Everything You Need to Know About Purchasing a Home in South Florida
Whether you’re a first-time homebuyer or a seasoned veteran, keeping tabs on the litany of tasks required to purchase a home can be overwhelming. Escrow accounts, contract requirements, inspections, title insurance, mortgage procedures…the list is long. But I’m here to help you sort through all the details and get you on the fast track to buying your new home.
Step 1: Preparation…And Some More Preparation
Yep, it’s that important that I had to repeat it. Preparation, or a lack thereof, can be an absolute killer during the home buying process. Don’t be left in the dark, feeling unsure about making major decisions. Get yourself prepared and enter the home buying arena with confidence.
establish homeownership goals
Now is the time to ponder your goals and expectations for a home, not when you’re at the closing table about to sign on the dotted line. Only you can make these determinations, but here are some factors to consider:
- The type of home that fits your needs, whether it be a single-family residence, multi-family unit, condo, co-op, townhouse, mobile home or farm
- Whether this will be your primary residence, a second home, or an investment property
- How long you plan to own the home and if you need room for expansion
- Whether or not you’re willing to take on a project such as a fixer-upper, foreclosure, or short sale
Pro Tip: If you’re purchasing a property with a spouse, family member, friend or business partner, be sure to get everyone on the same page and working toward the same goals. Be open and honest about your aspirations, and share them with each other and your real estate agent. Arguing in front of a seller over the benefits of a walk-in closet versus a man cave is not a good look…
set a budget…no really, you need to do this
Whether paying cash or obtaining financing, bite the bullet and prepare yourself a detailed budget. I know, it’s boring and time consuming, but better to find out now if you’re overreaching instead of after closing. This Monthly Expense Sheet and the standard 28/36 Rule will get you started. Be sure to include all current expenses as well as future costs associated with owning your new home. Establishing a monthly outlay that you are comfortable with is the key here. Just because a lender is willing to give you $300,000 or you have $300,000 in savings doesn’t mean you have to use the entire amount. The excitement of owning a new home will quickly turn sour if you’re “house poor” after 3 months of ownership.
prioritize wants vs. needs
I ask all my clients to sit down and compile a list of everything they need in a home, followed by everything they want in a home. Needs, I’ve found, are usually pretty standard assuming you have a roof over your head and running water. Home size, number of bedrooms/bathrooms, and location generally fill out the top 3 spots. Also taking consideration are less common items such as handicap accessibility and space to work-from-home.
Wants, alternatively, can be extensive and should be prioritized to keep your home search realistic. A home gym, two fireplaces, and a 4-car garage are great features, but are they really necessary? You be the judge, but try to keep expectations in check when working on a budget. Many “wants” can be added later on, but you cannot feasibly change your home’s location.
do i have sufficient savings & credit?
Saving enough money for a down payment or cash purchase can take months or even years. Unfortunately the spending isn’t confined to simply the home’s purchase price. Closing costs, attorney fees, inspection reports, mortgage charges and homeowner’s insurance are just a few of the added upfront costs. As a general rule of thumb, you should expect to spend anywhere from 1.5% to 5% of the home’s purchase price on these closing-related items. This can deplete your savings in a hurry if left unaccounted, leaving you short for things such as vacations, holiday shopping, or even basic necessities. So, don’t forget to create that budget!
Also, take a look at your credit score and debt-to-income ratio. If going the financing route, lenders will rely heavily on these two metrics. Simply put, the higher your credit score the better your interest rate will be. And most lenders will not issue a loan if your debt-to-income exceeds 36-43%. So, if these areas need work, now is the time to address them.
must i sell my current home before buying?
If you plan on making your new home your primary residence, you’ll probably need to sell your existing home first. In many cases, you’ll need the proceeds from the sale of your current home to cover the down payment and closing costs associated with the new one. At the very least, I recommend having your existing home actively listed for sale before ever beginning your new home search, preferably with a few qualified buyers already showing interest.
Simultaneous closings can be tricky and often times require additonal clauses and contract riders. In today’s market of low inventory and historically low interest rates, savvy sellers are aware that the buyer pool is filled with plenty of qualified candidates. This makes them less likely to accept an offer contingent on the sale of an existing home. So, bottom line, make sure you are well on your way to getting your current house sold before setting out to purchase a new one.
