s because it is one of the most expensive markets in the country, with its own unique (and in my opinion, unnecessarily obtuse) rules and regulations.
In step 1, I discussed the savings aspect — you should be secure in your finances before moving forward with buying a home, for obvious reasons.
But besides a sizable down payment, your money will be going towards a number of other fees otherwise known as closing costs.
WHAT CLOSING COSTS ENTAIL:
The down payment of your home (again, as little 3% for FHA loans, and at least 20% for conventional loans)
The title insurance/lender policy, which protects the lender against any issues on the house made by the current owner that didn’t come up during title search ($3,000–$4,000)
Recording fees/city and government taxes ($10,000–$12,000)
The inspection fee (typically around $600-$800)
The attorney/legal fees (anywhere from $1,000 to $4,000)
The appraisal fee ($700-$800)
Home insurance (must sign up for insurance before closing day) ($1,500–$3,000, depending on factors such as square footage, location, single-family vs multifamily, near flood zone, etc.)
Title search — investigates the home for previous violations, outstanding tickets, liens, so that you’re not on the hook for it ($700 — $800)
Mortgage tax (around 2% of the total cost of home)
A mansion tax (only if your home is being purchased for $1million or more — another hideous law from hell that only exists in NYC — a percentage of total home cost)
Title closer – the person who comes to closing on behalf of the title company ($200–$300)
Bank attorney fee — your mortgage company’s attorney who will be at closing ($1,000–$3,000)
Real estate taxes for the following quarter (variable)
Bank fees, broker fees, etc (variable)
Loan origination fee (variable)
I might be missing a few, but this list should cover the gist of it.
Bottom line: during your savings period, be sure to anticipate holding down enough additional cash to amount to 1–6% of your purchase price to cover closing costs.
Make sure all your money is seasoned long before your purchase — meaning your lender can trace where it came from. As I mentioned earlier, if you’ve got a bunch of cash stashed somewhere or if you’re receiving large amounts of money in gift cash from family, be sure it is sitting in your bank account for at least two months or deposited along with a gift letter (which will be provided by your bank or broker.) Otherwise, underwriting is going to be very tedious.
A few no-no’s during the entire contract-to-close process:
- DO NOT MAKE ANY LARGE PURCHASES
- DO NOT OPEN NEW LINES OF CREDIT
- DO NOT CHANGE JOBS
Doing any of these will raise red flags to your bank and hinder your home purchase.
After contract signing, you’re another step closer to becoming a homeowner.
In my offer letter, I committed to sending over 5% deposit of my offer and conducting a home inspection within seven days. Now that I signed the contract, I am legally obligated to follow through. This deposit will go into a place called an escrow account.
An escrow is a savings account handled by your mortgage company. It’s where your deposit money for the house is stored safely in the event that something goes wrong and the sellers can’t run off with it. It holds your monthly mortgage payments, annual property taxes, and home insurance, and pays it incrementally on your behalf.
Contract signing is serious business. It binds both sellers and buyers to a legal commitment, and there are penalties to breaking it. For instance, if a seller suddenly receives an offer on their home that’s way higher than yours, they can’t just walk away from the deal and accept the new offer – not unless they want to deal with potential legal complications or pay hefty fees.
The same applies to you, the buyer. The only way in which you can break the contract is if your contingencies are not met. My offer was contingent on an inspection, appraisal, and mortgage, so if any of these failed to pass – for instance, if my lender refused to let me borrow full amount necessary for the purchase, or if the house turned up serious issues during the inspection – then I am free to walk away. But if I suddenly change my mind or get cold feet about purchasing, I could lose the 5% deposit and face other legal issues, too.
If your inspection report turns up any issues you’d like addressed, you need to flag them with your attorney so they can discuss it with the seller’s attorney. At this point, your attorney and the seller’s attorney should be the only mode of communication. This isn’t a hard and fast rule, but it is advised since they are the ones advocating for you from a legal perspective.
