You’ve made the decision to buy a home. It’s a big step and a major life transition, but with some planning and homework, you can do it!
It’s not unusual to experience mixed feelings when you’re buying a home: elation, excitement, fear, frustration. This is probably the biggest purchase you’ve ever made, and emotions come with the territory. Be prepared for the ups and downs that can come with the process: You drive by the home of your dreams only to lose it to a faster buyer. Or you find an unexpectedly affordable fixer-upper in the neighborhood where you’ve always wanted to live. You can buffer yourself from home-buying highs and lows by becoming a knowledgeable consumer. You’re less liable to feel anxious and stressed if you understand what’s happening every step of the way.
Don’t buy a home with your eyes closed. Learn about mortgages and how much you can afford. Talk to a lender and get pre-approved for a loan. Research the market and explore different neighborhoods. Know your priorities, and anticipate some compromises along the way.
Just keep your “eyes on the prize” and it will all be worthwhile.
Buying a home may seem a bit overwhelming, like learning a new language. Points, PMI, pre-approval, escrow, title search – there’s a lot to absorb. Relax. Take a deep breath. There’s nothing involved in first-time home buying that’s beyond your abilities. Millions of people have done it, and so can you.
You can find plenty of help along the way, including books and Internet resources, as well as professionals to guide you. Your real estate agent, mortgage lender, attorney and home inspector can be a wealth of information. And don’t forget to turn to family members and friends for advice and support through the process.
So prepare for an often exciting, sometimes frustrating, occasionally anxiety-provoking ride! The more you know about the process, the less stressful you’ll find it. In brief, these are the basic steps involved in buying a home:
Like most home buyers, you’ll probably decide to work with a real estate agent. At your initial meeting, you’ll discuss the type of home you want and the different locations that appeal to you.
It helps if you’ve done some homework first. Create a “wish list” to capture what you want in a home, and make sure to share this with your agent. Consider the neighborhood where you want to live. Is it urban, rural or suburban? What kind of amenities and community activities does it offer? How far is it from your workplace? Start comparing different areas and set your priorities.
Get Pre-Qualified – Even Better, Get Pre-Approved
Don’t wait until you’ve found the home of your dreams to talk to a mortgage lender. You don’t want any surprises after you’ve made an offer. By getting pre-qualified, you’ll know how much you can afford to borrow (but remember, you don’t have to borrow the maximum).
And consider getting pre-approved. A written pre-approval provides you with credit approval – and usually only subject to receipt of an acceptable title and appraisal. This can help you narrow in on your search and also puts you in a stronger position with a seller when you make your offer.
Look at homes and visit neighborhoods. The more properties you see, the better sense you’ll have of what’s available in your price range. Make sure to give your honest feedback to your real estate agent, so that he or she can better identify homes that meet your needs.
Write and Present the Offer
Your agent will work with you to draft your purchase offer and present it to the seller and the seller’s agent. The offer will include a cash deposit (“earnest money”) to show good faith. The seller will accept your offer, reject it, or most likely make a counter offer.
If the seller does not accept your first offer, you’ll probably receive a counter offer. It is not uncommon to counter back and forth for several rounds. Once your offer is accepted, you generally have 5-7 days to submit a loan application.
When the sales contract is accepted and signed by you and the seller, your agent opens what is termed either “escrow” with an escrow company, or “title” with an attorney or title company (the term and the type of entity it is opened with varies by state). This usually happens within 10 days of signing the contract. The escrow/attorney/title company holds all funds, including your initial deposit, until instructed by you and the seller (or your agents) to distribute them.
The escrow/attorney/title company will search the chain of title for the property you are buying, and prepare a preliminary report. This document will show who owns the property and what liens, if any, have been placed on it.
Conduct Home Inspection
After the contract is signed, you usually have 7-10 days to inspect the property and document its condition. You should hire a professional home inspector to do the job.
If you’re already pre-approved for a mortgage, this process will be that much faster. Once the loan is finalized, conditions are satisfied, and a clear title is confirmed, you can do a final walk-through of the property.
Your primary role at the closing: signing papers! Escrow/title closes when the escrow/attorney/title company records the deed in your name, the seller gets paid, and all of the funds are paid out. You receive the keys and assume your new role as homeowner.
Making an offer
You’ve done the research. You’ve visited the open houses. You know how much you can afford. You’ve talked to your family and friends about everything you think you want in a house and, finally, you’ve found the right house for you. How do you go about making your offer?
There are many things to consider when making an offer. So where do you begin? Your real estate agent should provide you with a list of comparable properties (a Comparable Market Analysis or CMA), which can give you an idea of what similar homes are selling for in that area. Use this information as a guideline for making a solid offer on the house you want. When you review the comparables, pay attention to the sale dates, the locations, the features, and the terms and conditions
Get Everything in Writing
During the home-buying process, you may have become quite friendly with your agent, a seller or perhaps both. Buying a home is like embarking on any business venture, so it’s wise not to let friendship dull your good business sense. Verbal agreements do not hold water in the world of home buying – you need to put everything in writing, regardless of your relationship with the real estate agent or seller.
