Home Buyer's Guide
There are many things to consider when it comes to buying a home in Madison. Whether you’re buying your first single family home or condo, moving to a larger home or downsizing, our in-depth Buyer’s Guide will walk you through all the steps. Click through the tabs below to learn how to:
- Get pre-qualified for a home loan, make important financing decisions and choose a lender
- Conduct your home search like a pro, online and in person
- Be confident in making an offer and not be overwhelmed by the paperwork, negotiations or bidding wars
- Prepare for the closing process and understand all the costs so you don’t find surprises
When it comes to financing your new home, there are many things you’ll need to consider. First, you’ll need to get pre-qualified for a mortgage, then you’ll need to make some important financing decisions and then you’ll need to choose a lender.
Get Pre-Approved for a Mortgage
Today, in the real estate market or Madison and the surrounding communities, you really need to be pre-qualified before any seller is going to take your offer seriously. This will also help you have a clear understanding of how much you can afford to borrow.
To pre-qualify for a mortgage, your lender will look at your income, your debts and your down payment. Because we’re in a “seller’s market” right now, it’s advisable to take that pre-qualification to the next level before you find your perfect home by getting pre-approved for a mortgage. A mortgage pre-approval will be in writing (generally valid for 90 or 120 days) and will also require you to prove your income and credit history. Pre-approvals will include an interest rate guarantee.
However, a pre-approval is not a guarantee that a lender will provide a loan for just any amount of money for any kind of home. Lenders want to know that the home they are purchasing with you (by lending you the money) is worth what you paid. In Wisconsin, banks require an independent appraisal of a home before they advance the mortgage funds.
By being pre-approved you will know how much mortgage financing you can get, which will help you know what price range of homes you should be targeting in your search. It allows you to focus your house hunting efforts, and provides relative certainty about financing once you find your perfect home.
Mortgages can be a little intimidating, especially for the first-time buyer. Once you’ve qualified for a mortgage, there are some basic decisions you will have to make before you close on your house or condo. These decisions include: mortgage term and amortization, interest rate and type of mortgage. The following section provide basics for each of these decisions:
The mortgage term and amortization period impact the amount of money you can borrow (and thus the price of the home you can buy), and establish how much your monthly payment will be to your lender.
The term of a mortgage is the entire time a lender will loan you money for – the most common terms in the United States is either 15 years or 30 years. Your monthly mortgage payments are calculated based on the interest rate and the length of the mortgage term. Monthly payments on a typical residential mortgage will result in the total loan being entirely repaid to the lender at the end of the mortgage term.
Choosing a mortgage term is tricky and requires you to be knowledgeable about trends in the marketplace, as well as having a sense as to the amount of risk you’re willing to endure. The shorter the term of the mortgage, the higher your monthly mortgage payment will be. On the plus side, you’ll end up paying less interest to the lender on a shorter term mortgage. It often comes down to how much you can afford to pay each month for your mortgage.
Most residential mortgage payments consist of two parts: principal and interest. Each monthly payment reduces the balance owed on the mortgage by a portion of the payment that is credited to the principal. Over time, the proportion credited to the principal will increase. Also remember, the sooner you can pay down the remaining balance, the less total interest you’ll pay. There are several ways you can pay down your mortgage faster, from accelerating your payments (for example, paying biweekly instead of twice a month, for 26 payments per year instead of 24 will make a noticeable difference over the life of the home loan) to making lump sum payments on your mortgage.
The interest rate is one of the most important factors that determines how much you end up paying for your home, both on a monthly basis and over the life of your mortgage.
Interest is the cost of borrowing money. Interest rates fluctuate with the economy. Right now in Wisconsin, interest rates remain at record low levels. The interest rate you lock in at the beginning of the term will have a significant effect on the amount you pay each month for your mortgage. There are two basic types of interest rates used in residential mortgage products: fixed-rate andadjustable-rate.
Fixed-rate mortgage – this means committing to an interest rate that will not change for the term of your mortgage. This financing strategy locks in how much of your monthly payment repays the principal vs. going to interest. Fixed-rate mortgages are great in an economy where interest rates are going up, such as the Unites States is experiencing right now. A fixed rate mortgage means you’re not at risk of paying higher interest rates over the life of the loan. In an economy where interest rates are going down, you could be stuck paying more in interest than the current rate.
