First Time Homebuyer's Guide to Buying in Anchorage
Buying a home for the first time is a big decision, and in terms of personal finance, is the difference between continuing to pay someone else’s mortgage, or starting to build a significant personal investment. But more than that, it is a chance to start building equity with your mortgage payments, while having the ability to write off the interest on your taxes.
For budding property investors, I’ll be writing a future post on what it takes to get into a multiplex. The financial downturn in 2008 has left Anchorage and other cities across the country with a large amount of captive renters. These are people whose credit has was impacted by foreclosure, bankruptcy, or a string of unpaid or late bills. This large population of renters has pushed rents high and with the interest rates currently hovering between 3.5% and 4% there are opportunities to pick up properties that cash flow well even while owner-occupying. More on this in a future post, however.
For now, I have written a guide that will walk you through each of the steps in buying your first home here in the Anchorage municipality. The steps elsewhere in the state will be very similar, but I have focused the guide on homes here in Anchorage with a number of tips and info that will make the process easier and more enjoyable.
1. Figure out how much you can afford to spend on a home.
The first thing to consider when thinking about purchasing a house is what your price range is going to be. If you haven’t done so yet, try playing with a Mortgage Calculator to crunch some numbers. See if you can find a loan amount at current rates (which you can check here) that will leave you with a comfortable monthly payment amount. Make sure and calculate for home insurance and taxes!
Anchorage property taxes run at right around 1.5% and FHA loans have a .85% mortgage insurance rate (PMI).
For home insurance, the statewide average according to www.homeinsurance.org is around $900 per year. You should be safe calculating 70-100 a month depending on the age of your desired home.
There are two basic kinds of loans available to all first time homebuyers. The Conventional loan requires a down payment of 5%, while a FHA loan requires 3.5% down to close on a house.
Other people with certain backgrounds or living in certain areas qualify for types of loans: veterans of the armed forces can qualify for a zero down VA loan. Rural residents can qualify for a zero down USDA Rural Development Loan. Those with Native American heritage can qualify for a HUD 184 loan which has beneficial down payment and interest rate terms.
2. Start thinking about housing types and Neighborhoods that you are interested in.
Are you looking at moving into a condo or a townhouse for your first property? Do you have the desire and means to buy a single family residence?
Not sure yet? See the below links for some popular types of first time homebuyer houses here in Anchorage. In them I cover neighborhoods, price, general features, yard size, and other miscellaneous information. It should give you an idea of four of the basic types of starter homes here in Anchorage.
If neighborhood or schools are important factors in your decision make sure to check out these links:
Eagle River/Chugiak neighborhood map
You can use the Beautiful Alaska Map Search to check out neighborhoods that you are interested in.
3. Run a few searches on properties to get an idea of what is currently on the market.
The search widget here on BeautifulAlaska.com will get you the most current set of listings on the market directly from the MLS. After spending some time searching you will start to get an idea of what is on the market and where.
Websites like Zillow, Trulia, and Realtor.com do not have up to date listing information from the MLS which can be confusing for first time homebuyers. They are reliant on being fed that info from other real estate licensees and their listings can be months to years out of date. While they have some cool tools that you can use to estimate property value, look at neighborhood trends, etc make sure you are using a website that has a direct MLS feed at the point when you start looking for houses.
Try running several searches for houses with specific queries in the Advanced Search page. For example, you can search for Foreclosures specifically by choosing the "Foreclosure Search" option. You can also try searching for multifamily homes or condos if you are interested in those types of homes.
4. Line up your team.
Once you have an idea of what you want and where you want it you can start to get your team of real estate professionals together.
If you have a bank or other lending institution that you like, you can give them a call and get pre-qualified for a loan fairly quickly. Lenders will want, at a minimum, your last couple of months of pay stubs and last couple of years of tax returns. You can expedite the process by having these scanned into your computer as PDFs so they are easy to send to the financial institution that you have chosen. Different lenders may want other financial documents as well, such as bank statements, and investment account sheets. You will eventually have to submit all of these in the process of applying for a mortgage, so getting all of this lined up early will save you having to do it later.
If you don’t have a financial institution that you particularly want to use you can ask your real estate licensee for recommendations.
