The 11 Steps to Buying an Apartment: What First-Time Apartment Buyers Wish They Had Known
More and more Millennials are choosing to stay in cities rather than purchase in the suburbs. But purchasing an apartment comes with a few more steps than buying a house. So you know exactly what you’re about to get into, read through this how-to guide before you start.
Step One: Check Your Credit Score
The worst mistake you can ever make in real estate is to assume. Don’t assume that banks will loan you a certain amount of money. You may not get anything if you have a bad credit score.
There are three credit bureaus: TransUnion, Equifax and Experian. These three credit bureaus each compile a credit report, which is a history of your debt and on on-time payments.
FICO, in turn, takes the information from your reports and turns them into scores. The higher your score, the better. Scores can range anywhere from 300-850.
Mortgage lenders choose the middle score all three scores, not the average. So if you have a 680 from Experian, a 700 from TransUnion, and a 720 from Equifax, your lender would use the 700 from TransUnion score when determining your interest rate.
Note: If you’re applying for a mortgage with your spouse, then your mortgage lender takes the middle credit score of the person with the lowest credit score. For this reason, it may be to your advantage for one of you to purchase the property by yourself and add your partner to the deed after closing.
Check Your Reports for Errors
Credit Bureaus make mistakes. In fact, they make mistakes all the time. Comb through each report and make sure the information in them is accurate. If they’re not, you’ll want to dispute it with them.
You can get a free copy of your credit report from each credit bureau each year at: https://www.annualcreditreport.com/index.action
Don’t drag your feet on this! A faulty credit report could cost you thousands of dollars if you get a bad interest rate!
Step Two: Calculate Mortgage Payments
Don’t spend a lot of time on this. Just because you could afford the payments on a particular apartment does not mean you would get approved for the necessary loan amount. However, it is a good idea to have a ballpark number in your head as well as a general purchase area. You may realize early that you can’t afford to live in a certain area, or the opposite might happen and you’ll that you could afford to live somewhere more upscale.
Mortgage calculators do exactly what you would think: they calculate how much a monthly mortgage payment would be. If you’ve never used one, we’ve written up a quick how-to guide to get you started:
Step Three: Calculate Your DTI
DTI stands for debt-to-income. How much money are you bringing in compared to how much money you’re sending back out? Debt only includes financial obligations you have to lenders or agencies who have loaned you money. Internet, phone, groceries, gas and things of this nature don’t count. Therefore your debt only includes things like:
Add up your minimum monthly payment for each and divide that number by your gross monthly income (the amount you make before taxes). Multiply the result by 100. The answer is your monthly DTI ratio.
Lenders don’t like to see DTIs higher than 43%, and thus will not loan you any amount that would push your DTI higher than this when you factor in the monthly mortgage payment.
It might be in your best interest to pay off what debts you can. This will lower your DTI and help you afford a more expensive apartment.
Step Four: Get Pre-Approved
People often jumble up pre-approved and pre-qualified. They’re not the same.
Pre-qualification is just a hypothetical yes. It’s not a guarantee that a bank will lend to you. When you get pre-qualified, the lender just takes the information you provide, but does not actually take a hard look at your financials to verify your information. Moral: Don’t go home shopping with only a pre-qualification!
Pre-approval is the opposite. The lender has taken a hard look at your financials and deemed you worthy of credit.
You can rate shop for about a month without hurting your credit score each time (hard inquiries hurt your credit score by about five points). Find the lender with the best rate before you go shopping.
Step Five: Find the Right Realtor
Don’t just accept the first realtor you find. You’re going to want someone that truly knows what he or she is doing. At the very least, interview them. Questions you should ask realtor candidates include:
How many clients do you currently have?
How many houses have you helped clients sell or buy?
Can you provide recent references?
Do you work with a company?
Do you have another job?
How long have you been a real estate agent?
Do you work by yourself or with a team?
When are you available to show houses?
What’s your response time?
What are your fees?
What can you tell me about (select purchase area)?
Don’t take the first person you meet. That’s a recipe for disaster.
For more information, read our article on how to find the perfect realtor.
Step Six: Go Hunting
Find apartments that excite you (and that you can afford) and schedule walkthroughs with your realtor. Obviously never put an offer on something you haven’t seen.
When you do walkthroughs, don’t just look at the apartment. You’re going to want to also spend time seeing the neighborhood and each floor of the apartment building itself. Also be sure to go back at different times of day, as well as over the weekend. Do you due-diligence to make sure you would be absolutely comfortable and happy at your future home.