Adjustable-rate mortgage – an adjustable rate mortgage means the interest rate of the loan will fluctuate over time in line with prevailing market interest rates. They typically have lower starting interest rates than a fixed rate mortgage, but the interest rate and payment amounts can change over time. Sometimes they are also known as floating rate loans or variable rate loans.
Variable rates are usually pegged to changes to a well-known index, such as the 1-month LIBOR. An interest rate change one month also changes the monthly payment due for that month, as well as the total expected interest owed over the life of the loan.
Types of Mortgages
Conventional mortgage – these are the most common type of mortgage. The lender will typically loan you up to 80% of the appraised value or purchase price of the property (whichever is lower.) You generally need to come up with the other 20% as a down payment.
Second (and third) mortgages – these are additional financing arrangements behind an existing mortgage, also secured by your property. Secondary financing is generally provided at a higher interest rate and for a shorter term than the first mortgage.
High ratio mortgage – When you don’t have the 20% down payment required to get a conventional mortgage, a high ratio mortgage can sometimes advance you up to 95% of the home’s appraised value or purchase price. However, since you are borrowing more than the usual 80%, your lender will need the mortgage to be insured against default. You will have to take out private mortgage insurance (PMI) for the amount borrowed over 80% of the home value. This insurance payment is added tot he monthly loan payment.
Choose a Lender
There are many kinds of lenders and home loans out there. It’s a good idea to go to at least three lenders, including:
- Your current bank. They have your banking history via bank accounts, credit cards and investments. They typically like holding on to long term banking customers so they should be motivated to give you a good rate and terms.
- A mortgage broker. Mortgage brokers work with several different lenders and will go to them on your behalf to find the best mortgage rate and terms for your circumstances. A mortgage broker earns their income with broker fees which are usually paid by the banks, so it’s a good way to compare home loans without having to do all the hard work yourself.
- Your real estate agent’s referrals. A good Realtor will have a carefully curated list of vendors whom they know and trust through years of working on real estate deals. A good agent wants to make the whole process of arranging financing as easy as possible and will be able to provide guidance along the way.
You don’t have to make all of these decisions before you start looking for houses. However, I strongly recommend you get a pre-approval letter. It makes life so much easier when submitting an offer on a new home in a hot market – you will have to act fast and have credibility! The specifics of mortgage term, rate and even which lender you use can be decided—and changed— even after the offer is accepted. However, the more you understand about your options, the better prepared you will be when you find your ideal house.
How I can help you with financing
- I’ll help you focus. Together, we’ll look at financial considerations to make sure you’re looking at properties that match your budget. Then we’ll develop a plan to help you afford what you want.
- I’ll walk you through the real costs of owning a home – and help you navigate the mortgage and financing process.
- I’ll put you in touch with her preferred Dane County lenders and mortgage brokers.
Now, for the fun part! Whether you’re searching online, visiting open houses or searching with your buyer agent, searching for your dream house or condo is both an art and a science. Here’s what’s involved:
Have a wish list
Knowing what you need versus what you want in your home is critical. What are your must-haves, your nice-to-haves, and your no-thanks features in a home? How many bedrooms do you need? What kind of yard space do you want? What about counter-tops, appliances and floors? You can’t get what you want if you don’t know what you want. Of course, location will be a big decision – what Madison neighborhood best suits your lifestyle and aspirations?
In a hot market like Madison, there could be a need for give and take. Almost everyone needs to compromise on something, and when it comes to buying a home, it usually comes down to 4 things: size, finishes, location and price. What’s most important to you? Would you rather live in a bigger house or closer to downtown? Are you happy to spend more money for a renovated house or could you buy a cheaper house that has a few remodeling projects? Would you consider living on a busy street to more affordably live in a neighborhood with access to good schools?
Pick your team
Buying a house or condo will likely be the biggest purchase you’ll ever make – but don’t worry, you don’t need to do it alone. You’ll want to start by choosing a great Madison real estate agent who works exclusively for you. You’ll also need a lender to take you through your financing options. There are hundreds of professionals out there (of varying quality), so ask your friends and family for recommendations, do your research and don’t be afraid to interview multiple people.
