The Home Buying Process Explained
Now that we have begun the process of purchasing your new home, there are some things you should keep in mind. The following should help you better understand the procedures involved in buying a home:
1. Pre-Qualification and Good Faith Estimate (GFE)
It is in your best interests to be pre-qualified by a lender BEFORE getting too involved in finding what you may think is the right house for your needs. This will allow both you and the Seller to have a higher level of confidence that a sale will successfully go to settlement/ closing. It also helps establish a much-needed positive atmosphere from the start and will more likely lead to successful negotiation. In addition, a “Good Faith Estimate” (which is a break-down showing estimates of all of your closing costs as well as your monthly mortgage payment) will help you determine what price range is best for you. Knowing this will help you establish a good starting point for your search.
Keep in mind that the Agreement of Sale requires that a Buyer make a formal, mortgage application within a specified period of time after contract execution.
2. Credit Checks
The lender will need to run an in-file credit report in order to properly determine their ability to provide mortgage financing as well as to determine the possible amount of financing. The process is governed by strict federal regulations. If there are any errors in the report, you will want to resolve them before looking for a home. A “good” credit report will carry a great deal of weight with the Seller during negotiations. If there are any problems, you will be advised on how to contact the Credit Bureau for corrections. Credit scores can be improved with the help of a professional.
Keep in mind that a Buyer should NOT do anything that could adversely affect their credit as an updated credit report will be run close to the settlement date.
3. The Search
Once I understand what you are looking for (this may be an evolving process so do NOT get frustrated!), including your potential "price range", we can focus on homes that you may want to consider looking at. The process is as much about finding the best home for your needs as it is about eliminating those that will not meet your needs but could waste your time by distracting you from the goal. I will search the Multiple Listing Service (MLS) for those homes which will meet your needs. This involves my setting up an automated search for you: newly listed, price-reduced and back-on-the-market listings will be emailed to you every day. All you have to do it check your email. I realize that many Buyers will set up their own auto-searches on Internet sites and that is fine. Please keep in mind that the MLS operates in "real time" (as good as the Internet is, much of the information you find there is stale) and that my search is only as good as what you tell me so please be sure that I am searching for what you want.
I recommend looking at no more than 4-6 houses at a time as looking at more than that tends to be counterproductive as they start to blend together. We will evaluate each home to see what you like and what you don't like before we select more to see (this is where the process evolves). Please keep in mind that other Buyers are receiving the same information as you so you risk losing the home you may really want by waiting to call me to see homes or by reacting slowly when you find one you really like. Similarly, finding one you like BUT not being "pre-qualified" could be a problem, especially if you have competition.
4. Earnest Money Deposit ("Good Faith" Money)
When you make your initial purchase offer on a property, all the terms and conditions will be included in an “Agreement of Sale” (they may change but, if a Seller accepts your initial offer, you are obligated to honor what that offer states). Buyers typically include an “Earnest Money” check made payable to the Listing Agency (most offers are scanned and emailed so those deposits are held by the Buyer's Agent until the offer is fully executed). Once submitted to the Listing Agency, the deposit money will be placed into an escrow account and held there until settlement. Depending on the negotiations, the amount of the deposit made with the initial offer, the type of market and the price of the house, additional deposits may be required (typically, it makes sense to get past the property inspections before offering any additional deposit money). Any deposit monies provided within 30 days of settlement must be certified funds. If an agreement falls through due to no fault of yours (please refer to the actual contract), all deposits will be refunded if there is no dispute over the monies. However, a default by the Buyer's could possibly result in a dispute/ loss of deposit money. State laws strictly govern the disposition of these deposits. More details about deposits will be contained in the agreement of sale.
5. Interest Rates, Lock-ins, Discount Points
Interest rates and points vary from day to day. NEITHER THE LENDER NOR THE REAL ESTATE AGENT HAS ANY CONTROL OVER THESE VARIANCES. Many lenders and loan programs will allow a lock-in on a loan for 45-60 days (75 days or longer may be available with some lenders). If you don’t close by the lock expiration date, your costs will likely increase. Each “point” is equivalent to 1% of the loan amount. “Points” paid usually mean a better interest rate. Be aware of the conditions that affect your loan.
You should be sure to lock in your interest rate no later than 14 days prior to settlement.
It is also very important that a Buyer not do anything that could cause a delay in processing their mortgage, such as not making a formal written mortgage application by the time stated in the agreement of sale, not paying for the application/ credit report/ appraisal as soon as it is requested by the lender and delaying the lock in of your interest rate. You could be in "default" and could lose your deposit money EVEN if you are denied a mortgage if did not adhere to the time frames.
6. Estimate of Closing Costs
Your mortgage loan officer will give you an estimate of the funds required to close/ settle on a home in your desired price range, usually in the form of a “Good Faith Estimate” (GFE). Typical Closing Costs are 5-6% of the Sale Price as a rough estimate. The actual amount depends on items such as the amount of the annual taxes, the type of loan (including mortgage insurance) and the number of points you may take. The cost may be reduced if the Seller agrees to provide an "assist" towards your closing costs. This is part of the negotiating process but is more common in some markets/ locations than in others. A Seller Assist is when you ask the Seller to essentially refund part of the purchase price back to you at the settlement table to be applied towards your closing costs. It is not a rebate or cash that you can walk away with as it MUST be used to offset some of your allowable closing costs, as permitted by the lender. The amount permitted depends on the type of loan and amount of money you are putting down against the house. For example, the maximum for an FHA mortgage is 6% of the sale price.
Keep in mind, that the "assist" is a REAL cost to the Seller as it reduces their proceeds, allows you to buy a house you might not otherwise have the money to buy AND that some Sellers do not accept providing an assist as a cost/ marketing expense of selling their house.
