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Like a lot of us, you’re a city dweller who’s fallen in love with one of the villages dotting the shores of the Hudson River. Something about it — the park running along the waterfront, the restaurant serving the best produce from the region, or beautiful boutiques along the main thoroughfare — made you realize that this was a place you’d like to live.
So what’s the next step? If all you do is glance at the real estate listings or drop by a couple of open houses, then you’re not likely to get very far. What you need is a plan.
When people ask us what steps they need to take in order to buy a home along Metro-North’s Hudson River Line, we tell them that they need to think about these three things first:
Get prequalified for a mortgage
A lot of prospective homebuyers — especially those going through the process for the first time — are surprised that the first question they will get is whether they have been prequalified.
What does it mean to be prequalified for a mortgage? Why should you be prequalified if you haven’t decided on a property that you want to buy? And will being prequalified have any effect on your credit score?
A prequalification letter states that a lender is tentatively willing to lend to you a certain amount of money for a mortgage. This letter is based on information you provide the bank and is not a guaranteed loan offer. Because a lender usually doesn’t run a credit check, it has no effect on your credit score.
But a prequalification letter is an indication to sellers that you are more than just window shopping. You are seriously looking for a home and have the finances necessary to put an offer on the table.
Getting prequalified gives you some important information as well. You know approximately how much a bank is willing to lend you for a mortgage. If you can only get a mortgage for a $500,000 property, you know that there’s no point in looking at those that are out of your price range.
Being prequalified is a simple process. On the other hand, being preapproved for a loan is more involved because you have to provide documentation for your income and your savings. Because the preapproval process requires a credit check — and results in a temporary dip in your credit score — most buyers start out with being prequalified.
Plan for your down payment
Once you get prequalified for a mortgage, you have two important pieces of information: how large of a mortgage a lender is prepared offer you, and how much of a down payment you’ll have to plan on putting down.
That’s because most buyers who opt for a conventional loan put down 20% of the total sale price in order to avoid having to pay for private mortgage insurance. Called PMI, this type of insurance protects the lender if the buyer can’t make their payments. Lenders don’t require PMI after an owner has 20% equity in their home.
Certain types of loans — such as such as government-backed FHA loans — don’t require a 20% down payment. FHA loans do require you to pay PMI for the life of the loan, however. Your financial advisor will be able to help you decide if this makes sense for you.
The math for a 20% down payment is pretty straightforward: If you want to purchase a property that costs $500,000, then you have to put down $100,000 in funds that you have saved.
During the preapproval process for a mortgage, your lender is going to want to see that you have access to that $100,000 (or whatever the figure happens to be). If you’ll need to sell stocks or access a 401(k) in order to have enough cash for a down payment, you’ll want to start thinking about that now.
Be aware that there are some restrictions on using gifts from family and friends for a down payment. Lenders are less likely to allow you to use gifts if they didn't come from someone who is closely related to you. When you want to use a gift for a down payment, some banks ask you to provide a letter that proves the funds are not a loan to be repaid.
Having your down payment ready is a good idea, especially in a competitive housing market. Anything that shows sellers that there won’t be any snags with your financing makes you a stronger candidate.
Find the right buyer’s agent
Once you’ve decided to look for a home in the Hudson Valley, the first order of business is to choose a real estate agent. Not just any agent, though. You should be on the lookout for a buyer’s agent.
The real estate agent that you meet at an open house, the one who tells you what a great house it is and how it won’t be on the market for long so you should move quickly — that’s a seller’s agent. Their job is to get the house on the market and find a buyer as soon as possible. Their responsibility, therefore, is entirely to the seller.
What you need is a buyer’s agent, someone who is there to represent you. They will make sure that all the right paperwork is filed, negotiate any deals on your behalf, and keep all the channels of communication open as the sale moves towards the closing date.
Working with a buyer’s agent doesn’t cost you a thing. Their share of the agent’s commission is paid by the seller at the closing. That’s why we always tell people that working with a buyer’s agent is a no-brainer.
You’ll be interacting with a buyer’s agent on a daily basis, so make sure that you work well together. If a buyer’s agent doesn’t seem to be listening to your needs, or if they don’t understand what you’re looking for, look elsewhere.
We tell buyers that they should meet with at least three different agents before deciding on who’s right for them. Discuss their background, their knowledge about the area, and their sales record. Their love for the region should be clear from the minute you start talking with them.
