The Home Buying Process
A step-by-step look at the home buying process
Find a real estate agent aka realtor - you will want to select an agent that clearly communicates with you and is patient about all your questions.
Find a mortgage company aka lender - most real estate agents have lender referrals. It is great to use a referral because the realtor has some previous experience with the lender and is giving you someone they have experience with.
The lender will pull your credit report and verify your assets and liabilities (debt)
You will receive a prequalification or preapproval. A preapproval is more desirable because it shows credit has been pulled and assets verified.
Why you need to talk to a lender before shopping for homes? You want to make sure you are seeing the homes within your budget. If you are looking for a used Toyota you wouldn’t go test drive a brand new Lexus, would you? And, if you happen to find the home you want, you will want to submit an offer as soon as possible. It could take a day or two to get your prequalification or preapproval and then you could miss out on a home you really want.
Start shopping - Your Real Estate Agent will send you properties that fit your criteria and budget
Showing time! Your agent will accompany you to see homes. They will help point out features or areas of concern.
Making an offer on a property - Your realtor will work with you as well as do research to give you a range that makes sense to offer. Your agent should be able to look at the recent listed and sold properties in the vicinity that are most like in comparison to the property you’d like to purchase.
Negotiate terms of offer - when you offer a price on a property there are several factors that are considered.
Price offered
Financing or paying cash
Amount of earnest money
Time before inspection
Closing date
Flexibility
Final offer becomes contract - at this point you will know:
Sales Price of Home (can change after inspection/appraisal)
Closing Date
Title Company
Inspection Contingency Date
Loan Contingency Date
Submit Earnest Money within 3 business days - if you fail to submit your earnest money to the Title Company within 3 days then the contract will be null and void.
What is earnest money? Aka escrow. It is the skin you have in the game. It is the money you are putting down to say you are a serious buyer and that you are willing to show you want the property. Some people will offer 1% earnest money at contract acceptance, and then additional money after inspection, showing that you are willing to put up funds to make sure the sale goes through. It’s okay if you don’t have the extra cash to submit additional earnest money, but you need to have at least 1% of the sales price for earnest money. Anything less is considered a poor risk to the seller.
What happens to earnest money? It is held by the Title Company, in an escrow account. If you pull out of the contract due to inspection or financing issues then the earnest money is returned to you. If the inspection is acceptable and you move forward to financing, and obtain loan approval then the earnest money is credited to you at closing.
Will I ever lose my earnest money? Yes, if you fail to follow the terms of the contract.
Find a Home inspector - your realtor should have some referrals for you
Why you need a home inspector - a home inspector is trained and certified in home inspection. They will give you an impartial opinion on the condition of the property as well as recommendations for home maintenance. Because they are certified, their opinion holds more weight to a seller when a problem is found.
What happens if the home inspection fails? There is no pass/fail on a home inspection. The inspector will look at the property from top to bottom and let you know any issues they find, such as a leak in a roof or a crack in a foundation. The contract gives an inspection contingency date that gives the buyer the opportunity to ask for repairs/replacements or walk away from the contract and get their earnest money back.
Find Homeowners Insurance - you may need the result of the 4 point inspection in order to complete approval
Talk to your realtor about Home Warranty
What is a Home Warranty? A home warranty is a kind of insurance that assists when things go wrong. A home warranty costs around $400-$1000 and can be purchased by the buyer or the seller for the buyer’s benefit. It will cover the cost of repair or replacement of HVAC (heating, ventilation, air conditioning), Hot Water Heater, appliances (washer, dryer, refrigerator), plumbing and more. There is an upfront cost for 1-3 years. There is a deductible you pay of $50-$300 and then they repair or replace an item and cover the remaining cost. This is highly recommended for any home over 10 years old.
Negotiate repairs from Home Inspection - depending on the contract you signed will depend on how this goes. An As-is Residential Contract will allow you to terminate the contract during the inspection period for anything that bothers you. If you signed the Residential Contract for Sale and Purchase then the buyer asks for repairs/replacements. If the seller disagrees, then they can obtain a home inspection, at the seller’s cost. Then if there is a discrepancy, the buyer and seller pay for a third home inspection and then move on to arbitration to negotiate the contact. An As-Is contract has the expectation for minor or no repairs, the Residential Contract…allows for more negotiation in the inspection process. Inspection requests for repair/replacement should be limited to issues of safety, not preference. For example, asking for replacement of an electrical box that is a fire hazard is acceptable, but asking for a different paint color or new countertops is a preference.
Amend the contract (optional)
Sometimes the seller will give the buyer a credit in lieu of repairs, or reduce the price of the home. Lenders have guidelines on items that must be repaired prior to closing and what can be credited.
Mortgage lender will order an appraisal
What is an appraisal? An appraisal is the valuation of the property in a snapshot of time. Appraisers have to be a certified professional in order to be hired. It gives the mortgage company confirmation of the value of the property. It is not the actual value, a property is worth what anyone is willing to pay for it. It is a constantly changing value depending on homes that sell in the neighborhood. An appraiser will look at the property and make sure it adheres to all the requirements for the type of mortgage you are obtaining. The appraiser will look at recent sales of properties in close proximity and most like the property you are buying. The appraiser will issue a valuation report showing that the property is worth a specific amount. The mortgage terms will be based on that, and the sales price. For example, you have a house under contract for $325,000, the appraisal comes in at $327,000. The mortgage company will base all their numbers on the $325,000 as the number to calculate the amount down, etc.