When you decide what to offer on a home, your agent will write up the paperwork, called a purchase contract. If you’re not working with an agent and don’t have a lawyer, consider hiring an attorney to help you construct a written offer.
If you want to learn more about what’s involved in the purchase contract, request a sample from your agent or attorney. Review it carefully, and don’t hesitate to ask any questions. You want to feel confident that you thoroughly understand any documents you will sign. You don’t want to feel rushed or pressured at this stage, and that’s exactly what happens when you’re concerned about outbidding others for your dream home.
The Purchase Contract
What exactly is an offer? Do you just jot down a number you feel comfortable with and slide it across the table to the sellers? Actually, an offer involves a number of details in addition to the price. A typical purchase contract includes: the deposit amount, the mortgage and down payment amounts, the closing date, the occupancy date, an itemization of what’s included in the sale, various contingencies to protect both you and the sellers (such as property inspections), time periods for performing the contingencies, an itemization of who pays which fees, and the options available to both buyer and seller should either party default.
Of course, there are always optional clauses and conditions that you or the seller can include in the contract, such as:
- Earnest money (a deposit made by the potential home buyer to show that he or she is serious about buying the house)
- Returning earnest money
- Deed and title condition
- Financing arrangements
- Settlement date and possession
- Prorating (the contract should state that property taxes will be prorated to the closing date)
- Sale of current residence
- Response time limit
- Home inspection
- Environmental tests
- Termite inspection
- House furnishings
- Condition of house at settlement
Okay, you feel ready. You’ve researched comparable homes and worked through a contract with your agent or attorney. Now it’s time to contact the seller’s agent and present the offer. Whether you place your highest bid immediately or start lower depends on the asking price and the competing buyers. Don’t feel pressured to offer the asking price just because that’s what the owner wants. Offer what you feel the house is worth, based on your research and conversations with your agent. The seller has the option to make a counter offer, and then the negotiations begin.
Emotions are at an all-time high. Between assembling the paperwork, scheduling inspections and scrambling to get those finances in order, you forgot about how much fun it will be to have your own home! But there’s just one more step you have to take to make your dream a reality. Close the deal.
The closing is the proverbial “signing on the dotted line” – the process that transfers the home title into your name, verifies homeowners’ insurance on the property, commits the mortgage terms in writing, and usually, puts the keys to the house in your hands. In general, you will leave the closing and move into your new home. The weeks and months of anticipation are all settled in the couple of hours that a closing takes.
Generally, the closing occurs at the office of an attorney, a title company, or an escrow company. Closing procedures vary depending on where you buy your home. In some locations, the buyers and sellers attend the closing, along with the buyer’s real estate agent. In other areas, only the buyers are present. Typically, though, the closing is attended by the buyers and their agent, as well as the closing agent, who reviews all of the home sale components and obtains your signature to finalize all agreements.
Closing Costs Defined
You may think the cost of a home is the only number you should focus on at closing, but there also are costs associated with sealing the deal. Both buyers and sellers are responsible for certain closing costs, and these depend in part on what area you live in and/or where you are moving.
As a buyer, you can expect to pay the following closing costs: fees for obtaining a mortgage, inspection fees, homeowners insurance, transfer taxes (if any), title insurance and escrow or attorney fees. Your real estate agent should provide you with details regarding the area you are purchasing in and the customary associated fees.
What to Expect at the Closing
It may seem like you’re faced with paperwork at every juncture of the home-buying process, but it all culminates at the closing. A number of documents are typically dealt with at this time:
- Settlement statement
- Loan papers
- Title insurance
- Homeowners’ insurance
- Title or deed
- Down payment
- Closing costs
The closing is your final opportunity to make certain that everything related to buying your home is correct. That’s why it’s important to do some preparation before you attend the closing, so that you understand exactly what’s involved.
What Will You Need
Compile what you need and review all documents beforehand to help to make the closing as trouble-free as possible. Your real estate agent may go over the various items with you in advance, but you should know what to expect and what to have on hand, including:
- Homeowners’ Insurance Policy: You’ll need to show proof of home insurance paid in full for the first year.
- Settlement Statement: You should receive a copy of the settlement statement before the closing date. Because it takes some time to create this document, it typically is not available until a couple of days before the closing. This statement will tell you the total amount of cash you will need to bring with you and detail how the various funds will be dispersed. It’s a good idea to provide a copy of the statement to your agent for review.
- Certified Funds: The settlement statement specifies the amount of money you need at the closing so that you can bring a certified check with you.
It does take a little time to get organized for the closing, but it’s well worth the effort. Once it’s over, you’re now the proud owner of your dream home.