Searching for houses and condos online
88% of Americans search for their new home online. While there are endless real estate websites out there, here are the ones you should consider:
- Realtor.com is the official website of the National Association of REALTORS®. It pulls available properties for sale directly from the Multiple Listing Service (MLS) system that agents use. Realtor.com is usually a day or two behind what’s happening in the market, but a great tool to explore what’s for sale and start to get a feel for what’s available.
- The Bunbury & Associates home search tool – Of course I’m biased, but our home search tool pulls house and condo listings directly from the MLS every couple of hours and includes a lot more information than what you’ll find on realtor.com. You can set up a custom home search for yourself using the iFind tool on the Bunbury & Associates website. This will automatically email you listings that match whatever criteria you set, so you never miss a listing.
- Real estate search sites – such as wisconsinhomes.com, zillow.com and trulia.com. These can be a good starting point but be aware that they can often show listings that are quite out of date. I’ve seen “current” listings that were sold two weeks earlier. This can be frustrating for buyers to learn after they get their hopes up while searching online.
- Custom listings from a REALTOR – Another way to get quick and easy access to what’s available is to have a real estate agent e-mail you daily listings of available houses and condos that match what you’re looking for. You should contact me if you want to get started with this capability.
Tips for looking for a home online
- Keep an open mind. Photos aren’t always representative of what the house looks like in real life.
- Don’t always believe the description. Realtors can be creative so you should learn to read between the lines. ‘Ready to put your decorator touch on it’ means it needs a lot of work. And ‘Nakoma dream home for under $300k’ probably isn’t really in Nakoma.
- Remember that the asking price is very different than the sale price. In a hot market like Madison houses often sell for more than the listing price. If you want to know actual sale prices, sign up for our monthly Neighborhood Report that give you all the inside scoop.
- If you’re shopping for a condo, keep in mind that what’s included in the maintenance fees varies from building to building, so it isn’t easy to compare condos.
House hunting in real life
This is your opportunity to get a feel for the different Madison neighborhoods, refine your wish list, and ask questions. While a wish list seems kind of scientific and is a useful tool in deciding which properties to visit, the truth of the matter is that most people walk into their perfect home and just feel it. Of course, it helps when it satisfies your needs and wants too, but don’t underestimate the power of ‘just knowing’.
You can visit homes for sale in real life with your real estate agent or by attending an open house. Keep in mind that not all properties will have open houses, so working with a real estate agent you trust the only way to guarantee that you’ll be able to see the houses or condos you want to see (and on your schedule!).
Tips for looking at homes in real life
- Make a plan. Madison is a relatively big city and you probably have a few target neighborhoods. Try to focus on one neighborhood at a time while you’re searching. Remember to consider traffic and the time it’ll take you to parallel park. I’ve grown up in Madison so I can help with any local information, just ask.
- Car pool. If you prefer to let me do the driving you can focus your attention on the actual neighborhoods rather than when to turn left. This is a great option for people who are new to Madison. If you’re checking out open houses, try walking or biking to them – Madison is a great city for cycling!
- Wear slip on/slip off shoes. Seriously! You’ll be taking your shoes off dozens of times, so save yourself the hassle of lace up shoes.
- Focus on the neighborhood, not just the house or condo. Drive around the neighborhood. Locate the schools, parks and grocery stores. Take a walk down the street and check out the neighbors. Make a point of going to a cafe, restaurant or pub in the area.
- House hunt at different times of the day. Everything looks better when the sun is shining, but it’s important to get a feel for the property and the neighborhood during the day and at night.
- Experience the bad with the good. Every neighborhood has its positives as well as negatives, so make a plan to experience them. Thinking of buying a house near the airport? Check it out during hours when planes are coming and going. Thinking of buying downtown? Make sure to check it out when there are students in town and parties are in full swing.
- Take notes and photos. It’s amazing how quickly you can forget the first house or condo you saw. And no, you’re probably not allowed to take photos of other people’s houses without their permission, but it happens all the time. Just don’t go posting them online.
- See past the ugly. You’ll probably be surprised to find out how some people live, but don’t let someone’s bad decorating tastes, outdated style and poor housekeeping get in the way of finding your perfect Madison house or condo.
- Don’t get attached to the seller’s stuff. This happens all the time and that beautifully staged condo won’t look nearly as great with all your IKEA furniture in it. Try to imagine your furniture and style in the home.