For more information on selling your home, check out my Website as well as The 6 Essentials of Home Sale Preparation. Or Contact Me directly to schedule a free home consultation.
Step 2: Secure Financing
Once you’ve established some realistic expectations for your new home search, it’s time to move on to step two: how you are going to pay for this huge expenditure. If you’ve saved and saved and saved and are in a position to pay with all cash, congratulations. You can skip right along to step three. If you’re not one of these lucky few, your next order of business will be to secure financing via some sort of mortgage loan.
research lender types & loan products
Choosing the right type of lender and the best loan product for your needs can seem like an impossible task. There are so many options to sift through, it can be overwhelming to say the least. Conventional, jumbo, credit union, brokers and bankers, FHA…it’s a lot to digest. The key takeaway here is this: every lender is different and so are the products they offer. Doing your research and selecting the best solution for your needs will save you time, money and a big headache down the road.
There are literally thousands of articles published online that cover this topic in great detail. So rather than re-inventing the wheel, I encourage you to check out the following: Understanding Loan Options from the CFPB and What Are the Main Types of Mortgage Lenders from Investopedia.com. These two articles do a great job covering the different types of mortgage lenders and the various loan products at your disposal.
Once you’ve nailed down your lender type and loan product, you’ll want to shop around for the best possible deal. This generally involves searching for the lowest interest rate, but be on the lookout for excessive lender fees, points, and shady pricing tactics. A “great rate” can oftentimes come with a laundry list of caveats, but if you’ve done your research you will know all the right questions to ask. The CFPB offers an amazing Home Loan Toolkit that will keep you organized and on track when shopping rates.
select a primary & backup lender
Now that you’ve narrowed down the best rates and weeded through all the fees and fine print, it’s time to decide on your lender of choice. But don’t stop there. Make sure to have a secondary lender in tow for the off-chance something goes awry with option #1. No lender can guarantee with absolute certainty that your loan will go through, so having a fall-back plan can be a saving grace when closing day is fast approaching.
Pro Tip: Don’t overlook the importance of a well-regarded loan officer. This is the actual human being you will be dealing with on a regular basis. If they are not on top of their game, important details can slip through the cracks. Keep tabs on their responsiveness, willingness to answer questions, and follow-up skills. If they don’t instill trust in you, chances are they’re not keeping up behind the scenes.
obtain a loan pre-qualification and pre-approval
So there’s one last thing before you can go out and actually start searching for your dream home. And it’s a biggie.
Most sellers these days won’t even consider an offer contingent on financing unless it is accompanied by some type of mortgage pre-committment. This signals to the seller that you’ve done your homework and are serious about following through on your offer to purchase. There are 3 phases of mortgage committment, each coming at certain milestones of the buying process.
Mortgage pre-qualification is the first phase and is pretty straight forward. It requires some basic financial information and can be done over the phone in a matter of minutes. A good lender can have a pre-qualification letter back to you the same day, enabling you to go out and look for homes within the given price range.
Phase 2 is mortgage pre-approval and is much more in depth. It involves filling out a loan application, allowing the lender to check your credit, verification of your financial information, and a home appraisal (known collectively as underwriting). This step typically takes place a little later in the process (once you’ve settled on the house you want to buy), but it’s worth noting here because you can be readying some of this information in advance. With the pre-approval, your lender will provide you with specific values for your approved loan amount and interest rate. Check out Pre-Qualified vs. Pre-Approved: What’s the Difference for more details.
The third and final phase is the mortgage loan committment, but we’ll address this later on…
Step 3: Find a Home
So you’ve done tons of research, established your wants and needs, and secured the funds for purchase. Now the fun begins! It’s time to get out and start pounding the pavement. Well, almost. You’ll want to narrow down your search to avoid traversing the entire world. If you’re working on a budget, finding the perfect fit may require some creative thinking. So, don’t be discouraged if you aren’t completely blown away by the first few houses you see. It’s amazing how a few simple DIY projects can transform a dud into a diamond.
select a real estate professional to assist with your search
A real estate agent will be your biggest advocate when it comes to buying a home. You should be able to lean on them for support and guidance, and they are bound to you by a fiduciary responsibility if working as a Single Agent. A good agent will be skilled in contracts, negotiation, customer service, problem solving, and research. They should have a solid working knowledge of the real estate market, home design & construction, loans & closing procedures, and local customs & laws.
