Purchasing a home is a major life milestone that brings both excitement and anxiety with it. Like anything else in life, having a good advisor to lead you through the necessary steps will bring a sense of calm to the process. With time, care, good advice, and research, you can take control of the home-buying process.
It’s true that anyone can shop for a house, and even get a peek inside, without formally signing on with a real estate agent. But most would agree that a buyer’s agent will more efficiently match you with your desired property much faster than looking for a home without an agent. There is no cost for using a buyer’s agent since the seller pays the agents on both sides of the transaction as compensation for getting their home sold.
Most real estate agents belong to the National Association of Realtors (NAR) and must agree to abide by a code of ethics. That code essentially stipulates that Realtors deal with all parties of a transaction honestly. A Realtor is obligated to put the clients’ interests ahead of his or her own. He or she is also required to make a full disclosure of the problems with a property and to be truthful in advertising. A realtor will be able to set up an MLS search to help you find homes available for sale, set up showing appointments, and administer all of the paperwork necessary to purchase and close on a home. While a realtor will be extremely helpful with the process and legalities of purchasing a home, a key responsibility is to help you define your wants and needs. Use the sheet below to help you narrow down the features of the ideal home that you’re searching for:
Buyer Preference Sheet
Here is an outline of the home purchasing process that should be accomplished in order:
Home Purchasing Process
Credit reports are kept by the three major credit agencies, Experian, Equifax, and TransUnion. They show whether you are habitually late with payments and whether you have run into serious credit problems in the past. A credit score is a number calculated from a formula created by Fair Isaac based on the information in your credit report. You have three different credit scores, one for each of your credit reports. A low credit score may hurt your chances for getting the best interest rate, or getting financing at all. It’s important that you actively check on and know your credit scores. Try Fair Isaac’s MyFICO.com. If you find any errors on your report, contact the agencies directly to correct them. In most cases, it can take two or three months to resolve. If the report is accurate but shows past problems, be prepared to explain them to a loan officer.
Next, you need to determine how much house you can afford. You can start with an online calculator. For a more accurate figure, ask to be pre-approved by a lender, who will look at your income, debt, and credit to determine the best loan for your financial situation. I maintain a list of reputable lenders that are competitive, timely, easy to reach by phone or email, and have a track record of success. Call me if you need contact info for my preferred lenders. No one knows your cash flow better than you, but a general guideline is to aim for a home that costs about two-and-a-half times your gross annual salary. If you have significant credit card debt or other financial obligations like alimony, child support or an expensive hobby, then you may need to set your sights lower. In total, your monthly home payments should not exceed 36% of your gross monthly income. Your lender will discuss which type of loan (FHA, Conventional, VA) best suits your situation. The type of loan that you secure will dictate your downpayment as well as the amount of closing costs that the seller will be able to contribute to the transaction. If you can put down more than the minimum, the lender may be willing to approve a larger loan or a better interest rate. If you make a down payment under 20% of the value of the home, you will probably be required to pay for private mortgage insurance (PMI). PMI is basically a safety net protecting the bank in case you fail to make your payments. PMI adds about 0.5% of the total loan amount to your mortgage payments for the year. Once you reach 20% equity in the home, you can apply to remove the PMI requirement, thus reducing your monthly payment.
You will need cash for your down payment and closing costs. Again, the type of mortgage will determine the minimum downpayment that you must make. Once you’ve considered the down payment, make sure you’ve got enough cash on hand to cover fees and closing costs. These may include the appraisal fee, loan fees, attorney’s fees, inspection fees, and the cost of a title search. They can easily add up to more than $10,000 — and often run to 5% of the mortgage amount. If your available cash doesn’t cover your needs, you have several options. First-time homebuyers can withdraw up to $10,000 without penalty from an Individual Retirement Account, if you have one, though you must pay taxes on the amount. You can also receive a cash gift (check with your lender for size of allowable gift) from each of your parents without triggering a gift tax. You can also tap a 401(k) or similar retirement plan for a loan from yourself. CAUTION: Once you’ve been approved for a mortgage, it’s very important that you do not make any large purchases or open any new lines of credit. In most cases, this will void your approval and could potentially cause your transaction to be delayed or withdrawn.
