1) Steps to buying a house in Rochester, MN
Step 1: Homebuyer Education
The more time you invest upfront learning about the home buying process the more successful you will be at buying the RIGHT house. You will also feel more comfortable and confident when the time comes to put an offer and start the house buying process. This guide will be great place to learn more and will serve you as your guide to buying a home.
If you are struggling with your your credit, budget and or are not in a financial position to buy a house there are resources here in Rochester, MN that can help you.
Three Rivers Community Action is a non-profit organization here in Rochester that has home buying counselors who are ready to help at not cost to you.
Scheduling a meeting with a Realtor and/or lender will also help you learn more about the home buying process. It is important that if you have questions you can meet with a professional who is willing to spend the time to answer questions and go over the home buying process.
I am always happy and available to help in any way I can so feel free to reach out anytime!
Step 2: Figure out what’s affordable
There are a couple different ways to decide what’s affordable. What’s your current rent payment? Is it affordable? Based on a monthly rent or home payment you can figure out what an affordable house price will be for you.
Another more objective way to analyze if a payment is affordable to you is to look at your gross income and do a little math. Let’s do an example. Say you make $50,000 a year. That would equal $4,166 per month. The lender who borrows you money would want you to have a monthly home payment between $1,041 – $1,750. Now the higher end of payment means that you would be spending 42% of your monthly income towards a home. This is a high percentage because it isn’t taking into account monthly debt payments and other expenses you may have.
The lower $1,750 payment would mean you are spending 25% of your monthly gross income. Now, if your payment is lower than that, the bank would still be happy to help you buy a home but when considering the median home price and dow-payment most buyers do, it wouldn’t be unreasonable for your house payment to end up being around 25%-42% of your gross income.
If you aren’t a numbers person or just don’t like doing math, the Realtor you work with or lender should be able to explain this to you in detail.
Home affordability excel spreadsheet
Step 3: Meet with a Lender
There are different lenders that will promote different products with different interest rates, terms and costs. Once you do find a lender you feel comfortable with you should get a pre-approval. This step is important to have done prior to looking at houses.
Depending on your house buying goals there may be a lender that will better meet your needs. For example, if you are a first-time home-buyer, you may want to work with a lender who provides downpayment assistance. Below are a couple of options for local lenders here in the Rochester area.
Mayo Credit Union
Guaranteed Rate Affinity Plus
A lender will ask you for the following to see if you qualify or a loan and so that you can get pre-approved:
- Most current paystubs covering last 30 days
- Last two years of your W-2
- Most current bank account statement
- Last two year tax returns
They will also need to check your credit so that they know what your other debts are, see if you have collections and make sure your credit score is where it needs to be to qualify for a loan.
Step 4: Shopping for a house
This is the fun part of the home buying process. This is when you will meet with a professional Realtor and talk about what you are looking for in a home and what your needs are. Your Realtor will help you narrow down your search criteria and pro-actively help you find homes and tour them. Your Realtor will guide you throughout the entire home buying process.
Needs vs. Wants List
When looking for a great Realtor make sure you check out their reviews from different sources like Zillow and Google Business. Below are links to my most recent reviews.
Google Business Reviews
Step 5: Writing an offer & negotiating
Once you find a home that you love and meets your needs, then it’s time for your Realtor to help you write a purchase agreement. A purchase agreement is a written contract that when signed by both buyer and seller it becomes a legally binding agreement.
When putting an offer there are three things that can happen. The seller can:
- Accept your offer
- Send a counter-offer
- Decline your offer
The main parts of a purchase agreement are the following:
Offer price: Dollar amount the buyer offers
Seller paid closing cost: Dollar amount you are asking the seller to pay for closing cost.
Earnest Money: Money you put up front to show you are serious and have funds to put towards purchasing a house.
Inspection Contingency: Period of time that the buyer has to have an inspector look at the home.
Financing Contingency: Protects the buyer in case the buyer fails to secure financing after being pre-approved.
Closing Date: The future date in which buyer will signs necessary documents to purchase the home and become the new owner.
Having a professional Realtor will help you ensure that you are getting the best possible price and terms on your new house. A Realtor will be able to provide you with information on what other houses in the area have sold for and provide you support during the whole house buying process.
