Homebuying 101
A Ten Minute Primer To Buying Your Next Home
Most of our clients, when they decide to buy a home, are nervous about taking on such a huge endeavor. At the same time, they are excited about the prospect of owning their own home. Searching and buying doesn’t have to be a tedious task, and having the help of a qualified Realtor® can make the job so much easier. Below, we’ll take you through the steps that all home purchases go through so you’ll be familiar with the process when you’re ready to buy your next home.
PRE-APPROVAL
The first step any potential homebuyers will need to take is to obtain loan pre-approval from a qualified lender. It is VERY important that you choose a quality lender with good referrals. You’ll come across two different kinds of lenders – mortgage bankers such as Countrywide Home Loans or Washington Mutual; and mortgage brokers – who shop your loan among a host of loan providers. Naturally, the better your credit – the better the deal you’re going to be able to put together. We typically advise that you speak with three lenders and obtain a Good Faith Estimate from each. The Good Faith Estimate will detail your interest rate, an estimate of your closing costs, and an estimate of your monthly payment. By shopping your loan around you can compare rates and costs among different providers to make your best deal. You can even leverage your Good Faith Estimates to improve on the deals being offered to you. Regardless of whom you pick to fund your loan, once you pick one you’ll need to obtain a certificate of pre-approval from that lender.
The certificate should:
- State how much you are qualified to buy
- State that the underwriter has reviewed your credit, employment history, and financial statements
- Include a signature from the lender
This certificate or letter typically accompanies any offers you may make on a home to show that you CAN actually afford to buy it. Most reputable listing agents will REQUIRE that your pre-approval certificate accompany your offer before presenting it to their clients. If you do not know any lenders, you can review a list of several lenders that we have worked with in the past at http://www.athomeinkaty.com/buyers/vendors.php.
FIND A REALTOR®
These days, you can’t throw a rock without hitting a Realtor®. With all the books, late night commercials, and exposure that real estate investment has gotten lately – we’re seeing record numbers of new agents entering the business. The problem of course is that just like every business – you get good agents, and bad ones. It’s important that you find a Realtor® who’s looking out for your needs and not their own bottom line. If you feel rushed when first meeting an agent, chances are you’ll feel that way all the way through your transaction. Pick a Realtor® who will take the time to listen to your needs, formulate a game plan, and walk you through the process step by step. As a buyer, under most circumstances Realtor® fees won’t cost you a dime. Realtors® are typically paid by the seller or in the case of new construction, the builder. Even if you’ve got your heart set on new construction, it’s in your best interest to take your Realtor® with you when you look at new homes – remember that the salesperson working at the model homes represents the builder – NOT YOU!
When working with a Realtor® to buy a home, you’ll probably be asked to sign two documents – one is titled ‘Information about Brokerage Services’ and the other is a ‘Buyer’s Representation Agreement’. The first document simply defines your relationship with your Realtor® – meaning who he/she represents in a transaction and what their responsibilities are. The second is an agreement between you and your Realtor® stating that he/she will work for you, representing you for a stated time period and in a stated locale – and that you agree to work only with him/her for the duration of the agreement. This agreement is what allows your Realtor® to earn his/her wages. It’s nothing to be scared of, but rather gives your Realtor® some assurance that they will be paid for services they perform.
OF COURSE, WE WOULD LOVE TO BE YOUR REALTOR® OF CHOICE!
NEEDS ANALYSIS
Regardless of who you choose to be your Realtor®, the first thing your Realtor® should do for you is to perform a needs analysis for you. Basically, you’ll take a piece of paper and draw a line down the middle of it. On one side you’ll have your Needs, on the other your Wants. Your ‘Needs’ column will reflect the things that you absolutely must have to purchase a home (number of bedrooms, bathrooms, square feet). Your ‘Wants’ column reflects the things that would like to have in your home, but aren’t required for you to make an offer (vaulted ceilings, pool, three car garage). After all, if your Realtor® can’t help you narrow down what you’re looking for, you could potentially be looking at hundreds of homes.
PROPERTY SEARCH AND TOURS
Once you and your Realtor® have established a clearly defined list of criteria and a maximum purchase price from your lender, he/she can pull a list of available homes and the touring begins. Typically, your Realtor® will print a list of about 10 available homes at a time and schedule a time block to show them to you. Your Realtor® will then plot a course and show the homes to you one at a time. At each home, your Realtor® should be asking questions and taking notes to help you narrow down the list of possible homes. When we show homes, we’ll ask you at each home, “If you HAD to pick between this home and the last home we saw, which home would you pick?” This helps us narrow down your choice between two homes rather than 10 or 15. At each stop, we’ll ask the question again and by the end of the day you should have a favorite. In the event you’re not ready to make an offer, we remember that home and start the process over again until you are ready to make your offer.