If the sellers refuse to address the issues, it’s up to you to decide whether you want to remain in contract or end it. In many instances, inspection issues are cosmetic or can easily be fixed, but if it’s something serious to do with the roof, foundation, etc, then you should push to get it fixed. Your attorney will negotiate on your behalf and include all terms in the contract. If all looks good, then full steam ahead.
OK — so you’ve signed the contract, the house passed inspection, and you’ve locked your rate (I recommend locking for 90 days.) Your broker, if you chose to use one, and your attorney should be in contact as well. Your broker will have also sent you a number of documents to sign, such as the broker agreement, rate lock agreement, etc.)
The next steps are title search (initiated by your attorney) in which a title company investigates the home’s history to see if there are any outstanding issues – such as if there are tickets from the city the current owners haven’t paid, or violations against the house. If any issues are flagged, the title company will flag to the sellers, who must then address and resolve the issues.
Until any title issues are cleared, the home cannot close. In my case, the sellers of the home I was purchasing had a couple of outstanding violations that needed to be fixed. However, because New York City’s housing agencies were backed up because of the influx of purchases during the pandemic, it took a long time to address — well beyond my rate lock. I ended up needing to extend the rate lock in order to secure the low rate, otherwise I would have been forced to accept the current market’s rate which, while still historically low, was not as low as my locked rate.
Extending your rate lock is not fun, because in order to keep the low rate, you have to pay to extend it – a percentage of your home cost, PER DAY. In some instances, the bank will waive extension fees, but not all the time. This is why I recommend locking for the maximum number of days – you never know what will cause a holdup for closing.
While title search is being conducted, your next step as the buyer is ordering an appraisal. An appraisal is a report conducted on the bank’s behalf to make sure the house is worth what you’re purchasing it for, a fee that typically costs around $750. Once paid, the bank will send an appraiser to look at the house and pull information on comparable homes (called comps) in the area.
Comps are other homes in the neighborhood that you are purchasing in, that are similar to your home in terms of number of bedrooms, bathrooms, structure, etc, that have sold in the last 6 months or so. The sold prices of these homes determine the market value, so if a comp recently sold for significantly less than what you’ve offered for your home, it could be a sign that you may be overpaying.
For example, if you’ve offered $600,000 for a 4-bedroom, 2-bath home, and you are putting 20% in down payment, it amounts to $120,000 – which means the bank intends to loan you $480,000 in mortgage. An appraiser will investigate to make sure the home is worth that amount by visiting the home and conducting an audit of similar homes in the area to see if they sold for similar prices.
If the appraiser sees that similar 4-bedroom, 2 baths have sold for much less, they may decide that the home is actually worth $550,000, for example, and not $600,000, and they will list this value on their report. This means that the home did not appraise, and the bank will only loan you enough money to cover their approved appraisal value.
At this point, you can either ask the sellers if they are willing to lower the home price to the appraisal value, or move forward with your offer and find a way to secure enough funds to pay the difference that the bank won’t lend you. If the sellers agree to drop the price to the appraised value, your attorney will send a contract amendment that accounts for the difference.
Your final option is to walk away from the deal with no penalties, since an appraisal contingency was built into your offer.
In my case, my offer for the home was actually $10,000 higher than what the home appraised for, which meant I offered more money than what the house was worth (got a little overzealous there.) Once I received my lower appraisal from the lender, my options were as follows:
a) Pay the difference of the $10,000 at closing because the bank won’t lend me more money than what the home is worth.
b) Get a conventional mortgage with PMI, which would require me to pay an additional fee on top of my monthly mortgage until the debt-to-loan value reached 78%, at which time the PMI would automatically be removed.
c) Have my attorney request that the sellers drop the purchase price to the appraisal value.
d) Walk away from the deal and get my 5% deposit returned (but I’d lose all the other money I’d spent thus far, such as partial attorney fee and inspection.)
I went with option C, and I was fortunate enough that the sellers agreed to drop the price to the appraised value. Trust me, there were tons of houses on the market, some in less-than-stellar condition, that sold for way over the asking price, so I honestly lucked out here.
