How The Home Buying Process Works
TIP 1: RESEARCH AND PREPERATION
Ask yourself, are you ready to buy?
While you may feel ready to buy a home, it’s worth assessing your personal level of interest in home ownership before you make what will most likely be the largest purchase of your life. There are many hidden costs that come with home ownership: From property taxes to utilities and maintenance, these costs can add up quickly, and if you’re not prepared, it can feel like you’re drowning in tiny details.
Make sure you’re financially prepared for not only your down payment,
mortgage and closing costs, but these hidden costs as well. Beyond financial concerns, you should spend some serious time thinking about your personal pros and cons of home ownership.
Pros/Cons List:
Pros
✓ You’re paying YOUR mortgage not someone else’s. No more
throwing thousands away a year. Those thousands are going
into your own home (investment).
✓ Freedom to renovate at your leisure
✓ Real estate increases in value over time; your new home is a
long-term investment
✓ With a fixed-rate mortgage, you can lock in a monthly
payment and plan around it accordingly
Cons
● Landscaping and general home maintenance are now your
responsibility
● The hidden costs of home ownership can increase
● Big initial cash investment for down payment
After you’ve put real time and effort into the preparation process, it’s time to begin the actual process of searching for and purchasing your home.
Get Pre-Approved
Before you dive into the home search process, you should get pre-approved by a mortgage lender. Pre-approval doesn’t mean you’re committing to purchase a property or take out a loan: It’s just a signal of interest that makes the process move more smoothly further down the line and when financing your preapproval usually needs to be presented with your offer. In a market like today, word of advice- BE FULLY READY. You don’t want to find a home and lose it because you were not prepared. Another tip- don’t be afraid to shop around
and speak to a few lenders in order to compare rates.
There are two major reasons you should get pre-approved before you start looking at homes:
1. Your mortgage lender wants to know whether or not you’re qualified to borrow money from them. To determine whether or not you’re qualified, they’ll look at your income, your outstanding debts, your credit score, and your general financial health.
2. Getting pre-approved helps you understand what your price range is, because it’ll tell you how much a lender is willing to let you borrow.
Knowing what type of mortgage, you’ll be able to secure will help you
decide what price range to look in.
Find an Agent
Last but not least, you should find an agent before you start looking for a home. No, it’s not a requirement — plenty of people have searched for and purchased homes without an agent. But a dedicated agent’s knowledge on real estate and the process will be invaluable during your house hunt. Buying a home is one of the biggest investments you can make, so you should make sure you’ve got the help, guidance and tools you need to manage that investment from start to finish.
TIP 2: NARROW YOUR SEARCH DOWN
Before you begin your home search, start off with a list of “wants” and “needs.” Try to be as realistic as possible: Depending on your budget, you’ll likely end up in a situation where you have to make compromises to find the home that is best for you. With those “wants” and “needs” written down and ready to go, here are a few important things to keep in mind as you’re house hunting:
Start at Home:
Before you take your home search outside of your current home, make a list of things you like (or love) about your current space. Do you get amazing natural light? Are you on a quiet street? Do you have friendly neighbors? You may take these things for granted on a daily basis, but pin-pointing the things you like about your current home will help guide you and focus your home search.
Research Schools:
Whether you’ve got little ones at home or not, schools have a huge impact on the potential value (and resale value) of your next home. Do your research and make sure you’re looking at homes in school districts you’d feel comfortable living in. After all, even if you don’t have children now, plans can always change. Buying a home is a long-term investment and ensuring that your new home is in a good school district can make all the difference a few years down the road.
The Parking Situation:
If you're looking at a single-family detached home, look beyond the existence of a driveway. Is it easy to enter and exit your home? Is there enough parking available for all your family’s cars?
Take Stock of Curb Appeal:
You can change a lot about a home, but beyond a few coats of paint,
changing the way it looks on the outside can become a huge project. Make sure you like the overall look of the house. Would you feel comfortable showing this home off to your friends and family?
Location, Location, Location:
It’s easy to get caught up in what seems like the “perfect” house, but
what happens if that perfect house is an hour from friends, dining, and
entertainment? Searching for the perfect location to settle down in is full of trade-offs: After all, some people would flourish in a home that’s an hour from entertainment but 15 minutes from work. Keep your desired neighborhood characteristics at the front of your mind as you browse but remember that nothing will be perfect.