MAKE YOUR OFFER AND NEGOTIATE
Once you find the home that you want, it’s time to make a formal offer. Here is where the paperwork starts! Your Realtor® will have you sign a purchase contract along with all applicable addendums. The contract you submit will detail the sales price, the closing date, who pays for what, closing costs requested from the seller and the agents that are party to the contract. Your Realtor® will then deliver your offer to the listing agent for the property. The listing agent will then consult with their client, and either accept your offer as is, or will counteroffer with terms of their own. In some circumstances, usually when the offer is extremely low, listing agents may be instructed not to counteroffer and simply say another offer is needed.
Note:
Negotiation skills are usually where most new agents are lacking. You need someone looking out for your interests and bottom line rather than someone who will concede anything just to get the deal sealed and earn their commission.
EXECUTE AND OPEN TITLE
If you submit an offer, and it is accepted as is – the listing agent will have his clients sign and initial all documents and then sign and execute the contract. Once executed – you are in contract for the purchase of the home. By the same token, should you submit an offer and the listing agent counteroffers – once you sign and your agent executes the agreement – you are under contract. Once the contract has been executed, copies are made and delivered to all parties including the agreed upon Title Company who will then open title, if it has not already been opened. In addition, your option period check, if any, gets delivered to the listing agent and your earnest money check is delivered along with the contract to the Title Company. Earnest money checks are meant to convey the sincerity of your offer. Most listing agents will view offers with higher earnest money checks more favorably as it conveys seriousness to the offer.
Opening title is done by delivering an executed copy of the contract to a Title Company who in turn assigns the file to an examiner. The examiner will then gather all available information about the history of the property – both the land itself and the improvements upon that land (a house). The examiner researches the property to determine whether or not the title to the property is insurable. Once the examiner completes their work, a commitment for title insurance is issued which states in essence that they will insure that the property is clear of defects and liens provided a certain set of conditions are met. Usually these conditions include any outstanding mortgages, any personal liens, unknown heirs, etc. Typically your Realtor® will receive the title commitment and then it becomes your Realtor’s® responsibility to help you meet any required conditions to close prior to your closing date.
OPTION PERIODS & INSPECTIONS
Almost all contracts these days include an option period clause. This paragraph in the sales contract acts as an ‘escape clause’ in the contract. Essentially it works like this – you pay a per diem, typically $10 per day, for the unrestricted right to cancel the contract for any reason whatsoever. If you wake up in a bad mood, or are having a bad hair day – as long as you are still within your option period, you can cancel the contract. The most common option period we see is $100 for 10 days. This money is paid to the seller upon execution of your contract and either will or will not be credited to you at closing depending on the terms of your contract. In the event you do cancel your contract, the option period money that you paid is retained by the seller and your earnest money is refunded to you.
Home inspections, which we highly recommend, are usually performed during the option period and are the responsibility of the buyer. We maintain a list of qualified inspectors that we’ve worked with in the past and who can help you with your home inspection at http://www.athomeinkaty.com/buyers/vendors.php. A typical home inspection will run you between $200 - $300 and takes about 2 hours to complete. Your inspector will then deliver an inspection report which you should review with your Realtor®. In the event your inspection reveals a clean bill of health no further negotiations will be needed. However, if there are some repairs that need to be made, your Realtor’s® negotiation skills will come into play again.
APPRAISALS AND SURVEYS
Appraisals are almost always required when you are financing the purchase of a home. They are normally ordered by your lender and paid for by the buyer. Some lenders will pay the appraisal fee up front and bill you at closing, but most will require a check up front to cover the cost. An appraisal is an independent analysis of the value of the home you are purchasing and is used to ensure that the home is worth what the lender is loaning to you to buy it. Lenders won’t loan $100,000 to purchase a home that’s only worth $80,000. In the event that you default on your loan, they can’t recoup the majority of their money and incur a lot more expenses going through the foreclosure process. Appraisals start at around $375 and are usually performed only after the option period has expired and the deal is moving forward. Appraisals are always a buyer expense, but some lenders offer to pick up the cost for teachers, firemen, and police officers.
Surveys are usually required by Title Companies to close transactions. They are the line drawings or meets and bounds descriptions of the properties that describe the boundaries of both the land itself and the improvements upon that land. Most homeowners have them – although they don’t realize it – and in most cases, existing surveys can be used to close a sale. In the event permanent changes have been made to a structure on the property since the last survey was performed, usually a new survey will be required. If an existing survey cannot be found, a new survey will be required to close the sale. Who pays for that survey is determined by the terms on your contract. Nine times out of ten, the survey will be ordered by the Title Company at the instruction of the paying party. The cost for surveys varies widely, but you can expect to pay at least $350. Again, some title companies will front the cost of the survey, while others will require a check be delivered beforehand. Surveys are usually performed after the expiration of the option period.
