How to Buy an Apartment
How to Buy an Apartment
If you’re tired of monthly rent and plan on staying in your current city for the foreseeable future, you may be ready to take the next steps and buy an apartment. Luckily, the process is very similar to buying a home, but there are a few differences you should be aware of as a future property owner.
Step 1: Get Pre-Approved
Knowing what loan amount a bank will approve you for can prevent your imagination from running wild. And if your dream apartment suddenly comes on the market, any offer you make will be taken seriously by the seller.
Compared to other types of loans, the paperwork needed to get pre-approved for a mortgage loan is minimal. If you’re denied, take a look at your credit reports and check for any errors that may be lowering your FICO credit scores. You can check all three credit reports for free once a year at Annual Credit Report.
Step 2: Calculate What You Can Afford
While a bank may be willing to give you more than you thought you would be approved for, this doesn’t mean you should spend that amount. Determine what you want your payment to be and go from there.
Your loan officer will likely provide you with a spreadsheet of loan amounts and their monthly payments, but you can use a mortgage calculator to determine what kind of price range you think you should be in.
Always know what kind of monthly mortgage payment you can expect with different pricing tiers before you get serious with an offer and HOA research.
Step 3: Find A Local Real Estate Agent
Take the time to find a realtor that is familiar with your desired neighborhood. You want someone who is not only capable of answering all of your questions, but who is also able to share advice that you don’t even know you need.
This means he or she should be able to easily answer and obtain information on:
Proximity to local schools
Crime rate
Designated parking
Public transportation
Utility costs
Amenities
Monthly HOA fee
Property taxes
While HOA information is one of the most important variables when it comes to buying an apartment, many states restrict what an agent can and cannot discuss with you—because doing so would be akin to practicing law.
For Your Consideration: 30 Years to Life: How to Curb Anxiety and Avoid Buyer’s Remorse When Buying Your First House.
Step 4: Determine Property Taxes
Property taxes come with any real estate purchase, and can price you out of certain neighborhoods.
The money you pay into escrow account each month is used to pay your property taxes, so there is no need to put anything extra into your savings. However, because your mortgage holder takes care of it, your monthly payments could increase year to year with any change in taxes.
When calculating whether you can afford to buy an apartment, divide the total amount the seller pays in property taxes by 12 to determine how it will affect your mortgage payment.
Step 5: Make an Offer
When you’ve found the special one and have decided on an offer, contact your realtor.
If you choose, you can make your offer more appealing by not having an inspection clause, which allows you to walk away if the inspection is horrible. In many situations this is dangerous, but if you’re in a competitive market you could consider hiring a contractor to go with you on the initial walkthrough.
One thing you don’t want to skip out on, however, is an HOA clause that states you can back out of the sale if the HOA is not to your liking. Somes states require this clause, but it’s not universal.
After they have received your offer, the buyer may accept, counter, or decline. If time is of the essence— meaning multiple apartments have popped up that you’re interested in— you can give them a time limit to get back to you.
Step 6: Sign the Purchase Agreement and Make an Earnest Money Deposit
If your offer is accepted, you’ll have to make an earnest money deposit (usually 1-3% of the purchase price). You’ll also have to sign a purchase agreement.
Purchase agreements lock both the seller and the buyer into a legally binding contract, and is what prevents both parties from walking away from the sale.
Assuming the purchase moves forward, the earnest money deposit will be put towards your down payment and closing costs.
Step 7: Research the HOA
Apartments typically have an HOA (homeowners association), which issue their own rules and regulations for living in the complex. While there are a lot of benefits to HOAs, they come with extra costs separate from mortgage payments. Fortunately, the money is used to help maintain the entire complex.
Typically, HOAs take care of:
Amenities
Maintenance and repairs
Insurance for common areas
Reserve funds
Property staff
Professional property managers
Property management company
The most important thing to inquire about an HOA is whether or not its financials are in place— particularly whether it has enough money set aside in reserve funds (money for future repairs). If there’s not enough, HOA fees could increase significantly in the coming years.
As discussed, HOA research falls under buyer due diligence. The only thing realtors can do is ask about fees and forward any paperwork they receive. You will either need to read through everything yourself or hire a lawyer who specializes in HOAs, and possibly an accountant, too, to go through its financials.
When it comes to buying an apartment, this is one of the most important steps, and should not be glossed over.
Step 8: Get a Home Inspection and Home Appraisal
Buyers pay for both the inspection and appraisal. If you back out of the sale because of any information you receive, you won’t receive a refund.
The appraisal is more for the lender than it is anything else, but you'll want to pay attention to the inspection report. You can ask the seller to fix any issues that were found, but they may decline.
At this point, you can also make a counter offer if you believe the apartment’s physical state warrants a lower purchase price.
The sale can also be forfeited.
However, if you stated in your original offer that the inspection was for informational purposes only, then you cannot make a lower offer.
Step 9: Choose a Loan Type and Down Payment Amount
The type of loan you choose may revolve around a few factors, such as:
Your credit score
The apartment’s location (for the off-chance it qualifies for a USDA loan)
The purchase price
The size of your down payment
The closer you can get to a 20% down payment, the less time you’ll have to pay PMI (private mortgage insurance PMI). For a conventional loan, PMI is often removed automatically once you reach 22%.
If you choose to take out an FHA loan, you'll pay MIP for the entire loan term if you make a down payment smaller than 10%. According to Freddie Mac, borrowers pay between $30-$70 each month for every $100,000 borrowed.
For your consideration: Are zero down payment mortgages real?
Step 10: Choose a Home Insurance Provider
Property insurance covers any loss or damage to your apartment and assets inside your home. Similar to property taxes, the money that you pay into escrow each month will pay for your homeowner’s insurance.
There are many types of insurance, and the type you choose affects your monthly premium. Your lender may require you to purchase extra coverage such as flood insurance if the apartment is in a high risk area.
You must purchase homeowner’s insurance before closing. In fact, your loan officer may require proof of insurance weeks before closing.
Step 11: Do a Final Walkthrough
If you requested any repairs, this is your chance to verify they were done. And if it was agreed that any additional appliances would be left (such as window AC units), you’ll need to see they were, in fact, left behind.
Check for any possible damage done while the seller was moving out. If damage did occur, it’s not fair that you would be the one to pay for it.
For Your Consideration: How to Navigate a Final Walk-Through.
Step 12: Close
You’ll need to do a bank transfer or get a cashier's check to cover your down payment and closing costs. The full amount needed will be disclosed to you by your lender.
Closing is usually pretty fast, but be prepared to sign and initial many documents.
For Your Consideration: How to Reduce Closing Costs.
Conclusion
By reviewing all these steps you’re officially ready to move forward and buy your dream apartment.
FAQ
Is it still a good time to buy if interest rates are going up?
In 1981 interest rates were 18.53%.
Interest rates are currently at 6%. It’s not as good as it was in 2011 when rates were below 3%, but it’s still very low compared to what people used to endure.
Secondly, when interest rates rise, housing prices tend to go down, so things tend to balance out.