If you have a real estate licensee (the Alaska Bar Association frowns on us calling ourselves “agents” for some reason) in mind, give them a call. They can help you with any of the above steps if you are having trouble. They will also be able to send you properties that fit the set of criteria that you tell them you are looking for. If I can put in a shameless self promotion plug, we are really good at what we do, so don't be afraid to give us a call :)
5. Go check out some houses!
Once you start getting listings that you are interested in, either through searching on a website like BeautifulAlaska.com or another similar one, or you are being sent properties by licensee, you can have your licensee arrange a time for you to go meet them at the properties.
When you are there try to get a good idea of the place. If there is a crawlspace, poke your head down there. Does it smell moldy? Is it nice and dry? Can you see plastic covering the ground? How does the furnace look? How about the roof? A quick look can give you an indication of the life left in them. Replacing things costs money!
Click this link for more on what to look for during your trip to see a home.
Before a licensee can show you a property, however, the State of Alaska has us explain what we do as real estate licensees. There will be a small form called the Alaska Real Estate Commission (AREC) pamphlet that they will go over with you that spells out what things a licensee will and will not do in the transaction.
6. You find a great house and you want to make an offer..
So you have seen a number of houses and there is one that stands out. Maybe it is your dream house, maybe it is going to be a great future investment, or maybe you just like it enough to put in an offer. Tell your real estate licensee and they will get the ball rolling.
First, they are going to need to get a letter of prequalification for the property and the amount you want to offer from your financial institution. This shouldn’t take longer than about 24 hours to get.
Next, your licensee is going to write the offer, generally about a 9 page document along with a few other addendums like your Bill of Sale, maybe a lead based paint disclosure if the house was constructed prior to 1978, and maybe an addendum if you are applying for a FHA or VA loan.
Once the offer is drawn up, your licensee will sit down with you and explain the details. On a standard contract there is generally a clause that says something along the lines of “if any new information is discovered or provided about the property during the course of the purchase process, buyer will have the right to terminate the contract and get a full earnest money refund” In short, doing a home inspection, having the property disclosures provided after offer acceptance, preliminary title report, or a few other things are grounds for getting out of the purchase and sales contract if you realize that this is not the property for you (ie, it has major issues that you didn’t know about).
I go into much further detail on the contract here if you are interested in reading more.
In order to complete the offer you will have to deposit some earnest money in the trust fund of your real estate licensee’s brokerage. It is usually 1% of the property value and the brokerage will hang on to it until closing when it will be applied towards your down payment and closing costs.
7. Offer is in! Now what?
First off, unless it is a short sale or foreclosure (little different rules on making offers) you should hear back within a day on whether or not your offer has been accepted, rejected, or countered.
If accepted, great! Move forward to the next step.
If rejected, the sellers evidently had a better deal on hand, or thought they could get a better deal than you offered them. If you still want the house and the sellers haven’t accepted another offer, you can consider making another offer for more money or fewer conditions (did you ask for things in your offer that the seller may not want to give up, seller assistance in covering closing costs, prize furniture?), or if the property doesn’t sell after a period of time you can try again at the same price. If yours is the only offer and it gets rejected rather than countered, it is because the seller and seller’s licensee do not think that the “meet in the middle” negotiations would lead them to a sales price they would be happy with.
If countered, the sellers want to negotiate the price or terms of the offer. The counter-offer may ask for less in seller covered closing costs, or may ask for a higher price than you had originally offered. You and your licensee can figure out how the negotiations go from there, but be aware than while these negotiations are happening, the seller can accept other offers. It isn’t until you have a signed and accepted Purchase and Sales contract that the property is off the market.
8. The seller has accepted your offer.
The property is now “pending.” Meaning that you now have (usually) a six week process to complete the purchase of the property.
One of the first things that will happen is your licensee will schedule a home inspection with a licensed home inspector. You will have put in a timeframe in your offer as to when you were supposed to have this completed, and there will be some dates for when there is to be an agreement on repairs. Your licensee will check with you to see what a good time will be to schedule the inspection within the contract dates that you have set out in the offer. They will schedule the home inspector and you will all meet at the property at the agreed upon time. Paying for the home inspector will be one of your only out of pocket costs during the transaction. Home inspections in the Anchorage area cost around $400-500 for a single family residence or condo, and go up if you are purchasing a duplex, triplex, or four plex.
Your home inspector will arrive and meet you and your licensee at the property and will take generally 1-2 hours to complete their inspection. During this time they will be checking the home’s electrical system, making sure the breaker panel is properly wired, checking plumbing, appliances, the crawl space (if you house has one), exterior, attic crawlspace, and pretty much everything in between to make sure that everything is working properly. If it isn’t they will be making notes.