As I mentioned above, buyer’s agents are almost always paid by the seller of the home. There are some rare exceptions to this rule, but in most cases, you will not pay me a commission to help you purchase a home. A buyer’s representative has the same access to homes for sale that a seller’s agent does. One of the very first discussions that we will have will be to explain “agency.” This discussion will clearly explain who works for whom, who is paid by whom, and my duties and obligations to you as my client.
Determining where you want to live is of primary importance. Look for signs of economic vitality, easy commutes to work and school, and pay special attention to districts with good schools, even if you don’t have school-age children. When it comes time to sell, you’ll find that a strong school system is a major advantage in helping your home retain or gain value. I will be able to give you an idea about the real estate market in your target area and if homes are selling close to or even above the asking price. Be wary of choosing search criteria that are too restrictive. For example, select a price range 10% above and 10% below your true range to allow for negotiation. I will set up a search to notify both of us when a home goes on the market that matches the parameters that you’ve given me. Look carefully at the location of the home, as well as the features, cost and photos provided in the listing. If you decide that this is a home that you’d like to see in person, call or email me. I will set up an appointment with the seller’s agent for a time that is convenient for all of us. Each time that we visit a home together, I will ask you what you like/dislike about that home. Your feedback will help me narrow down your search to the type of home that you want.
Once we find the house that you want, we will move quickly to make a purchase offer. I will advise you on the structure and amount of your offer by looking at data from homes that have sold in your target area in the last 12-18 months. An offer is composed of four key elements: Purchase price, closing costs that you’re requesting the seller pays, earnest deposit, and property inspections that you will conduct. If you really want the house, don’t lowball on the price especially during peak times or seller’s markets. Remember, that your leverage depends on the pace of the market. In a slow market, you’ve got muscle; in a hot market, you may have very little. There’s no foolproof system for negotiating a fair price, but a pre-approved buyer that offers a fair price with minimal closing costs is a good way to get a seller to take a serious look at your offer. An earnest deposit is your proof to the seller that you’re serious about purchasing their property. Most buyers put down at least $1000. For homes that cost over $100,000, 1% of the purchase price is standard practice. In most cases, there will be a counter-offer from the seller if your offer is less than list price. Once we’ve been able to agree on the terms of the purchase, we have an “accepted” agreement. The purchase contract will contain an approximate closing date. Congratulations!
Now that we have an accepted purchase agreement, it’s time to start working through all of the contingencies that are contained within the contract. Most of the time, these contingencies are a whole house property inspection, termite inspection, title search, and appraisal. Some buyers also request radon, structural, mold, or HVAC inspections as well. I will keep track of these contingencies throughout the 30-45 day period leading up to closing day. EVERYTHING will be in writing so there is a paper trail that is easy for all parties involved in the transaction to follow.
In addition to the appraisal that the mortgage lender will make of your home, it’s a good idea to hire your own home inspector. An inspection costs about $400, on average and usually takes three hours or more. If the inspector turns up major problems, like a roof that needs to be replaced, this will need to be negotiated with the seller. You will either want the seller to fix the problem before you move in, or deduct the cost of the repair from the final price if your lender will allow that. If the seller doesn’t agree to either remedy, you may decide to walk away from the deal, which you can do without penalty if you have that contingency written into the contract. It may take up to 15 days to receive your earnest deposit back from the escrow agent. The seller will be asked to provide receipts for all repairs made prior to closing on the sale.
At least three days before the actual closing, you will receive a final Settlement Statement from your lender that lists all the charges you can expect to pay at closing. This will be sent via email or overnight mail. Once you acknowledge receipt of your statement, your 3-day waiting period begins before we can close on the home. Review your statement carefully. It will include things like the cost of title insurance that protects you and the lender from any claims someone may make regarding ownership of your property. It also contains the amount of costs that the seller agreed to pay toward your closing. I will arrange a walkthrough at the property that you’re purchasing 1-2 days prior to closing to make sure the home is still in good condition. This also gives the buyer the opportunity to look at the repairs that were made to be sure they were done according to your standards. On closing day, you will need to bring a certified check (lenders won’t accept personal checks or cash) for the amount specified on your settlement statement as well as a photo ID for each person listed on the purchase agreement. The actual closing is often somewhat anticlimactic, as there is a large stack of papers to sign. When all are signed, I will hand you the keys to your new home!