Honesty, integrity, attention to detail, and a strong work ethic will set the great agents apart from the average ones. Choosing someone that understands you and your goals is imperative. While your husband’s friend’s niece may be an easy choice, it’s better to seek out an agent that meshes with your personality.
Pro Tip: Be sure to ask if your agent charges a “transaction fee” or “buyer’s fee.” These are “garbage fees” that get tacked-on at closing and are, well…garbage.
Note: Keep in mind that real estate agents are required by federal law to abide by Fair Housing standards, so there are certain questions they simply cannot answer for you. Something as innocuous as “is this a safe neighborhood” is off-limits to agents. So if your agent tells you, “I encourage you to do your own research,” you’ll know why.
narrow down results online
The internet is filled with homes actively listed for sale and is the best place to begin your search. My Website, other real estate websites (like corcoran.com & realtor.com), and social media are an excellent resource for creating a more manageable group of possibilities. Shoot for 6-10 listings for starters, as this will give you a good overview of the homes in your price range. Be sure to set up saved searches, “like” favorite properties, and sign up for automatic email updates. This will keep you in the loop and ensure you are the first to know about listings new to the market.
tour active listings & open houses
I’ve found over the years that most buyers can only handle about 5 showings per day. Yes, you may be the exception, but the details start to get fuzzy for everyone else after four or five houses. So if you have a plethora of homes to see, plan on spreading them out over several days. Also, a good practice is to take notes as you walk through each house. This will help you recall important details at the end of each day and draw comparisons later on.
If you’re touring open houses, it’s always best to have your real estate agent present. If for some reason this isn’t possible, be sure to let the listing agent know that you are already working with another agent. Be polite and courteous, but don’t fall into the trap of answering all of their questions. Remember, the listing agent works on behalf of the seller, not you!
Step 4: Make an Offer
So you’ve found your dream home and are ready to make an offer. The excitement at this point is almost palpable. But any old offer won’t do. Knowing which contract to submit, alotting the proper amount of time for inspections & closing, and understanding proper procedure is vital to making sure you are protected. You’ll rely heavily on your agent during this phase, and rightfully so.
contracts, clauses & contingencies
The Florida Association of REALTORS® provides all its members with a comprehensive set of contracts, riders, and addenda from which to work. These documents are tried-and-true, all-encompassing, and updated on a regular basis. If purchasing residential property in South Florida, there is really no reason to use anything but these standard devices.
I’ll avoid putting you through a contracts class here, but you should be aware of the two primary instruments used in our area: The Florida REALTORS® Contract for Residential Sale & Purchase and The Florida REALTORS® AS-IS Contract for Residential Sale & Purchase. There are several key differences between the two, primarliy regarding repairs and permit issues. Each contract has its own benefits and approriate setting, though the AS-IS Contract has become the most commonly used in recent years. I recommend reviewing these documents with your agent in advance of making an offer so you fully understand the parameters and legal obligations.
putting pen to paper
Writing and negotiating your offer is where your real estate agent becomes invaluable. If they truly know the local market and are shrewd tacticians, they will ensure that you don’t overpay or, worse yet, risk being outbid. Your initial offer will be a jumping off point and will set the tone for future negotiations. It’s easy for a seller to be put off by a “low-ball” offer, so you’ll want to make a strong enough first impression without being too overzealous.