How the I can help you hunt for a house
- I’ll help you match what you want with the greatest opportunity for a wise investment. Together we’ll examine your needs, wants and must-haves to create a vision of your ideal home or investment property.
- I’ll stay on top of new properties in the hot Madison neighborhoods as they come on and off the market. I’ll send you daily listings of what’s available and monitor what’s happening, as it happens.
- I’ll be your house-hunting partner on your schedule. I can take you to see any property that’s for sale and sometimes even ones that aren’t.
- I’ll save you time. I can preview properties on your behalf and screen what is or is not for you, saving you time and hassle. I can send you video profiles of what I’m seeing – or better yet, you can follow me streaming live on the web
Making an Offer
You’ve put in the effort and you’ve found the right home for you: it satisfies your wish list, it’s in your price range, and it feels right. The offer process is both exciting and a little stressful. We begin by drafting the Residential Offer to Purchase agreement (in Wisconsin real estate it’s known as the WB-11). This is a legally binding document which addresses everything from the price you are prepared to pay, to the inclusions you want (washer/dryer, big screen TV), to your ideal closing date (the date you complete the transaction), to conditions that need to be met for the deal to go through. Once you’ve submitted your offer, the seller can accept it, reject it or respond with a counter offer. During these back-and-forth negotiations, you may need to compromise on some things, but a good real estate agent will work hard to get you what you want. And if you’re in a bidding war, make sure you know the facts about bidding wars and that you work closely with your buyers agent.
Meet Conditions and Provide Deposit
Conditions are requirements within the Residential Offer to Purchase that must be met for the deal to go through. For example, you may have included a financing condition or a condition that allows your attorney to review the legal details of the property, or a home inspection contingency. And of course, you’ll need to submit a deposit, known as earnest money – in Madison, typically around 2-5% of the purchase price, which is held in trust until closing. Once the conditions have been met, the agreement is firm, and now it’s just a matter of planning for the closing date. Not to mention packing!
How I can help you negotiate and get your new home
- I have been successful in helping my clients because I work hard to find the best outcome for my clients as well as the seller. While my clients’ interests will always be my highest priority, I’ve learned that negotiating isn’t just about get the best result for one party. It’s about finding a win-win that makes everyone happy. In my experience this is the best way to make a deal happen. Hands down!
- I’ll stand up for you come negotiation time. I won’t be bullied or pressured to take any action that you aren’t comfortable with.
- I’ll clarify the fine print. I’ll take the mystery out of financing and legal requirements and make sure your interests are protected
Once you have a clean deal (both you and the seller have agreed on price and agreement terms, you’ve submitted a deposit, and there are no more conditions to waive), the closing process begins. This will require you to be in close contact with your lender and possibly your attorney – they’ll need lots of information and, of course, money from you.
The few days before you take possession are the most critical – you’ll need to sign a lot of paperwork, provide a certified check for the balance owing and complete a final walk-through of the property.
Closing is the point at which the ownership and possession of the property are transferred from the seller to you. It takes place after all legal and financial obligations have been met. Closing the purchase will be a team effort: in addition to yourself, your real estate agent and your lender will all be involved in making sure the deal closes smoothly.
Costs of Buying a Home
As you go through the process of buying a home, you’ll probably want to know how much money this will cost you in total. Your lender and real estate agent can help you estimate your costs. Some of the things you can expect to pay are:
- Down payment. How much you need to have saved and brought to the transaction. Different lenders will have different requirements, depending on your individual situation.
- Title transfer fees. These are set by the State of Wisconsin and other local municipalities.
- Lender fees, if applicable (appraisal fees, application fees, etc.)
- Adjustments (the seller may have pre-paid property taxes, utilities or other expenses past the closing date which you will need to reimburse during the closing process)
- Legal fees (if applicable)
Just call me for a detailed list of all the closing costs involved in buying a house or condo in Madison.
The title company will calculate the final amount owing, and you will need to work with your lender to make sure you have the correct amount for a certified check at closing before the property can be transferred into your possession.
If you’re a first time home buyer, you could qualify for some great government programs that can save you thousands of dollars in closing costs. Talk to me to learn more about some of the programs you should consider.