In a previous post we discussed selling your house in a divorce. The other side of that coin is buying a home. Buying can be more stressful as the decision-making responsibility falls squarely on your shoulders, and a home is likely the largest single purchase you may ever make. Luckily, the same caveat applicable to selling applies to buying — understanding the process involved, and the decisions required can relieve a significant amount of the stress, and allow you to focus on moving forward.
Similarly, this post discusses the home-buying process as a series of “steps,” though, again, the buying process is never as linear, cleanly divided, or simple as described. Even if you think you understand the steps, consult your lawyer and experts for guidance at each step.
STEP 1. PREPARING TO BUY – FINANCIAL PLANNING
Step one; budgeting. How much house can you afford? Is it realistic to contribute the lion’s share of your monthly income to a mortgage payment when you have many other expenses that were not your sole obligation before the divorce (maintenance, utilities, insurance)? It’s possible to obtain a mortgage whose payment is a significant part of your total monthly obligation, but it’s neither necessary nor advisable.
Remember; there are also closing costs (3% – 4% of the price), moving and other expenses (e.g., new furniture) to manage during this process. Plus, most lenders want to see that you have finances to cover a few months of mortgage payments.
Once you have determined your budget, research mortgage options. There are several types of mortgages, with conventional loans, requiring a deposit of up to 20% of the purchase price, being the most common. Speak with your bank about a mortgage; however, a mortgage broker, with access to significantly more lending options, may be a better source.
When you apply for a mortgage, the lender will ask you for substantial documentation. Gathering it all ahead of time can expedite the review and approval process. Be prepared with, at least; 2 years’ tax returns, W-2s, paystubs, bank, brokerage and retirement account statements and proof that you have closing funds. This isn’t a complete list, and your lender may ask for even more information.
All of this information can be provided even before you’ve chosen a home to request the lender “pre-approve” you for a loan. A preapproval is a form of lending commitment (subject to other underwriting requirements), and makes you a much stronger buyer to sellers.
Even if preapproved, getting a loan depends on an appraisal; a bank won’t lend you more than a certain percentage of the home’s value. If the appraisal is higher than your offer there’s no problem; but if lower you may need to come up with extra cash, renegotiate the price, or move on to another home.
STEP 2. FINDING A HOUSE
Now for the fun part! Make a list of your must-haves and your like-to-haves (e.g., price, location, amenities) and start searching! Zillow, Trulia and similar websites are good places to start, or attend open houses. Also, it’s wise, but not required, to work with a real estate agent (whose fees are paid by the seller). An agent can more easily locate options within your desired location and price and ensure the research, paperwork, and other tedious parts of the home-buying process are done for you — preventing your search from turning into a full-time job.
Critically; don’t be afraid to walk away from homes that don’t have your must-haves, and, don’t reject an otherwise perfect home for easily fixable cosmetic issues.
STEP 3. MAKING AN OFFER
Once you’ve found your dream home, you need to submit an offer. Your attorney or agent should help you with the offer process; there are substantial variables that go into making an offer.
When making an offer, remember to:
Bid wisely; ask your agent for sales of comparable homes in the area, and then start a bit lower in your initial offer.
Make clear demands about what you want (e.g., appliances, fixtures, curtains, carpeting, etc.) and don’t want included in the sale.
Determine what contingencies; requirements permitting you to withdraw without penalty if certain things do not happen, will be included. Common contingencies include; (i) completion of a satisfactory inspection; (ii) mortgage contingency allowing withdrawal if you cannot arrange financing; (iii) a requirement you sell your home before purchasing the new house; (iv) pest, radon, or other related inspections; and (v) an examination of the property’s title to confirm that nobody else has any claim or right to the property.
Flexibility with the Closing date can be used as a negotiating tool; if your flexibility helps sellers, you might be able to get other concessions.
STEP 4. THE SALE PROCESS
Once the offer has been submitted and negotiated, the final agreement containing key terms such as price, contingencies, financing terms, and closing date is signed, and you’re ready to move forward.
Your first act should be to find a qualified home inspector and conduct an inspection. The inspection is a must-do! No one wants to move into a house and discover that the “new” HVAC is 30 years old, the home has termites, or worse. If possible, attend the inspection; it’s a great opportunity to ask questions and learn about the home you may soon call your own.
The inspector’s report will note issues and anticipated repair costs. Your agent will submit these anticipated costs to the seller; and, depending on the cost of the fixes, you can request that seller fix the issues before Closing, or reduce the home’s price by the cost of the repairs.
As the Closing approaches continue to be vigilant. Obtain a detailed list of closing costs from your lender. Besides the expenses tied to your loan, you will have fees such as title insurance and transfer taxes; however, watch for gratuitous fees such as messengers, or e-mail printing and ask to have these items removed from your bill.
The day of or day before Closing you should do a final walk through. This is an important step. It’s your last chance to see the house before you buy it. Come prepared with your checklist, ensure that the agreed-upon repairs were completed and everything works. If possible, have your agent accompany you as witness and help answer questions.
The Closing date is when you take ownership. By that day, financing and other contingencies must be satisfied and title examination completed. At closing, paperwork required to formally obtain the loan and consummate the sale is completed, money is transferred (from you and your mortgage company to the seller), and, congratulations, you get the keys.
Repeating what we said in our last post; buying a home is a monumental undertaking. In a divorce, the emotional and financial consequences are exponentially magnified. Better understanding the process and working with professionals who can guide you through the maze of issues can help smooth that process and allow you to focus on moving forward.