The Buying Process
So you’ve decided to buy your first home! Congratulations, this is the very first part of the process. This post will serve to prepare you with the basics of the home buying process but your Realtor (hopefully me!) will be your most valuable resource.
As you get ready for your home purchase, there is a multitude of decisions and timeline milestones that you will want to be prepared for. Here are the milestones & topics I will cover.
- Contact a trusted Realtor
- Focus on Finances
- When am I ready to show homes?
- What expenses are part of the home buying process?
- The Offer
- Due Diligence
- Closing Day
Contact a trusted Realtor
Most people know someone that is a Real Estate agent but just because your mom’s best friend’s daughter’s soccer coach is a Realtor doesn’t mean you owe them your business! Do your research and find a Realtor who you trust to represent your best interest and provide you their very best service. Buying a house is the largest purchase many people make in their lifetime and it is important to work with someone who will make it an enjoyable experience and more importantly, protect your interests as a buyer.
Focus on Finances
The next step in the process is to get pre-approved with a lender to purchase your home. Your Realtor can recommend a mortgage professional or you can choose your lender. A Loan Officer will look at three things when establishing your ability to purchase: Credit, Income, & Assets.
– CREDIT – Make sure to take a look at your current credit report. Try to avoid excessive credit inquiries, opening a new credit line, or closing any credit lines (that may include purchasing a new car or other larger items on credit or opening a new credit card) between now and when you are going to apply for your loan.
– INCOME – If you are a salaried employee you will need to be in your job for a minimum of one full year. If you work on commission, two years of full-time employment are required. If you have changed jobs recently but it was within the same industry that will still count towards the amount of time in the job.
– ASSETS – Cash in the bank, retirement accounts, and all of your other assets will be considered when the Loan Officer inputs your information in the underwriting system. If you keep cash under the mattress, now might be the time to get it in the bank so it will show your true net worth!
When am I ready to view homes?
Before you go shopping for homes, you will want to know the purchase price that you qualify for and the corresponding monthly payment that will go along with that price. The Loan Officer will be able to tell you this based on your financial position, your annual income, and in consulting with you on what your goal monthly budget will be. The Loan Officer will set a recommended price range and give you a Pre-Approval letter with the details of the loan product that works best for you. Next, you will establish your search criteria. This will consist of a conversation with your Realtor about the type of home you are looking for. Here are some of the things to consider:
- Type of Home? (single-family, townhome, condo, investment property)
- What area would you like to purchase in?
- What is the minimum number of bedrooms that would work for you?
- What about bathrooms?
- Any must-haves? (pool, garage, fireplace, go-kart track, etc.)
What costs are part of the home buying process?
Let’s talk about the costs of buying a home and when each payment will be made throughout the process.
Escrow Deposit A.K.A. Earnest Money Deposit (EMD)
The first time that money will be debited from your account towards your new home will be your EMD. This is a portion of your overall down payment that gets paid when you go under contract and will be held until closing day. This deposit, often called, “skin in the game” is typically 1-3% of the purchase price down as escrow. For example, if you are buying a $250,000 house, you can put down $2,500 in escrow. This is not EXTRA money or fees. If your total down payment is going to be $10,000 on a house, and you have already put $2,500 down in escrow, you will simply bring the remaining $7,500 to closing.
The second time that money is going to be debited from your account will be to pay for the Home Inspection. The Home Inspection ( I like to call it the Home Education) is a day, usually within the week of going under contract, where your potential home is inspected by a certified home inspection professional to note any problems or hidden issues which may affect the price. This costs between $300-$800 depending on the size of the home.
The 3rd payment that will be made during the process is paying for the appraisal. The appraisal typically costs between $500-$1000 depending on the size of the home and is completed approximately 2 weeks before closing.
The final payments you will make will be the Down Payment and Closing Costs when you go to closing and take possession. I find these two are the most confusing aspects of the finances so I want to give them extra attention here…
There are many types of loans with varying required down payments. Here are the most common:
- VA = 0% Down
- FHA = 3.5% Down
- Conventional can be 3%, 5%, 10%, 20% or more!
Let’s take a 5% Conventional loan as an example … If you are buying a $200,000 house, your down payment will be $10,000. Simple enough.
These are the other costs associated with purchasing outside of the down payment. Some examples include:
- Prorated Taxes/Utilities – Depending on when you close, you’ll pay back the seller for any taxes or utilities that they have already paid into the home for that year.
- Title Insurance – Every home purchased with a mortgage will require title insurance. The title company handles the majority of the logistics for compiling the legal documents required to close and will provide you with a Title Insurance Policy to protect your ownership of the property for a stated period after settlement.
- Lender Fees – When you obtain a mortgage, fees are paid out to the company that packages all of the financial documents needed to issue the loan.
- Homeowners Insurance – Often you will pay a portion of your homeowners’ insurance premium for the year upfront at the closing table.
All of these can be estimated by your Lender when obtaining your Pre-approval so you can truly understand what your total out-of-pocket cost is going to be on closing day.
Coming back to the $200,000 purchase example … if you take the 5% down payment of $10,000, closing costs could be in the range of $8,000. That means our total out-of-pocket will be approximately $18,000.
So you’ve found a home you love and viewed it with your Realtor, now what? It’s time to make your offer! Your Realtor will now help you put together your offer contract and supporting documents. Let’s talk about terms:
- Purchase Price – When we are deciding what to offer the seller, one thing I don’t care about is … ready for this? … THE LISTING PRICE! I’ll let you in on a little secret…do you know how the seller and the listing agent came up with their list price? They made it up!
Here’s what I DO care about:
- What other homes, in that same area, sold in the recent past that are similar to this home?
- Were they bigger?
- Were they in better condition?
- Did they have a more appealing location?
