Buying a new home may seem simple (find it and buy it), but in reality there are many steps and possible hurdles to overcome in the process. Making it from pre-qualification to move in requires a team effort. This article helps you know what to expect during the total buying process from the moment you talk to your lender, to the moment your offer is accepted to the day you get the keys to your new home.
1. Get Pre-Qualified / Pre-Approved for a Mortgage
If you are needing to get a loan to buy a home (not a cash buyer), you must get pre-qualified for a mortgage before you step into the world of searching for a home. Pre-qualified is a cursory look at your credit, finances and your worthiness to obtain a mortgage loan. Pre-approval means you've gone through the underwriting process and have already obtained the loan. While getting pre-approved for a mortgage is not required to close a deal, it can help you close the deal quicker as being pre-approved signals to the seller that you have strong financial backing. In turn, being pre-approved can give you more bargaining power when negotiating with a seller. Another key advantage of being pre-approved is that certain lenders will offer you a rate lock, which means that you can secure an interest rate and not be a the mercy of the markets if interest rates rise before you close the deal. Not all houses will qualify for all loans. You need to work with your agent and lender to make sure you're only looking at homes that qualify for your type of loan (loan limits, structure, etc.)
2. Find a Real Estate Agent
Ask your friends and colleagues for referrals. Talk to the agents who have been referred to you and see if they are competent and see if you can develop a rapport. You want to make sure you feel like you can trust this person to go up and beyond for you and hold your best interest above their own.
3. Start Home Shopping
Your chosen real estate agent should have a website that is connected to the MLS that you can search and save favorites and have alerts delivered to you. Review areas first to see what areas you're most interested in and when creating searches, search within a 15%+ and - range of your price. Your lender might tell you what you're max loan limit is, but don't be allured by that amount and drive to the top of your range. Make sure that you can comfortably afford the mortgage payment, insurance, taxes, maintenance and unexpected costs that comes along with owning a home. Have your agent take you on tours of your favorite homes and have him/her provide you with property reports to get to know the area (if you don't already know it).
4. Find a Home
Once you find a home that works for you and your family that is in your comfortable price range, ask your agent to do a buyer's CMA (comparative market analysis) and research on the property to determine a pricing and offer strategy.
5. Make an Offer Through a Purchase and Sale Agreement
In this hot seller's market, your first offer should be a strong one. All of your lending docs, earnest money and finances should be buttoned up. If you come in with a low ball offer and weak financing, you could be rejected and banned from coming back to the negotiating table. Be sure your offer is not offensive. Most seller's are emotionally attached to their property and their price. Once you submit your strongest offer, you have provided your earnest money and a deadline. Many listing agents are setting a date for reviewing offers and will compare them all with their seller to determine the best offer -- which may not always be the highest priced offer. All cash, quick close offers will nearly always get picked first, even if it means a discounted price from the listed price.
6. Enter Into Mutual Acceptance (if not, go back to Step 3)
Once your offer is accepted, this is an exciting time! Now, the following steps occur.
7. Open Escrow
Escrow is an account held by a third party on behalf of two parties in a transaction. Because there are so many things that have to happen to complete a home sale, the best way to prevent either the seller or the buyer from getting ripped off is to have a neutral third party hold all the money and documents related to the transaction until everything has been settled. This is industry standard protocol.
8. Deposit Earnest Money
Earnest money demonstrates your "skin in the game" and is an indicator to sell. This is money you will get back unless you back out for no good reason.
9. Do a Title Search and Obtain Title Insurance
A title search and title insurance provide peace of mind and a legal safeguard so that when you buy a property, no one else can try to claim it as theirs later, be it a spurned relative who was left out of a will or a tax collector who wasn't (or thinks he wasn't) paid. A title officer will perform a title search to make sure there are no clouds on the title (third-party claims to a property that could call into question or invalidate your ownership of it). If there are, these problems will need to be resolved before the property becomes yours.
10. Complete the Home Inspection
A home inspection is not required, but you'd be wise to to have one performed. If you find a serious problem with the home during the inspection, you'll have an opportunity to back out of the deal or ask the seller to fix it or pay for you to have it fixed (as long as your purchase offer included a home-inspection contingency). Make sure you attend the home inspection so that you can hear and see any issues that come up for yourself straight from the home inspector.