Keep an Eye Out for the Unexpected
When you’re hunting for your next home, keep an eye out for any
potential non-cosmetic issues. That puke-green carpet may be ugly, but it’s not nearly as significant as potential mold or water damage under that same carpet. If your issues are just cosmetic, leave the home on your list: After all, carpets, paint, fixtures, and even your floorplan can all be changed with time and money, but larger structural issues are likely reason for concern
TIP 3: VIEWING PROPERTIES
Once you’ve narrowed down the list of homes you’d like to see, it’s time
to connect with your real estate agent. Some of the homes on your list
may have upcoming open houses, but your agent can schedule you to
see properties before then. Agents have access to information about
private showings, which can supplement any open houses you choose to go to. A private showing is arranged between the seller and/or seller’s agent and your agent, and these showings allow you to see properties on a schedule that works for you.
Open houses are still a great way to check out a home you love, but if
you’re in a competitive market….
Scheduling private showings can ensure that you have the information you need to make a competitive offer as early as possible.
TIP 4: MAKING AN OFFER TO PURCHASE
You’ve found the home of your dreams. Now, the only thing standing in between you and that home is, well… a lot of paperwork. This process begins with assembling an offer (don’t worry: Your agent will guide you through this process).
A written offer can include a number of different sections, including:
● A legal address and sometimes the legal property description
● Details regarding the purchase price and terms
● Information about closing costs and fees
● The date and time of the offer’s expiration
● Your projected loan closing date
● Other state-required provisions or disclosures
...and more. Before making your initial offer, it’s important to work with your agent in order to determine the most financially sound offer. If you undercut the seller too heavily, it could potentially make them feel undervalued and insult them, but if your offer is too generous, there’s a chance you could lose out on thousands of dollars of savings.
Once you’ve determined core details of your offer, there’s another piece to the paperwork puzzle that’s extremely important:
Contingencies:
Contingencies are conditions that must be met in order to complete the sale of your new home. These contingencies usually help to protect the buyer against any wrong-doing or shady dealings in the home buying process.
The most common types of contingencies are:
Appraisal contingencies
Ensures the property is valued at a pre-set minimum amount. Which in simple terms means you will only purchase the home if the appraisal is equal to or above the sales price offered. You can get out of the contract or renegotiate should the appraisal come back lower
Financing contingencies
Ensures the buyer has time to secure a loan. Financing contingency protects you from losing your down payment deposit if your lender does not come through with the financing.
Home sale contingencies:
Gives the buyer time to complete the sale and settlement of their current home in order to purchase their new home.
Inspection contingencies:
Gives the buyer the right to order an inspection within a set time period
Most contingencies provide an extra level of protection for homebuyers, but there are times where it makes sense to leave contingencies out of your offer. For example, buyers in very competitive markets might choose to leave contingencies out of their offer in order to make their offer more attractive than others. Be sure to consult with your agent before adding or removing any contingencies from your offer.
Now, this is where things get real.
Read and sign purchase agreement
Your agent will help you read through the nitty-gritty terms of the contract, ensuring that everything looks just right. It’s also best to have an attorney to help out with this process (and/or act as your closing agent) — there’s definitely a cost associated with this, but your home is the largest investment you can make, and you should do everything you can to ensure the contract is prepared correctly to protect you before moving forward.
Submit your formal offer
Once you’ve worked with your agent and/or attorney to finalize your offer it’s now time to submit your initial offer to the seller.
Negotiate
Negotiations with the seller will begin once they’ve received your initial offer. There’s certainly a chance (albeit a very slim one) that the seller accepts your initial offer outright, but there will likely be some pushback and negotiating. Some sellers will focus on price over anything else, while others may be more focused on the terms and getting you to remove some contingencies from your initial offer. These could continue after the formal offer is submitted — e.g. you could request repairs based on the home inspection, and the seller may negotiate a drop in sale price to cover the repair costs instead. Use your best judgement while negotiating, and make sure to consult any involved parties before advancing the process any further. There could be several rounds of negotiation, so don’t despair if negotiations take longer than you’d like.