Step 6: Professional Home Inspection
Even though you aren’t required to do a home inspection, it is always strongly recommended that you have a professional inspector inspect the house.
If you decide not to have a professional inspector you can always bring a family member or friend who may have expertise in construction, electrical, plumbing etc. who can give you some feedback on the condition of the house.
Home Inspection Checklist
For more information on local home inspectors here in Rochester, MN click here.
Step 7: Final Mortgage Application
During this part of the home buying process you will meet with your lender once again either in person or via email/phone. You will get a loan disclosures and you will also lock your interest rate.
Afterwards, the lender will also order the appraisal. Once the appraisal is ordered it usually takes about a week for the appraiser to go to the property, do the appraisal and get it back to the lender. Once the lender receives it, the appraisal has to go through underwriting.
At this point you can also start searching for a home insurance quote. Once you have an insurance company you want to work with, you can have them contact your lender or vice versa and the insurance agent will send your lender an insurance binder.
Step 8 Closing Date
The closing date is basically the day that you get keys to your new house. However, there are a few couple of things remaining before it’s all official.
What is a walk-thru?
Prior to closing you do what’s called a walk-thru on the home. This is usually done a day before closing or the day of closing. A walk-thru is where you go to the house to make sure that everything still looks like it did when you last saw the house. For example, at the walk-thru you will be checking for the following:
- Repairs the seller said they were going to fix
- Water heater is working
- No plumbing leaks on any of the sinks
- Furnace is heating & A/C is working (weather permitting)
- Appliances agreed upon to remain int the house are still there
Essentially, you are doing a visual inspection of the home. Typically, if there are issues, all parties will work together to get things fixed but it’s important to always have everything in writing and trying to be proactive during the process.
What is the closing date?
Closing date is the day that you sign all necessary documents so that the ownership of the house can be transferred from the seller to now you the new owner of the house. You will sign a lot of paperwork but at the end you will get the keys to the house. At closing you will need to bring a form of identification so basically a government form of ID.
One thing that’s important is to homestead the your new home. In Rochester, you will typically get a document in the mail that you will need to fill out in order to homestead the property.
2) Home Buying Team
- Housing Counselor
- Insurance Agent
- Closing Agent
- Loan Servicer
3) Money Management
Buying a home requires you to have a sound spending plan. That way you can ensure that you will have what’s needed to pay the mortgage and maintenance expenses that are part of being a homeowner.
Some costs associated with buying a house are:
- Closing Costs
- House maintenance
Here is a great article with top apps for managing your budget. I personally use Mint.com.
4) Credit Building
A credit score is a number typically ranging from 300-850. This number is a measure of financial risk to a lender. The higher the score the less risky you will be to a lender and conversely the lower your score the more risky you will be.
There are different scoring models that calculate your credit score. The most popular one is your FICO score. Now there are three credit bureaus that each calculate a different credit score. So when you meet with a lender and the lender pulls your credit report you should have three scores. The lender will pick your middle score and that’s the score that will be used to determine the risk level for the lender.
The earlier you can start working on increasing your credit the better. If you already have a good credit score then you are good to go.
Credit Karma is a great website and app to use to monitor your credit and it’s free.
5) Mortgage Basics
When buying a house it can feel overwhelming understating all the different terms and how financing works. So here we are going to explore the basics so that you feel comfortable when meeting with a lender.
Your monthly house payment will be made up of the acronym P.I.T.I. Let’s do an example:
Sale Price: $200,000
Down payment: 3% or $6,000
Loan Amount: $194,000 (30 year term)
Interest rate: 4%
Property Taxes (Yearly) – $2,500
Home Owners Insurance (Yearly) – $1,200
P = Principal – The dollar amount you pay every month that reduces your loan amount
I = Interest – The dollar amount you pay every month that goes towards interest
T= Taxes – The dollar amount you pay every month that goes towards property taxes
I= Insurance – The dollar amount you pay every month that goes towards property taxes
Principle & Interest= $936
Property Taxes = $208
Home Owners Insurance = $100
*Total House Payment = $1,235 + PMI
Private mortgage insurance or (PMI) is another expense that must be taken into account when your down payment is less than 20%. In this example we should expect to have PMI as part of the total house payment. Learn more about PMI
Fixes Rate vs. Ajustable Rate Mortgage (ARM)
Most loans will typically have a fixed interest rate. They will also not have a pre-payment penalty if you want to pay extra. However, you should confirm these details with the lender you use.