A word on Co-ops Vs. Condos
These two aren’t the same. There are some key differences that could affect both how you buy and sell the property.
Condo: When you buy a condo you are buying the property outright; however, there will be monthly fees you’ll have to pay (referred to as HOA fees), and you will also have separate property taxes from other units in the building. If and when you choose to sell, you can sell the condo on the open market.
Co-Ops: When you buy a Co-Op you’re essentially buying a portion of stock in the building, which entitles you to own and live in a specific residence. You can sell your unit on the open market, but other shareholders in the building can deny potential buyers the right to purchase the unit for any reason whatsoever. As with condos, you will have monthly fees, which are broken up to 50% maintenance and 50% property tax. At first glance, the fees might appear higher than condos, but will likely be the same. This is because your monthly fees include both taxes and maintenance, whereas with condos they’re broken up.
Step Seven: Calculate Apartment Ownership Costs and Read Through the Rules
No matter what you look at, there are going to be monthly fees. Ask what they are and be sure to add those costs to your monthly expenditures.
Note: Lenders consider HOA fees to be a part of your monthly payment, so it will affect your DTI, which can’t go above 43%.
Step Eight: Make Your Offer, But Be Prepared for a Counter-Offer
The most common mistake new homebuyer’s make is they negotiate too hard. They try to get the home of their dreams for as little as possible. If you’re going to negotiate, it’s wise to only negotiate on one of the following:
Sale Price, or
Ask the seller to lower the sale’s price and pay for your closing costs and you’ll likely get a flat out “NO.”
Decide what is most important to you: a reduction in your monthly mortgage payments or liquid cash. If it will be a struggle to make the minimum down payment, you should probably ask for closing costs. However, if you ask for closing costs, ask from the very beginning!
Question: What is an acceptable amount to ask the seller to come down?
There’s nothing written in stone, but the norm for sellers to come off an asking price is usually 5-10%. Go over that and you’ll most likely be in tricky waters.
Of course there are tales galore of buyers getting sellers to come an extraordinary amount off their asking price, but it’s not the norm. This is why you need a great realtor. A good realtor will take a look at recent comps and give you a good starting number to go off of. He or she will look at recent updates, and the property’s entire sale history to come up with a reasonable offer.
It’s up to you to listen to your realtor’s advice or not. You can make any offer you want.
Should You Ever Pay More Than the Asking Price?
This happens in certain cities like Chicago and New York where demand is high but inventory is low. Whether you do this or not depends on the unit and the location. The main thing you and your realtor will have to decide is whether or not you could get your money back. If you never plan on moving again, it’s not an issue, but if it’s possible, you never want to pay more than the asking price if you don’t think you could recoup that amount when you go to sell.
If you know you’re competing with another buyer, you don’t have to necessarily go way over. It may only take $500 over the asking price to give your offer an advantage.
Step Nine: Have an Independent Building Inspection As Well As a Separate Unit Inspection
Your lender won’t let you NOT do this, so just know it’s coming.
This step is to determine whether the building is structurally OK. Was it constructed to code? Does it need any future maintenance? If it does, does the HOA have the funds to cover those costs? If not, you’ll need to figure out how much the HOA fees are going to go up in the near future.
Step Ten: Renegotiate
Thought you were done with negotiations? Maybe, but not likely. It depends on what the inspections brought up.
You can ask for the seller to make repairs to the unit, but it’s up to them whether or not they will. When they agreed to your initial offer, they probably agreed to do repairs up to a certain amount. Exceed this amount and they’ll probably just tell you no. Don’t exceed this amount but instead ask them to lower the sale price, and here again they may or may not agree. It just depends on the state of the property and how badly the seller wants to sell.
It’s in their best interest to work with you because the property listing will say whether or not a deal fell through. Other buyers will likely figure out why, and will adjust their offer accordingly.
Step Eleven: Final Walkthrough and Close
Always do your final walkthrough. Just do it. Don’t skip out on it. They buyer might accidentally break something moving out or take something with them that you thought was coming with property.
Closing will feel like an eternity away, but when the day finally comes you’ll need to bring a check for the down payment and closing costs, as well as sign the necessary paperwork. Expect closing to take about 20-30 minutes.
Once all of the paperwork is done, your realtor will give you the key to your new home!
Buying an apartment will likely take you 2-3 months. As you can see, there are a lot of steps involved if you want to be a responsible buyer. Don’t rush anything. Apartments come and go every day. If you miss out on something, you only have to wait a few days before something else comes along that excites you.