TIP 5: AFTER SUBMITTING OFFER
Complete your loan application with signed purchase contract
There’s still paperwork left to be done. If you got preapproved for your mortgage, it’s time to submit your signed purchase agreement to your mortgage lender. While your lender will be reviewing your application, be sure to stay away from any major purchases. These may come off as red flags to lenders, potentially leading to your loan falling through. If you weren’t prequalified for your loan, now is the time to submit proof of income, verification of your assets, and your signed purchase contract to your mortgage lender.
At this point in the process, your lender may ask you if you want to “lock in” your interest rate, meaning that your interest rate won’t change, even if interest rates go up or down while you are waiting for your loan to be approved. There are pros and cons to locking in an interest rate: If you think interest rates will go down, it makes sense to wait in an effort to save a fair amount of money over the lifetime of your loan. On the other hand, if you’re unsure about fluctuations in interest rates (or really just don’t want to think about them too much), it’s completely fine to lock in your rate right away.
There are some other thorny terms you’ll likely run into during the process of applying for a loan. On the following page there are four big things to keep an eye on during your loan application process.
Escrow: Escrow is a general term to describe the part of the home-buying process when a third party (usually an escrow provider) holds on to the bulk of
the money involved in your offer, ensuring that both the buyer and the seller meet their obligations.
Equity: Equity is the difference between the value of your home and the amount you still owe on your mortgage.
PMI: PMI, or private mortgage insurance, is a type of mortgage insurance you may be asked to pay depending on the type of loan you’re applying for. This
insurance isn’t to protect you: It’s to protect the lender in case you’re no longer able to pay your mortgage.
Earnest money deposit: An earnest money deposit is usually part of your initial offer. This deposit is almost literally putting your money where your
mouth is — if you back out after submitting a formal offer with an earnest money deposit, the seller gets to keep the money.
Once your offer is accepted…
You’re in the home stretch! There’s more work to be done, though. First, you’ll need a homeowner’s insurance quote. All lenders require it, and it’ll cover any damage that happens as a result of a natural disaster or other “act of god.” Your loan can’t be closed until you provide proof of homeowner’s insurance, so be sure to make this a priority. During this time period, your lender will set up an appraisal to estimate the home’s value. As long as the appraised value supports the loan you’ve requested and there’s no significant disrepair, this appraisal likely won’t hold your loan up.
Once your offer is accepted:
● Get proof of home-owners insurance
● Get an appraisal (lender will schedule)
● Get an Inspection (you will schedule)
● Respond promptly to lender
If you don’t have an inspector you plan to work with, your agent can send you a few references. The inspector will comb through the home top to bottom, looking for any major damage or potential repairs.
One thing to note: the appraisal and inspection portions of your offer aren’t required. It’s possible to waive appraisal and inspection as part of your offer, but by doing so, you could put yourself at risk of running into a major problem after you’ve already closed on your new home.
Meanwhile, back at your mortgage company...
While all of this is taking place, your mortgage company will work on underwriting your loan. This is the process of verifying your income, assets, debt, and property details in order to approve your loan once and for all. Most of this work happens behind the scenes, but your mortgage company might ask you for additional documentation to help move the process along. For example, they could ask for documentation that backs up any deposits showing up in your bank account to verify that your income and assets match what you reported. Make sure you stay on top of your lender's requests — you don’t want to slow the loan process down.
TIP 6: CLOSING
Once your loan has been reviewed and accepted, it’s now time to close on your new home! “Closing” refers to the last step in the home buying process: The transfer of the home’s title from the current owner to you. Aside from the emotional cost of signing even more paperwork, there’s one major step associated with closing: closing costs which include a huge variety of individual one-time charges, including:
● Title policies
● Escrow or closing fees
● Notary fees
● Wire fees
● Courier / delivery fees
● Attorney fees
● Endorsements
● Recording
● State, county or city transfer taxes
● Home protection loans
● Natural hazard disclosures
● Home inspections
● Lender fees
… and more.
Closing costs vary from house to house and situation to situation, but when all is said and done, you can expect to pay between 2 and 5% of your new home’s purchase price in closing costs. Once you’ve signed all your paperwork, paid all your closing costs, and double- (triple) checked everything, congratulations!
You’re now a homeowner.
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