If you’ve submitted aything less than a full-price offer, chances are you can expect the seller to make a counter-offer. A counter-offer is a good sign that the seller takes you seriously and is willing to play ball. This back-and-forth can take place several times over a period of days, so try not to get hung up on insignificant details. As with any negotiation, you’ll of course want to operate from a position of strength, but keep in mind the ultimate goal is to have a meeting of the minds.
escrow & deposits
Now that you and the seller have agreed on a price and terms, it’s time to move into the escrow stage. Escrow is simply a period of time in which the seller agrees to take their home off the market for an agreed-upon amount of money – the deposit. There is typically an initial deposit due upon the acceptance of your offer, and a secondary deposit due at the completion of the inspection phase. These monies will be held by a neutral third party (the escrow agent), and then applied to your down payment or closing costs at time of settlement.
During this time you will complete all your due diligence and satisfy any contract contingencies. Once these are complete, your deposit will “go hard” and you will be bound legally and financially to all contract terms. This is also the point where you will submit to your lender for mortgage pre-approval and submit any applications for condo/HOA approval if applicable.
Step 5: Inspections & Due Diligence
Note: Steps 5 & 6 generally overlap as many of these requirements are taking place simultaneously.
While the days of “buyer beware” are long gone, it is still prudent to examine all aspects of a home’s “salability.” Florida Law requires that homeowners (and their appointed real estate agents) disclose “all known facts materially affecting the value of the property” which are not readily observable, but what if there are defects the homeowner isn’t aware of or isn’t sharing?
A qualified home inspector can provide you with a detailed report of the home’s physical condition, and a title company will work on your behalf to sort through the home’s ownership background. For a few hundred dollars now, you could avoid some hidden nasties that would cost you bigtime down the road. Let it be known, no home inspection or title search is infallible, but they can go a long way in giving you peace of mind.
Pro Tip: If buying a home with a mandatory HOA/COA, you’ll also want to use the inspection period to review all rules and policies set forth by these governing bodies.
typical home inspections
The four most common inspections performed in South Florida are the Standard Home Inspection, the 4-Point Inspection, the Wind Mitigation Report, and the Termite/WDO Inspection. Most inspection companies offer these services a-la-carte or in some form of package if necessary. Prices are dependent on the size and age of the house, but will generally start around $400 and go up from there.
Cash buyers are under no obligation to obtain any of these reports, but a standard home inspection is still recommended at minimum. If you’re going the mortgage route, one or all of these may be necessary depending on your lender requirements. For instance, your lender will mandate a 4-Point Inspection for a home that is 25 years or older. This standardized form focuses solely on the home’s roof, plumbing, electrical, and HVAC components. And yes, we have hurricanes in South Florida, so a wind mitigation report will assess a home’s structural stability in the event of a windstorm. A home conforming to the latest building codes can save you bigtime on your homeowner’s insurance.
While less common, there are a number of specialized inspection reports that are applicable to the South Florida market. In many cases these reports will be overkill, and the costs will add up quickly. But if you’re in the market for waterfront, historic, or high-end luxury homes, you may want to invest in one of more of these:
- Pool Inspection
- Sewer & Septic Inspection
- Seawall Inspection
- Soil Sample Report
- Chimney Inspection
- Radon Inspection
- Lead-Paint Inspection
- Asbestos Inspection
- Mold Inspection
- Defective Drywall Inspection
A title search analyzes the ownership history of the property and determines if there are any encumberances. Basically it’s a search of the public records to confirm the owner has the legal right to sell you the property. There are a number of issues that can be labeled as “defects”, and your title agent (or attorney) will do this research on your behalf for a small fee. Survey disputes, easements, liens, public records errors, and forgeries are a few of the items you’ll want to know about and/or have remedied prior to purchasing your home.
If any issues do arise with the home’s physical condition or ownership history, you will be faced with several options depending on the contract being used. With the AS-IS Contract, you will have the option to a) cancel the contract, b) accept the property “as-is”, or c) renegotiate with the seller. If using the Standard Contract, the seller will be obligated to remedy most defects up to a certain dollar amount. Anything beyond this ceiling will require renegotiation or cancellation.
Check out my post, Home Inspections Explained, for details on the various types of reports.
Step 6: Mortgage Process
As mentioned earlier, if you are paying cash for your home you can skip this financing step and move right along to step 7. Buyers obtaining a mortgage loan however will need to abide by the procedures and requirements set forth by their lender. Along with your real estate agent, your loan officer will be by your side throughout the buying process. The majority of your loan application will have already taken place during the pre-approval phase, but there are a few additional details to wrap up.