A pest inspection is separate from the home inspection and involves a specialist making sure that your home does not have any wood-destroying insects (termites or carpenter ants). You wouldn't want to buy a house with a termite problem, as even a small problem can spread and become very destructive and expensive to fix. Wood-destroying pests can be eliminated, but you'll want to make sure the problem can be resolved for a cost you find reasonable (or for a cost the seller is willing and able to pay) before you complete the purchase of the home. In fact, if any pest problem, even a minor one, is found, the mortgage company will require that it be fixed before you can close.
11. Renegotiate the Offer After Home Inspection
Even if your purchase offer has already been accepted, if inspections reveal any problems, you may want to renegotiate the home's purchase price to reflect the cost of any repairs you will need to make. You could also keep the purchase price the same but try to get the seller to pay for repairs.
If the purchase contract states that you're purchasing the property "as is," you don't have much recourse to ask for repairs or a price reduction, but you can still ask. You can also still back out without penalty if a major problem is found that the seller can't or won't fix it.
12. Lock Your Interest Rate
If you haven't already, you'll need to lock your interest rate. A good lender will watch interest rates closely for you and tell you when rates are at a low point so you can lock then.
It's important to note though that since interest rates are unpredictable and fluctuate multiple times a day, you shouldn't drive yourself crazy trying to hit rock bottom. Be satisfied with a rate that you think is reasonable given current market conditions and that you can comfortably afford. Also, keep in mind that rates vary by credit score, geographic region and the type of loan you're getting, so you may not be able to get the best rates you hear advertised.
13. Get the Home Appraised
Once you have satisfactorily gone through the inspection process and negotiated any issues found, then you are ready to move on to having the home appraised. Your lender sets this up and typically it isn't ordered until after the home inspection process is completed because some buyers and sellers can't agree and the house goes back onto the market.
The home appraisal is as much for you as it is for the lending institution. They just want to make sure that the value of the home matches the purchase price. Buyers do not typically attend appraisals. This is set up with the appraiser and the listing agent. Once the appraisal is received if it comes back at value with no conditions, then you're ready to move on to closing. If it doesn't come back at value (appraised for less than purchase price), you have a couple of remedies: a) you can ask the seller to agree to the appraised price (or they can put it back on the market) or b) you can come to the table with additional down payment to shore up the difference between the appraisal price and the purchase price or c) a combination of the above - seller comes down and you pay a little more.
If you're a VA buyer, this is a different situation if the appraisal comes in low.
14. Remove Contingencies
If your real estate agent helped you draw up a good purchase offer, your offer should be contingent on several things:
• Obtaining financing at an interest rate not to exceed a certain percent that you can afford
• The home inspection not revealing any major problems with the home
• The seller fully disclosing any known problems with the home
• The pest inspection not revealing any major infestations or damage to the home
• The seller completing any agreed-upon repairs
These contingencies often must be removed in writing by certain dates (known as active approval), which should also have been stated in your purchase offer, for your deal to close. However, in some purchase agreements, contingencies are passively approved (also known as constructive approval) if you don't protest them by their specified deadlines.
15. Funding Escrow
You most likely deposited earnest money when you signed the purchase agreement. The purpose of this money is to let the seller know that you are serious, or earnest, about your intentions to purchase the home. After all, the seller is going to take the property off the market so that you can purchase it. If you back out, the earnest money goes to the seller as compensation. If the seller backs out, the money is returned to you.
To complete your purchase, you'll have to deposit additional funds into escrow. Your original earnest money deposit is generally applied toward your down payment; you'll need to submit the rest of your down payment and pay your closing costs (unless the seller has agreed to pay them).
16. Sign the Papers
Obviously, one of the most critical steps of closing is signing the paperwork. There will probably be at least 100 pages. Although you may feel pressured by the people, who are waiting for you to sign your papers, like the notary and your mortgage lender, read each page carefully - the fine print will have a major impact on your finances and your life for years to come.
In particular, make sure the interest rate is correct and that there is no prepayment penalty. More generally, compare your closing costs to the good faith estimate you were given at the beginning of the process and throw a fit about any fees that are off by more than 10%.
17. Final Walk Through
One of the last steps before you sign your closing papers should be to walk through the property one last time. You want to make sure no damage has occurred, and nothing has been removed that is included in the purchase.
18. Move in!
It may seem like the buying process is a lot of work, but perhaps the worst part is the waiting. Most of the time, you'll just be sitting and waiting for someone else involved in the transaction to come through. So find something enjoyable to occupy your time and distract you while you wait, and feel secure in the knowledge that you've selected the best agent that knows how to make your buying and closing process go smoothly.
If you are buying or selling a home and have questions, let me know how I can be of service to you.