- All of these factor into our decision of determining Market Value for the home you are looking to buy. Once we know how much we truly think the home is worth THEN we will have a discussion if we think it makes sense to offer below, at, or even above list price! Going above list price is not a bad thing if we think that the market value is higher!
- Earnest Money Deposit – The EMD is typically 1-3% of the purchase price. Higher EMD’s show the seller that you are a serious buyer so if you think the house is your dream and a good buy, you might consider a higher EMD.
- Closing Date – When do you ACTUALLY want to take possession of the home? This will be largely dependent on when your lender can get the appraisal completed by and will typically be between 30-60 days.
- Financing Terms – Cash? Conventional Loan? FHA Loan?
- Inclusions/Exclusions – Keeping the window treatments? Patio furniture? Certain Appliances? Light fixtures?
Our purchase and sale contract outlining these terms as well as the Mortgage Pre-approval need to be submitted together to the Listing Agent so they can present it to the seller. They will either reject, counter, or accept our offer!
Depending on the market conditions, the sellers may agree to some of your offer terms, but counter offer you on others. Once offer terms are accepted by both parties, contracts will be drawn and then the real fun begins!
You have successfully made it through the Offer and Negotiations and now you are UNDER CONTRACT. Now we have the opportunity to investigate the property and uncover everything that could potentially be considered a defect in the house. We will meet the home inspector at the property and they will assess every inch of the house. Roof, foundation, windows/doors, electrical, plumbing, exterior, interior and more. They will generate a full report with pictures and descriptions which can be used to negotiate repairs. The inspections may include, but are not limited to the following depending on the type of systems in the home.
- General Home Inspection
- Septic Inspection
- Well & Water Inspection
- Air Radon Inspection
- Water Radon Inspection
The seller will decide which of the items (if any) they will fix and you get to decide if that is satisfactory to you. Here is the great part about the Home Inspection … If we find problems with the house that the seller is unwilling to fix or compensate us for and you are not comfortable moving into the home, you are allowed to cancel the contract and get your earnest money deposit back!
After the Home Inspection is over there are only a few final items that need to be addressed to get you to closing day.
Once we have that fully signed contract, the Mortgage Company started their process of underwriting the loan. The Title Company has started their due diligence for preparing all of the necessary paperwork with the county and municipalities to facilitate a smooth closing. You will be in close communication with the Mortgage Company to assist them if there are any miscellaneous documents they need from you in order to effectively and efficiently complete their process.
The mortgage company is also going to have the home Appraised. This is another great protection for you, the buyer. Essentially, they are going to send an Appraiser to the home who will give a neutral, 3rd party, objective opinion of value for the home. If the appraiser does not think the home is worth what we have offered, we will need to reduce the purchase price of the home.
There are 4 possible outcomes for a Low Appraisal:
- Seller agrees to take less money for their home.
- Buyer and seller agree to split the difference in value.
- Buyer agrees to make up the entire difference in value in cash.
- The Buyer decides to WALK AWAY from the deal if an agreement is not reached.
Ultimately, the decision is yours. The seller can not force you to pay the difference in cash. We will negotiate with the seller to determine the most fair outcome that is agreeable to both parties. If an agreement is not reached, the deal stops and the contract is dissolved, you get your Escrow Deposit back and everyone goes their separate ways.
I didn’t mention what happens when the appraisal is high or comes in at value because the deal moves right along if that’s the case and you get to move in with some immediate equity.
It’s been a long journey, you’ve gone through some ups and downs but we finally made it to Closing Day!
The day before closing (or morning of) we will head to the house together to perform a Final Walkthrough. We want to make sure nothing has happened to the house since the last time we saw it (holes in the drywall from moving out, tree falling in the backyard, water in the basement, etc.). Before you sign those papers you want to make sure it’s exactly right!
We will go to the predetermined closing location. Often it will be at the Title Company’s office. As the buyer, you have the right to select the time and location of closing which we will discuss in more detail as we actually get closer to Closing Day.
Three days before closing the Title Company is going to send you something called an ALTA Statement. This will outline every penny in the transaction that is transferring hands between all parties and you will know exactly how much you need to have your Certified Check made out for and to whom.
At closing, you will be the busy party signing a majority of the documents. The bulk of what you sign is called the Mortgage Package which outlines all the terms of the loan you are obtaining. You will have a chance to review all of these documents before you ever get to Closing Day so you’ll have plenty of time to digest and understand them ahead of time.
The Title Clerk will gather all of the fully signed documents, the Mortgage Company will wire the funds, the Seller will be paid, the deed will be transferred and just like that … You are now a HOMEOWNER!!!
This whole process can take anywhere from 20 minutes up to about an hour depending on if there are any small discrepancies that need to be accounted for at the Closing Table.
Now that you have a blueprint for the major milestones, I want to truly emphasize something …
Every. Person. Has. A. Different. Journey.
Here is a great metaphor as we wrap up…
We are about to go driving cross-country (home-buying) together. You could just start driving and figure it out along the way, making wrong turns, getting lost and frustrated. I guarantee your driving (home-buying)route (journey will t feel like a nightmare!
Instead, let’s map out your plan. Let’s figure out whether you want the scenic route or the most direct. I’ll be in the passenger seat with the updated GPS of the route(market), helping guide and inform you of the best possible alternatives.
YOU are in the driver seat. You are the one controlling the steering wheel of the direction we go. Your foot is on the gas when you are ready to move forward. Your foot is also on the brake, when you need to slow things down and take a break.
At the end of the day, this is about you! I am here as a guide, resource, and friend from start to finish.
I am always here to answer questions! I take pride in making sure the people I work with have an advanced knowledge of their home buying process so they know what to expect and can make smart, informed decisions along the way. We can only get you there if we have open, honest discussions about your needs and concerns.