7. Estimate of Monthly Payments
Included on the “Good Faith Estimate” form is a calculation of your monthly payments based on the principal loan amount, the interest rate, the annual property taxes and the cost of property insurance (PITI payment). Depending on the amount of your down payment and the type of financing used, there may also be a monthly MIP/ PMI (mortgage insurance) added to this. To ensure you are able to take advantage of current rates, ACT NOW! Don’t lose your dream home due to procrastination. When interest rates are around 5%, the cost/ price of a mortgage is $5.50 per thousand dollars borrowed (compare this to much higher interest rates!). Taxes and insurances are added to that figure to come up with your monthly payment.
8. Loan Processing
BE SURE TO HAVE ALL YOUR CREDIT CARD and LOAN balances for the loan officer at time of loan application. Verifications of required information will be mailed to the appropriate people. The Lender will require that the credit report and application fees be paid at time of application (these costs are non-refundable). Please also bring your last two months bank statements for all accounts as well as your last two full month's pay stubs. The time from loan application to closing usually takes 4-8 weeks, depending on a variety of factors so please plan accordingly. Delays may occur for any number of reasons. It is IMPERATIVE that you respond IMMEDIATELY to requests for information from the lender to avoid delays on your part.
It is also extremely important that you do not open any new credit accounts, buy a car with a loan, take cash advance or write a check from your credit card or any type of financial investment or loan whatsoever during the time you are looking for a home or waiting for your loan to approve. Speak to your loan officer before doing anything involving bank accounts, credit accounts or loans.
9. Home Inspections
When you hire a professional home inspector, keep in mind they will go over the home according to a detailed checklist. Many minor items will appear on the report. Do not be alarmed. You will have an opportunity to discuss these items with the Home Inspector to determine which, if any, you may want to ask the Seller to correct. We will concentrate on problems that meet the requirements of a “material defect”. Remember, the Seller has the option to decline correcting some deficiencies not expressly agreed to in the contract. Ideally, the house was priced properly/ realistically according to location, features and condition. Also, your offer should reflect "what you saw" as much as it relates to your financial ability. Your Agreement of Sale defines other types of inspections (such as radon and wood infestation/ termite) and your options. Together we will review these definitions and options in order for you to make informed decisions. A typical home inspection will take about 2 hours to complete and is a pivotal determining factor as far as whether a sale will proceed or not.
10. Home Owner's Insurance
You will need to talk to an insurance agent to determine needed coverage for your new home as soon as possible. Be sure your insurance agent knows the lender’s requirements. You MUST bring your prepaid (one year) insurance policy with you to the settlement table or pay for it before settlement concludes.
11. Title Search and Survey
The Title Company will order a title search to ensure that the Seller is able to provide you with "clear title" to the property and land. If there are any title problems (liens, encumbrances, etc.), we will keep you informed of the Seller’s efforts to resolve them.
12. Walk-through
We will conduct a final walk-through inspection of the property. I suggest doing this directly before going to settlement. Items subject to inspection are heating and cooling equipment, electrical and plumbing systems, appliances included in the sale, plus any other items/ repairs specifically agreed to or arising from the contract. Everything must be in working order.
13. Certified Funds Needed
A day or so before closing, the lender will let you know the amount of money you need to bring money to closing. REMEMBER, IT MUST BE CERTIFIED FUNDS obtained from your bank or credit union and made out to the Title Company.
14. Closing/ Settlement
This is the final step in buying your new/ next home. At the Title Company, or my office, you will sign the papers necessary to transfer title of the property to you. You will also be required to sign forms provided by the lender to consummate the loan. I will be there to represent your best interests. You must bring a current driver's license or photo ID with you to settlement.
15. Use Me to Communicate with Seller
If you have any questions or concerns, or want to look at the house again, contact me. I’ll handle this to prevent any misunderstandings between you and the Seller.
16. Utilities
Prior to settlement, you will need to have all utilities transferred to your name. If the utilities are already "on", it will be YOUR responsibility to call the appropriate offices and give them the necessary information to set up an account in your name. Do not wait until the last minute to do this! If the utilities have been turned off, some localities require an inspection before the utilities can be turned back on. You may then be required to pay a fee for this inspection. These fees vary from location to location and it may take a few days for the inspection to be made.
17. Buyer’s Remorse
It is not unusual for buyers to question their decision after they have signed the contract. This is normal! The evolving process will give you several opportunities to make sure that you made a wise choice. Remember that much planning, thought and determination went into your decision: take a deep breath and trust yourself. If you have followed the plan I have used time and time again, you can trust the process and know that you have done an exhaustive search, eliminated houses that did NOT meet your needs, determined which houses "seemed" to match your wishes and, ultimately, made an informed decision and purchased the best one! Any doubts will pass and I will be happy to get you any information that you need at any time to help you feel more confident in your decision.
18. Our Business Relationship Agreement
While we are in the process of your home search, it is extremely important that I be aware of and involved in every home you see. While you may be tempted to visit an open house or a new construction sample home or contact another agent without involving me, there are rules in our industry which could cause the Seller to not pay my fee if you visit any home without me (especially new construction!). In that case, you would have to pay me out of your pocket at closing and that is NOT my goal.
In order to avoid any potential problems, it is important that you allow me to be the contact for every single home that you see. In addition, you should not call another office or email any agent regarding a sign that you see or a listing you find on the Internet. As your agent, I am your advocate and my job is to promote and protect your interests above all else! You can trust in my commitment to you and I need to trust in your commitment to me. This is mainly to be sure that buying a home does not cost you more than we planned.
Finding and purchasing your new/ next home is a very exciting and can also be an emotional process. Allowing me to handle your questions, concerns and any inherent stress will enable you to enjoy this giant step in achieving your own American Dream. I look forward to representing your best interests in making your dream a reality.