Note: this inspection is a great time to ask your inspector anything you would like concerning the house, including what maintenance items you will have to take care of (things like: how to change out your furnace filter, what kind of insulation you should add to the attic if you want to increase the heat efficiency of your house, how far from the house to run your sump pump line, etc). If it is a good inspector they will volunteer info on stuff that you don’t know to ask about. They are construction professionals who have been in the industry for a long time. Take advantage of their knowledge!
A day or two after the inspection, your inspector will get you an inspection report. If there were issues they found, and there almost always are, there will be a delineation between things that will stand in the way of you getting financing, and other repairs. Your critical repairs, often referred to as Health/Life/Safety repairs will have to be completed before the home can be financed. When the appraiser comes through the property, they will be looking for these issues and will recommend to the bank that these items get fixed before the house gets financed. The bank, taking the recommendation of the appraiser, will require these items get fixed and reinspected before they will approve the loan.
That said, you will always ask for the seller to fix the Health/Life/Safety items. The other stuff on the report you can ask for the seller to fix as well, and usually a new round of negotiations starts. Once you and your licensee have a final list of what is (and is not) going to get fixed agreed on by the seller, the seller will get to work fixing those items.
9. Bringing the transaction to a close.
The seller’s licensee will usually wait until after the agreement on repairs to open title (it costs a few hundred dollars and the licensee wants to make sure that the deal doesn’t fall apart during the repair negotiations). The title agency that you chose with the licensee will do a search on the property to make sure that there are no outstanding liens or title issues that would interfere with a clean transaction. They will also do a search on you, the buyer, and on the seller to make sure that no one has outstanding tax liens or child support liens. They will issue a “preliminary title report” that will give details on the property and will list any of the issues that they were able to uncover. If there are issues, the affected party works with their licensee to fix them before closing so the transaction can finalize.
Sometime before closing the seller will have completed the required repair items and their licensee will let you and your licensee know that it is time to schedule for a reinspection by your home inspector. Area home inspectors generally charge $100-150 to meet you and your licensee at the house to ensure that the noted issues were taken care of. On occasion the work will not be up to the level it needs to be and the seller will have to try again. This will necessitate your inspector coming back out for another reinspection, but this time, and all future times, the seller will be on the hook for the bill.
Once repairs are complete, the seller will give the money for the appraisal to the lending institution to hire an appraiser. The value of the home must meet or exceed the amount of the offer price in order for the lending institution to move forward with the loan. On occasion though, it doesn’t. If you wrote a standard offer, there is language that says that if the house does not appraise for the offer price, that you are free to walk away from the property and get your earnest money returned. If you still want the property however, it is customary to offer again at the amount of the appraisal.
Example: If you offer $250,000 on a house and the appraisal comes in at $245,000 then your initial contract is annulled and you are free to re-offer at $245,000.
If the seller won’t accept the new offer (happens rarely) you have a few options. First, you can find another property. Second, you can come up with the difference between the appraisal and the offer amount in cash at closing. Third, your licensee can petition the appraiser with other, more favorable, similar properties in the same area (comparables) to see if they will adjust the appraised value of the house.
10. The final steps.
After the house appraises, eventually the lending institution will give the ok that your mortgage has been approved by the mortgage underwriter and that you are free to close the loan. If this happens earlier than your closing date and you and the seller want to speed things along, you can close the transaction earlier than the date set in the contract. Usually though the seller is busy getting packed up and moved out. A day or two before your scheduled closing you can meet with your licensee at the property for a final walkthrough to make sure that everything is in good order and the seller has moved out and cleaned up. This is a great time to measure for your furniture!
As your closing date draws nearer, your licensee will arrange with you a good time of day to meet you at the title office. A day or two before your closing you will receive the HUD-1 closing statement that details all of the costs of the transaction (if you had a good faith estimate it should be pretty close to the same amount), and will let you know how much money you will need to bring to closing to complete the home purchase. At the appointed hour you will meet your licensee at the title office where you will spend about a half an hour signing forms, getting last minute advice, and handing over your down payment and closing costs via cashiers check.
The next business day, the transaction will be recorded by the the State of Alaska and you will receive keys from your licensee. Congratulations, you own your first home!