Note: your lender is required by federal law to furnish you with a Loan Estimate within 3 days of receiving your loan application, so be on the lookout!
We touched on this earlier, but underwriting is basically an assessment of how risky you are as a borrower. An expert in finance (the underwriter) will closely examine your credit history, income, debts, assets and other factors to make a determination of risk. It’s important to note that during the entire home buying process you will need to keep tabs on your credit score, spending, and income. Any change to these areas could result in your application being denied. So, now is not the time to alter career paths, apply for a new line of credit, or buy that new Mercedes you’ve been eying…
Irregardless of your loan product or lender, an appraisal will be mandatory with any home loan. Essentially this is a detailed examination of a home’s value and is performed by an independent, licensed individual – the appraiser. It will provide surety to your lender that they are not over-financing your purchase. Mind you, there are specific standards required of all appraisers, but it is still just one person’s opinion of price. The good news is, if an appraisal comes in “light” you’ll be able to use it as a bargaining chip to renegotiate with the seller.
The final condition laid out by your lender will be that you purchase insurance. The types of policies required will be dependent on your down payment amount and the location of the home, and you are responsible for choosing the insurance provider.
Homeowner’s insurance will be a given with any home loan, and your lender will ask that you obtain a policy with certain coverages prior to closing. Similar to your mortgage, you’ll want to shop around for the best rates. And keep in mind you will have to pay for 12 months in advance, so be sure to factor this into your budget.
If purchasing a home with a mortgage loan and less than 20% down, your lender may require Primary Mortgage Insurance (PMI). This additional coverage protects the lender in the event you default on your loan. It usually ranges from .5% to 1% of the loan amount, and can be eliminated once you’ve built up 20% equity in the home.
Flood insurance may also be required if the home is located in an “area of high risk” as defined by FEMA’s Flood Maps. Policies generally start around $400 per year, but can go up to several thousand dollars depending on the home’s location and amount of coverage.
We touched on this in section 2, but once you’ve submitted all your documentation, underwriting is complete, all conditions have been met, and the home has been approved, your lender will issue you a notice of final loan committment. This will contain the exact loan amount and terms of your financing and is usually the final step before closing.
As stated previously, every mortgage is unique and may have different requirements. Condo loans are particulary tricky in the South Florida market. Estoppels, HOA approval letters, and condo questionaires are some of the factors you may encounter.
Step 7: Closing
You’ve nearly reached the finish line and closing day is almost upon you. You’ll need to arrange a few minor, yet still significant details to make sure everything goes smoothly.
pre-closing & walk-through
Prior to signing any closing documents or transferring funds, you’ll want to be sure your new home is ready for occupancy. This involves scheduling movers, setting up utilities in your name, initiating your wire transfer, and performing a final walk-though or re-inspection. Typically these will take place a day or two prior to closing.
review closing documents
If paying cash for your new home, your closing statement will be what’s known as a HUD-1. This is basically a list of all credits and debits to/from the buyer and seller. You’ll recieve a preliminary copy of this statement in advance of closing, giving you ample time to have it reviewed by a real estate attorney if you deem necessary.
For buyers obtaining financing, you will have a much more extensive list of documents to sign at closing. As of 2015, federal law requires the use of a Closing Disclosure Statement. This document lays out all the details of your mortgage loan and closing costs, and must be provided to buyers at least 3 days prior to closing. Again, reviewing this document ahead of time (along with your promissory note and mortgage) with a real estate attorney is best practice.
closing & transfer of keys
On the day of closing you will be tasked with signing all closing documents and ensuring all funds needed for closing are transferred. Be sure to bring 2 forms of identification with you. The closing packet will include your HUD-1 Statement or Closing Disclosure Statement (along with a promissory note, mortgage, legal affidavits, and any applicable disclosures). If you’ve made the proper preparations, you will have already reviewed these documents and will simply be checking for any discrepancies.
Once you’ve signed and your funds have been received by the closing agent, you’ll get copies of everything and a set of keys. And that’s it, you are officially a new homeowner!