BUYING YOUR NEXT HOME
PART 1 - TRADING UP

You got married. You had kids. You're taking care of your parents. You won the lottery. Whatever the reason, you've outgrown your home and want to trade up in size, location, luxury and/or amenities. It's time to find a new place.

Just like when you bought your first home, you need to evaluate your situation and crunch the numbers to see what you can afford. Just because you want a bigger, better home doesn't mean it makes sense for you to buy now.

The Steps

  • Step 1: Evaluate your creditworthiness.close

    Assess your financial profile and credit score. Lenders are no longer giving away home loans, so before you look at houses, find out if you'll be able to qualify for a mortgage with terms you can handle.

    • Calculate your debt-to-income ratio. Lenders want this to be 33 percent or less to qualify you for a loan. If your ratio is higher, pay down some bills.
    • Increase your credit score. Lenders consider your credit history when determining your interest rate.
    • Save for a down payment. Nowadays, most lenders require at least 10 percent down.
    • You may have to get a jumbo mortgage if you want a luxury home or plan to live in a very expensive housing market, like Los Angeles or New York City. Ask various lenders if you qualify for one.

     

  • Step 2: Figure out if you can afford to trade up.close

    Now that you've experienced homeownership, you're better at estimating what you can handle each month. Make sure you have enough income to cover larger mortgage payments, more home maintenance expenses and a higher cost of living.

    • Remember, a mortgage payment covers PITI principal, interest, taxes and insurance. A bigger home typically requires bigger amounts of PITI. Plus, if your down payment is less than 20 percent of the total loan, you may need to pay for private mortgage insurance, or PMI.
    • Find out how much home you can afford with this calculator. Use our mortgage calculator to figure out your monthly payment and total interest.
    • Calculate your buying costs, including closing costs and a down payment of at least 10 percent of the home price.
    • Create a budget for monthly homeowner expenses for your new home. A bigger home means higher costs of maintenance, heating and cooling. Refresh your memory with this list.
    • If you move to a more affluent neighborhood, you may be subject to higher costs of living, such as grocery prices, new school tuitions and gas and child care for a longer work commute.
    • Don't forget to factor in the costs of selling your current home and moving. Read our Selling Guide to find out what it takes to sell a home. And check out our Moving Guide for tips on minimizing the cost and stress of relocating.

     

  • Step 3: Update your "Home Wish List." close

    You know you want a better place, but what exactly do you want and need in a new home? Write down everything and create your vision of home. Consider your family, career and interests and make note of those things your current house lacks. Use this as a framework for what houses to look at.

    • Ask the same questions you asked when you bought your current home:
      • Where will you be in 5-10 years?
      • Do you have kids or plan to have them?
      • Does your job require you to move around a lot?
      • Do you have time to maintain a home and yard?
      • Do you want to live near work?
      • Do you want to live near shops, restaurants and nightlife?
      • How much living space do you need?
    • Study your list. Refer to it when you tour houses, or you may decide to hold off on buying. For instance, if you think you may move within the next five years, it doesn't make financial sense to buy now.

     

  • Step 4: Shop for a mortgage.close

    Depending on how much your credit score and financial situation have changed since you last bought a home, you may have more mortgage options to choose from. Shop around for the best interest rates and terms.

     

  • Step 5: Assemble your real estate team.close

    You don't have to hire the same people you worked with last time. If they did a great job, they'll appreciate your repeat business and may offer you a deal. If you prefer to start fresh, interview various real estate agents, title companies, appraisers and home inspectors to find the right ones for you. Ask family and friends or contact professional organizations for referrals.

    • Real estate agent. Choose a well-connected agent who is familiar with the neighborhoods you like and has experience with homes in your price range. Read the pros and cons of hiring a buyer's agent and get tips on shopping for an agent.
    • Title company and closing agent. The title company searches and examines the title to make sure the seller actually owns the property and has the right to transfer the title to you, the buyer. It also ensures the title is "free and clear," and there are no other liens against the property. The closing agent coordinates the formal closing meeting and handles escrow.
    • Appraiser. A state-licensed appraiser examines the home and researches comps and market trends to calculate the home's fair market value. An appraisal is required by the lender to ensure you're borrowing an amount equal to or less than the home's value. The cost of an appraisal can range from $300-$600, depending on the size of the home.
    • Home inspectors. A standard home inspection covers all major mechanical systems, structural integrity, cosmetic features and other aspects of the home. It can help reveal potential problems that a seller may not disclose or be aware of. Find out how to find the right home inspector. You can also get inspections for termites and other pests or environmental hazards like asbestos, mold and radon.
    • Homeowners insurance agent. Your lender requires proof of a valid homeowners insurance policy for the home, which you must secure before closing. Get quotes from at least three companies and pay the premium. This policy will protect your investment (and the lender's) in the event of property damage, theft and even liability.
    • Real estate attorney. An attorney can provide valuable legal advice and review your purchase contract and real estate documents.