What if appraisal comes in lower than the sales price? If an appraisal comes in low it can affect your mortgage. For example: You have a house under contract for $325,000, but the appraisal comes in at $312,000. The mortgage company is going to use $312,000 for the value and will calculate all monies from the appraised value. So, you would either have to come up with an additional $13,000 out of pocket or renegotiate the sales price. The lender can ask for a reconsideration, or they can negotiate with the seller. Or, if no one will budge, and you don’t have the extra money, you can terminate the contract on the loan contingency.
What are appraisal conditions? Certain types of loans have specific requirements, like a VA (Veteran’s Administration) will not allow a loan on a property that has unfinished flooring, the seller would have to agree to finish the flooring prior to closing. An appraiser can make conditions based on prewritten requirements, nothing is based on the desire of the buyer.
Loan sent for underwriting - The lender will use an underwriter to review the file. The underwriter will look at the credit report, the assets and liabilities (debts) and confirm that the ratios (debt to income ratio) are within the guidelines for the loan. The underwriter will also look at the value or the appraisal to confirm the loan to value ratio is acceptable. An underwriter may issue conditional approval, meaning that as long as the conditions they set are met then the loan is approved.
What are underwriting conditions? Underwriting conditions are items that the underwriter will verify are complete in the final underwriting. It could be that there needs to be a verbal confirmation of employment, or an updated bank statement. It’s all about the lender meeting their risk requirements and the buyer verifying that what they claimed is true.
Survey ordered - the lender will order a survey to verify property boundaries and encroachments.
What is a survey? A survey is completed by a licensed property surveyor. It is a study of the outlines and boundaries of the land and documents the improvements that have been made, such as a house, shed, fence, etc. It will reveal the boundary lines, as well as disclose any characteristics such as encroachments, utilities and easements.
What is encroachment? Encroachment means that someone owns something that is on or running through the land you are trying to purchase or own. For example: a neighbor puts up a fence without a fence permit. They place it along what they believe to be the property line, but it is actually two feet over the boundary. If no one asks the neighbor to move the fence, then over time that land will belong to the neighbor. It could devalue the property.
What is an easement? An easement means that someone else has the right to use an area of your property. For example, utility companies often have a utility easement where they have run underground utilities. They may need access to the area in order to complete repairs or upgrades. The utility company would have the right to dig on your property, do what they need to do and replace it in similar condition. So, if they tore up your lawn they would have to replant it. You do not want to put a permanent structure or concrete over an easement as it would create more damage the easement holder would have to repair/replace in the case or access. The property is still yours, but someone else can utilize part of your property for a specific reason.
Title Commitment issued - the lender will order the title work.
What is title insurance? Title insurance is what makes sure you have “clear title” on a property, and that no one else can make a claim on it. For example, if the owner had a swimming pool installed on the property. The contractor filed a lien on the property to make sure they got paid. The property owner paid for the pool installation, but the contractor forgot to close out the lien. If the lien is not cleared, then the contractor could come after the new property owner for the amount of the lien. Title insurance makes sure any debt against the property will be cleared to give the new owner clear title.
Buyer starts transfer of utilities - now that all the major components of the home buying process have been completed, the buyer has some work to do. The buyer needs to call the utility companies and start setting up accounts in their name to start service the day after closing. This insures there will be no disruption in service.
Mortgage company sends in loan package for final underwriting - the mortgage company should now have everything they need to finalize the loan. The underwriter will take another look to determine if everything is in order, the borrower has completed all their conditions, the title company can give clear title, the property has the value and they will issue a “Clear to Close” CTC.
Title company prepares ALTA statement - the Title company will take all the figures and calculate what is needed to complete the transaction. There will be the sellers costs and credits, and the buyers costs and credits, and the final number that will be credited or need to be paid by both parties. The realtors on both sides of the transaction will review for any errors and issue approval. The Title company will then send out to the buyers and sellers so that they can see how much is due or received at closing.
Buyer wires closing funds to Title Company - in most cases the buyer will be paying money at closing. Once the ALTA has been issued, then the buyer will receive a final number needed
Closing!
This is when you sign all the paperwork from the Title Company and the Mortgage Company (if you have a mortgage on the property). It used to be everyone in the same room signing paperwork, but now it can be just the seller(s) or just the buyer(s) at the Title Company. It can occur as a remote closing, where you sign via electronic signature from a computer or mobile device. It can be a remote closing where the Title Company arranges a mobile notary to meet you someplace to complete the paperwork and notarize your signature. Closing on a property today is much more flexible than the past.
Home Ownership!
Once closing is complete, you will receive the keys, remotes, etc. of the home, unless specified otherwise via your contract. Now is when you can make changes to the home, and landscaping.
Let me know if you have any questions about this process. It’s a lot of pieces coming together and that’s where having a realtor’s value comes into play. Your agent should be keeping track of all the important dates in your contract and reminding you of actions that you need to take. When everyone does their part it makes the entire process go much smoother. And, when there is a bump in the road, having an agent that can properly advise you makes a difference!