Once the title is cleared and appraisal is completed, the next step is purchasing home insurance policy, which is mandatory in order to close.
Home insurance is necessary to protect you from anything that can damage your home — roofing issues, a fire, or water damage, for example. It can range from $1000 to $3000 or more, depending on a number of factors like the size of your home, whether it is a single family or multifamily (2 or more units) home, the type of roof and material that it was built it, whether it requires additional flood insurance.
The last and perhaps most anxiety-inducing step? The underwriting process.
When you first apply for a mortgage pre-approval, lenders will pull your credit score and offer you a loan based on factors like your income, the amount of equity you have, your taxes, etc. During the underwriting process, your entire financial history is thoroughly investigated to ensure that you have all the funds necessary to follow through on your purchase, and that any suspicious deposits are accounted for. This is why it is important to season your money well before the final purchase: any large deposits that sit in your bank for longer than two months will not be flagged by the lender.
If you happen to have large sums of money deposited recently that can’t be attributed to your listed income or another legal source, then the bank will ask for documentation on where it came from. Be prepared to provide that information, or suffer the wrath of the bank and possibly lose the deal.
STEP 7: Closing.
Closing day is the big one.
If you’re cleared to close, it means you’ve successfully passed the underwriting process, locked your rate and mortgage, and secured homeowner’s insurance. The sellers have resolved any title issues and inspection problems, the home has been appraised, and you’ve settled any outstanding queries with the sellers.
At this stage, your attorney should provide you with a closing date.
Closing is the day in which the deal to purchase the home is finalized, and you become the legal owner of your new home. It typically takes place at either the sellers’ attorney’s office, or the buyers’ attorney’s office. The people in attendance for closing should be you and your attorney, the sellers and their attorney, the bank attorney, and someone from the title company. You can opt to have your real estate agent and your broker there, but it is not mandatory.
The day before closing is when you must conduct a final walkthrough of the home. This is in conjunction with your realtor, and it is your last opportunity for a general inspection of the home to make sure that everything is functioning and there hasn’t been any significant damages since your official inspection was conducted. If there are any issues — e.g. the boiler is malfunctioning or something that was working during inspection is no longer working–notify your attorney immediately.
Finally, closing: the day you’ve been feverishly anticipating for God knows how long.
Here’s what you need to bring to closing:
- Unexpired form of identification. Your driver’s license, state ID or passport all work. Bring two IDs just in case.
- Bank checks/Cashier’s Checks. This is to pay your remaining closing costs.
Now is the time to pay the rest of your down payment — in my case, the remaining 15%– in addition to the other closing costs I mentioned earlier.
If the bulk of the money you’re using for closing is in an online bank or an institution without a physical location such as Ally Bank, make sure to wire enough of that money to the aforementioned local bank. Closing costs are typically paid via a cashier’s check — you can obtain the latter quickly in person if the cash is liquid at a physical bank — but can take a few days if you do it online.
Sometimes you won’t receive the finalized amounts or names of payees that are due for closing until the very last minute (this was the case for me) so don’t be like me and spend the day before closing panicking because you didn’t know your online bank’s cashier’s check rules. Your attorney will confirm the final numbers with you beforehand.
3. A pen. Prepare to sign your name at least a thousand times.
4. A folder. You will likely walk away with a handful of the physical documents, so place it in a folder for safekeeping. Your attorney will send you digital copies for your filing as well.
The actual closing process shouldn’t take too much time, no more than a couple of hours tops. Throughout closing, the attorneys will make sure that everyone involved is aware of the contract terms, who is responsible for what, how much is owed, and all that jazz. Be sure to ask your attorney any and all questions during closing!
Finally, after all is said and done, the sellers will hand over the keys to your brand-new home.
Congratulations! You are officially a homeowner.
Hopefully this blog wasn’t too long or confusing.
Please note that this covers my experience only, and I’ve tried to convey it to the best of my ability and memory. Feel free to comment with any questions, comments or point out anything you think is vague or inaccurate or would like clarification on.