     

  • Step 6: Target your home search.close

    If you plan on staying in your current neighborhood, your job's easy. If you want to move to a better area or a new city, get to know the different kinds of neighborhoods and get tips on how to choose a neighborhood.

    • Research neighborhoods. Ask yourself these questions:
      • What's your job commute going to be like? Is the traffic heavy or light at the times of day you'll be on the road?
      • How's the school district? Even if you don't have kids, the quality of the school district affects your home's value, so it pays to find out.
      • Is there much crime?
      • How convenient are shopping centers, libraries, churches and so on?
      • Are any of these popular types right for me?
    • Choose a type of house. The type of house you choose (single family detached, condo, townhouse, duplex, co-op, etc.) depends on the level of home maintenance you want to handle and how much "common interest" you want to share with your neighbors. Each type of building and ownership comes with its own pros and cons, so choose one that fits your lifestyle.
    • Condos and Lofts. Find out what you need to know about HOAs.
    • New Construction. Many builders and developers are offering generous incentives to get rid of excess inventory.
    • Prefabricated. Consider a luxury or eco-friendly prefabricated home. Not to be confused with your typical mobile home, these high-end modular homes offer a unique plush lifestyle.
    • Decide which home features are most important to you. Ask yourself these questions:
      • Do you have pets? You may want to narrow the field to homes with substantial backyards.
      • Is your family growing? Make sure there are enough bedrooms for your family today and five years from now.
      • Be shrewd about storage space. Houses with cavernous rooms may be impressive to look at, but they sometimes compromise storage space to achieve that effect. Would you rather have a place to hang your crystal chandelier or a place to hang your coats?
      • Will any remodeling be required to make the home move-in ready for you? If so, are you handy with a hammer or would you prefer to find a home that needs little work?
    • Choose a style of house. Houses come in different architectural styles, from Victorian to modern to Cape Cod. Each has its own unique history, character and maintenance issues. FrontDoor's Home Styles Guide has videos and articles about 18 different styles so you can find the right one for you. Find out your architecture personality and upload photos of your own home and share your style with the FrontDoor community.
    • See what's available online. Ask your agent to check the multiple listing service (MLS) for homes that fit your criteria. Browse more than three million homes for sale now. Sellers who go "for sale by owner" (FSBO) advertise online and in newspapers.
    • Research the market where you want to buy. If it's a buyer's market where homes aren't selling quickly or sellers are cutting prices, you're in a much better bargaining position. If it's a seller's market, be prepared for possible bidding wars. Note the number of "for sale" and "open house" signs in your target neighborhoods. Pick up flyers and study listings online. How long have the houses been on the market? How "motivated" are sellers? Are sellers cutting prices?
    • Look for bargains off the beaten path. Consider buying a stigmatized property or look into the foreclosure market. Hire a buyer's agent or real estate attorney who specializes in these types of properties to walk you through the process. Read our foreclosure buying guide. Learn how to buy a house in pre-foreclosure, at a foreclosure auction, or a bank-owned property.

     

  • Step 7: Look at homes.close

    Set up home tours and attend open houses. Keep track of each house with a house-hunting journal and digital camera. Rate each property on a scale of 1 to 10, with 10 being the highest.

    • Take detailed notes of unusual features, design elements and incentives (i.e., furniture or appliances included, closing costs covered). Use FrontDoor's House Hunting and Open House Worksheet and the Savvy Woman's House Tour Feedback Worksheet.
    • Read the Buyer's Field Guide to the Open House for tips on how to make the most of your Sunday house hunting.
    • Look out for the Top 10 Red Flags for Homebuyers.
    • Be critical and ask these questions:
      • What service providers (cable, Internet, telephone) are available in the area and is the house completely wired for each?
      • How much do you pay yearly in city and/or county property taxes?
      • How much do utilities run each month? Does the house use gas or electric for the furnace, water heater and appliances?
      • How old are the major appliances, and which are included with the house?
      • Have there been any major repairs to the house and, if so, when were they completed? For example, how old is the roof? Has water ever damaged the basement or foundation?
      • Ever had problems with insects, spiders or rodents?
    • Scrutinize. Look inside cabinets, inside closets, at baseboards, at window casings, at door frames, where walls meet floors and ceilings. Look for any signs of damage, wear or poor construction.
    • Find out what not to do while house hunting.

     

  • Step 8: Calculate the home's fair market value.close

    Once you find a home you want to buy, ask your agent to pull comps and prepare a Comparative Market Analysis. Remember, you are researching the prices and features of similar homes that were sold within the past six months and homes that are currently on the market. FrontDoor.com and other real estate Web sites offer "recently sold" information for homes, or you can research local public records.