Closing costs are expenses associated with the purchase of your house. These costs include the following:
- Loan Origination Fee
- Title Insurance
- Title Fee
What are pre-paid expenses?
- Home Insurance Year expense
- Property Taxes – Half of your yearly property tax expenses
What is an FHA Loan?
An FHA loan is a government backed mortgage that’s insured by the Federal Housing Administration or FHA. This loan requires lower credit scores and down payments compared to what a conventional loan may require. This makes FHA loans popular with first-time home buyers. Some things to consider with and FHA loan:
- FHA upfront mortgage insurance (1.75% of loan amount)
- Mortgage insurance (If less than 20% down payment)
- Downpayment minimum of 3.5%
- Loan terms 15 or 30 years
FHA loans offer more flexibility for those buyers who don’t qualify for a conventional loan but they will cost you a more in the long run to have an FHA loan.
What is a conventional loan?
A conventional loan is typically not secured by a government entity. It is available through a private lender or the two government sponsored enterprises Fannie Mae and Freddie Mac.
Conventional loans will be less flexible in the requirements to qualify for a mortgage but will usually cost you less money in the long run. Compared to an FHA loan, conventional loans don’t have an up-front mortgage fee and the mortgage insurance can typically be removed after paying 20% of the original appraised value of the house.
It is important to see which loan type is more beneficial and explore all your options are when working with a lender
6) Real Estate Basics
- Earnest Money – Money that a buyer that goes towards your down payment but that you put up front when making an offer on a house. This money will usually be placed on trust account that is managed by the listing agents broker account.
- Contingencies – There are two main contingencies that important to understand:
- Inspection – period that a buyer will have to complete an inspection, ask seller for repairs and or negotiate, etc.
- Financing – protects the buyer and gives the ability to cancel a purchase agreement if the buyer is unable to secure financing to purchase the house.
- Seller’s Disclosures – Information that a seller will provide that should include any material fact that they know of that may affect your use or enjoyment of the property.
Types of Residential properties
- Single Family
- Twin homes
Appraisal – Formal valuation that is conducted by an appraiser and required when a lender is financing a property. There are a couple of different methods used for doing an appraisal. For residential properties, an appraiser will basically find similar houses that have been sold as close as possible to the house the buyer is purchasing, that has the same characteristics such as house size, bedrooms, bathrooms, style, etc.
What does a professional home inspection typically inspect?
- Radon Testing
- Thermographic Inspection
What is the inspection process?
Typically and inspector will do their inspection for usually about 2 hours depending on the house size and condition. Then after they are done buyers are scheduled for a walk-thru which takes about one hour or so again depending on findings and questions buyers may have. Afterwards the inspector will send you a report that usually will contain all the findings and information from the house inspection that was gathered.
What happens after a home inspection?
Once you get your inspection report and review it buyers will work with their Realtors to select the most important items or things that they want the seller to fix or replace. Sometimes the seller will prefer to negotiate on price or other terms instead of fixing or replacing at item. This part of the house buying process is different and varies in outcome. Having a great Realtor on your side will make a huge difference.
8) Life as a Homeowner
Keeping your house in great shape after purchasing it is very important. It will ensure that when you sell your home in the future you are able to sell it for the best price possible. Also, it will make your home ownership a lot more enjoyable.
How much should you expect to spend on maintaining your house? This is a great question and depends on several factors such as age, condition, wear and tear etc. The rule of thumb is to expect to spend about 1% of the house sale price every year. For example if you bought a house for $250,000 you should expect to spend about $2,500 a year. Now this is obviously a rough estimate. Some years you might spend more and others less but this rule will at least give you a baseline of what you should be budgeting.
Tips to be successful
Get to know your neighbors and be a good neighbor
Organize all your paperwork from when you bought your house
Any new mail you get regarding your house, property taxes, insurance etc. make sure you keep them all handy. If you ever have questions feel free to reach out to your lender, Realtor, title company etc.
Tools every homeowner needs
- Nail Set
- Tape measure
- Utility knife
- Putty Knife
- Phillips Screwdriver
- Flathead Screwdriver
- Long Nose Pliers
- Snow Shovel
- Hex Key Tools
- Power Drill
- Zip Ties