NEGOTIATE REPAIRS
It is important to keep in mind that professional inspectors will turn up MANY things that aren’t necessarily a safety risk, but must be disclosed as a matter of law. You must also keep in mind that home sellers are NOT REQUIRED to perform ANY repairs. It’s all negotiable! Now with that in mind, any SEASONED Realtor® should be able to advise you about particular problems that they see in an inspection report. It is your Realtor’s® job to help you pick and choose the repairs that you think are necessary and to negotiate having those repairs performed. In most situations, repairs that pose a safety or security risk should be your primary concern. Cosmetic problems can be negotiated as well, but should not be your focus for the purposes of negotiating repairs.
Once an agreement for repairs has been reached, an amendment to the contract is signed by all parties and becomes part of the original contract. If repairs are required, the seller then begins making those repairs so that they are completed prior to your final walkthrough. In the event a cash settlement for repairs is agreed upon, that amount will be credited to you at the closing table.
FINAL WALKTHROUGH
Your final walkthrough is typically made after all repairs have been performed and a day or two before closing. This allows you to inspect that the repairs were made properly and in accordance with the terms of your contract. Some buyers opt to pay to have their inspector come back out and re-inspect the items that were repaired, but under most circumstances – if your inspector explained the problem sufficiently, you should be able to determine if the problem has been resolved. You’re now ready for closing!
CLOSING COORDINATION
Your contract dictates a date that your closing must occur by. It states that closing must occur on or before a given date. Usually this means that closing happens on that date – but in actuality means you can close on any date up to that closing date. Your Realtor® will coordinate with all parties – you, your lender, the closing agent, the seller’s agent to make sure all requirements have been met and to set a date and time for your closing. Ninety-nine times out of a hundred if there is a delay with closing, it involves hang-ups with the lender documentation (this is where having a dependable lender really comes in). Your Realtor® should be in direct contact with your lender to ensure that all paperwork is delivered accurately and on-time to the title company. Everybody wants to close, and everybody has to schedule time to attend closing, so nobody likes when a closing gets delayed. Your Realtor® makes sure you’re ready to close before you walk out the door.
REVIEW SETTLEMENT STATEMENT
Once all documentation has reached the title company, a preliminary settlement statement (HUD1) is drawn up and delivered to the lender, your Realtor®, and the listing agent. Your Realtor® should review the settlement statement with you as soon as possible to address any corrections that might need to be made. Once all corrections have been submitted to the title company, another settlement statement is issued and must be approved by the lender. Once final approval from the lender has been obtained, closing can proceed at the scheduled time. Your lender and/or Realtor® will let you know if you need to bring a cashiers check to closing to pay for your closing costs. If required, your cashiers check should be made payable to the Title Company performing the closing.
CLOSING
Closing occurs at the offices of the agreed upon Title Company. Typically, you and your Realtor® will sit on one side of the table, while your sellers and their agent will sit on the other. The closer will sit in the middle at one end, and your lender might sit at the other end. Everyone is there to make sure your closing happens smoothly. Be sure to bring your closing cost cashiers check, if required and your driver’s license with you to closing.
The closing agent will first review the settlement statement with you and ask if you have any questions about any of the fees on the statement. Since you’ve already reviewed the statement with your Realtor®, you should already have a good understanding of the document. Both you and the sellers will be asked to sign a final copy of the settlement statement. Next you’ll proceed through all the documentation (and there will be a lot of it) for your home loan. The closing agent will briefly describe what each document is and have you either initial or sign each page. There is ALWAYS much more documentation for the buyer to sign than for the seller. Once all documentation has been signed and notarized, the closing agent will deliver the documentation to the lender and the lender will subsequently issue a funding number. This funding number allows the title company to disperse checks for all parties receiving them – including the sellers and Realtors®. Once funding occurs, the house is officially yours! Congratulations!
A SIDENOTE FROM AT HOME IN KATY
Buying a home is not a particularly hard thing to do, it’s just a process – one that is much easier with the help of a Realtor® – especially considering that assistance doesn’t cost you, as the buyer, a thing. This document is of course simply a summary of the process – but we hope that it gives you just a little insight into the process of buying a home. It is our sincerest hope that we’ve helped you in some small way. We wish you the best of luck in your search for your next home – and if there is anything we can do to help you, we hope you’ll give us a chance to earn your business. We would love to help you find your next home! Remember… whether you’re buying a new or resale home – you should always have an agent by your side – protecting your interests.