    • Using comps, figure out the average cost per square foot for the area, and see if the home you want is in line with it. If it's higher, the house may be overpriced. Here's how:
      • Add up the square footage of 3-5 homes and divide by the number of homes to get the average square footage.
      • Add up the sold price of each home and divide by the number of homes to get the average price.
      • Divide the average price by the average square footage to get the average price per square foot.
      • Multiply that by the square footage of your home to get the price.
    • Evaluate market trends, including whether homes in the area are selling for above or below the asking price (the list-price-to-sale-price ratio).
    • Assess factors specific to the seller. A seller's need to sell gives you an advantage in the negotiating process. Find out how much the seller paid for the house and what is left on the mortgage. Is the seller "motivated," or eager, to get rid of the property? For example, is the seller relocating for a job or juggling two mortgages? How many days has the home been on the market?
    • Read more about how to calculate market value.

     

  • Step 9: Make an offer and negotiate the deal.close

    Use the home's fair market value to come up with your offer price. Brush up on the steps to writing an offer and know the dos and don'ts of the negotiating process. Consider making a lowball offer in a buyer's market.

    • Remember to define the following in your purchase offer:
      • proposed offer price
      • a breakdown of what is to be included in the sale (i.e. appliances, furniture, window treatments, fixtures)
      • contingencies -- terms that the sale is dependent on, i.e. secured financing, a satisfactory home inspection, the sale of the buyer's current home
      • provisions for disclosures of any defects that would affect the property value
      • seller concessions -- if the seller will be paying part or all of the buyer's closing costs; typically 3 percent or 6 percent of the price
      • earnest money amount -- a deposit toward the down payment, typically 1 percent of the price
      • proposed closing date
      • expiry date -- typically 24-48 hours after the offer is made
    • Consider these negotiating tips:
      • An offer is more than just a price.
      • If you want to pay less than the asking price, propose terms that will make your offer more attractive to the seller, such as a speedy closing, suggesting an "all-cash" transaction or buying the house "as is."
    • Try these non-traditional financing options:
      • If you can't get a mortgage, ask the seller if he/she will consider seller financing. If you decide to do this, work with a real estate attorney to make sure the contracts are legal and fair.
      • Ask the seller to do a mortgage assumption, meaning you would take over the seller's mortgage payments.
      • If you're strapped for cash, ask the seller to pay closing costs, include a furniture stipend or leave the appliances, light fixtures and window treatments.
      • Work out a lease-to-own deal, in which you're a tenant for a set period (usually one to three years), with some of the rent being applied toward a down payment.
      • If your interest rate is too high, ask the seller to pay points to lower it.

     

  • Step 10: Get through closing. close

    If you really want the house, be flexible, persistent and creative to get the deal done. If you and the seller are having trouble agreeing on terms, try these negotiating tips. After both sides are happy and have signed the agreement, remember these tips for closing:

    • Avoid closing at the end of the month or the end of the year. You're likely to get better attention if you stay away from these very busy times.
    • Set a move-in date. You and the seller should agree on a date when you'll take possession of the home and move in. Put the agreement in writing.
    • Reserve funds for closing. You will need cash or a cashier's check for settlement costs (which can range from 2 percent to 6 percent of the loan) and your down payment, minus any earnest money you submitted with your offer.
    • Work with the seller to ensure the appraisal, professional home inspections and necessary repairs are completed. Refresh your knowledge with Home Inspection 101and How to Find the Right Home Inspector. If you're buying the home "as is," you can still get an inspection to find out about any potential problems. But if you find something wrong, you are still contractually obligated to buy the property.
    • Consider getting a home warranty policy to cover the cost of unexpected repairs or replacement of major systems and appliances. You pay for a year-long service contract, which ranges from $250 to $400, depending on coverage.
    • Do a final walk-through of the house. Two days before closing, take a tour of the house to verify it's in the condition you expect it to be in. If you asked the seller to make any fixes or leave any appliances or furnishings as part of the purchase contract, check to make sure these were done.
    • Review your estimated closing statement. Request a copy of the "HUD-1 Settlement Statement," which outlines the loan terms, exact amounts of money that will be exchanged at closing and how they will be disbursed, and total amount of funds you will need to bring to closing in the form of cash or a cashier's check. Review it carefully and look for any discrepancies with the Good Faith Estimate (GFE) you received earlier. If there are any errors, contact your lender.
    • Bring documents to closing. Show a receipt as proof that you purchased homeowners insurance for the home and hand over the cashier's check for the down payment and closing costs.
    • Plan your move. After you sign the closing documents and get the keys, make plans for your move-in date. Read FrontDoor's Moving Guide for tips on how to make your move go smoothly.