So You’ll Know What to Expect …
a General Overview of the Home Buying Process
When I meet clients for the first time, one of the most common questions they ask is, what can we expect from the homebuying process? Will you be with us every step of the way? That’s two questions, of course, but who’s counting?
The second question is the easier one to answer – it’s a resounding YES, I will absolutely guide you through every step of the process. I believe there is a right way and a wrong way to prepare to buy your home. I’m here to make sure that you get started on the right foot, crystallize your goals and walk you through each stage of the homebuying process. I’ve put together this quick and informative step by step timeline of a “typical” home purchase so that you’ll be able to mentally prepare and also feel more empowered in the process. I believe that we’re happiest when we know what to expect, so here goes.
1. Our Initial Meeting. The purpose of this meeting is threefold. First, we’ll get to know one another a bit. Second, I’ll assess where you are in the homebuying process; and three, we’ll discuss your plans and timeline. This information helps me best understand how to help you. This is also a chance for you to ask me questions and have me address any of your concerns.
Many times we will talk over your “wish list” for that perfect home. Things you’ll want to give some thought to are: How long do you plan on being in the home? (Hint: the longer you plan on being there, the more life changes you’ll need to plan for and consider). Do you want a home that is move-in ready or are you comfortable with renovating? Do you need to be close to public transportation?
I also like to discuss the costs (both upfront and due at settlement) that you will incur during the process and also, buyer agency (why I believe a buyer should have his or her own representative and what my specific duties to you will be as we go through the process of finding you the perfect home).
2. Talk With a Great Lender and Get Pre-qualified. When you are ready, choose a loan product that you understand. As a realtor, I like to think I’m integral to the homebuying process, but I am the first to admit that while it’s wonderful to have a great realtor, it’s even better to have a great lender. You MUST engage a lender that is responsive, caring and who will take the time to explain the process to you or you will be signing on for a lot of extra stress and heartache. I’m not kidding here, even if that sounds overly dramatic.
Choosing an incompetent and unresponsive lender could even jeopardize the deposit on the home you are purchasing if the lender cannot deliver loan documents on time. If you call a lender for an initial consultation and he or she does not call you back within 12 hours, they are not the lender for you. Why? Because when you need them at critical junctures in the process, they will not be there for you. It’s that simple.
I know two or three exceptional lenders who are tried and true, with in-house appraisers and underwriters, who will serve you very well and understand how serious this process is. They are not part-time and they take their jobs seriously. More than likely, I’ll pass along their names at our initial meeting.
When you speak with the lender for the first time, he or she will ask you to fill out an application. Most of the time, you can do this online. The application asks for your income, debts, assets, any property owned, etc. This is the time to disclose all of your financial information and not hold anything back – as the lender will use the information contained in your application to determine your suitability to purchase and the price point at which you can qualify. Click here for a list of documents that you’ll need to have handy during the home buying process. (Hint, this is an informative and relatively comprehensive list, you should check it out).
Once you’ve filled out an application, the lender will evaluate your financial information and,
(a) Provide you with a loan cost illustrator (i.e., a spreadsheet) that will estimate your monthly mortgage payments based on a certain price point. We use this information to properly tailor our home search to a price point that makes you comfortable.
(b) Provide you with a loan pre-approval letter that we will attach to any offer that we write as evidence of your bona fides.
3. You’re Ready to Go Out and Look at Homes! Once we have a targeted price range, I’ll start sending you lists of homes via email that suit your criteria. When you’ve narrowed that list down, I make appointments to visit the homes. Many times I will actually preview these homes for you to weed out any that do not suit your needs or to point out features that may not be evident from the listing alone (for example, a bad or impractical layout). This saves us time in the long run.
As you visit more homes, you’ll likely start focusing on which features or locations are truly important to you and which you can either “live with” or compromise upon. People often ask me how to decide whether a home is right for them. Of course, each home is unique and what I tell my clients is that often you know it’s “the one” by the feeling you get as you walk through. What makes a home right for one person is often intangible – there’s just a feeling you get when you enter. Or, on occasion, as happened with my own house, I visited the home once or twice and it piqued my interest. It wasn’t love at first sight, but the more I thought about the house, the more it grew on me and we made an offer.
A note about Open Houses: Many times, my clients begin this process by spending a few weeks visiting open houses. Here are some quick tips about Open House Etiquette. http://www.openhouse.com/article/A-Buyers-Guide-to-Open-House-Etiquette
4. Congratulations! You’ve Found “The One” – Let’s Do Our Homework and Write an Offer. When you’ve identified a property that interests you, we’ll take a look at the comparables (both sold and actively on the market) in and around the subject property’s neighborhood. It’s helpful to know if the seller is being realistic with pricing. Provided that the seller IS being realistic, we will draw up a contract and make an offer. Click here for a sample contract, in case you have insomnia tonight and need something to put you to sleep.
If you just clicked on the link above, you’ll notice that the contract is long. Much of it is boilerplate and may or may not apply to your particular situation. Rest assured, I can and will thoroughly explain the entire document to you before you sign anything. An explanation of the typical sales contract will not be found here, since the intent of this article is merely to give you an overview of the process as well as some of my thoughts on these steps.
5. What constitutes an offer? The offer that you submit to a seller generally consists of the following items, so be prepared.
(a) The sales contract (which outlines price, terms, condition, what conveys with the house, etc)
(b) Various addenda that cover financing, inspections and any special situations
(c) Disclosures about the property that are incorporated into the contract
(d) Lender pre-qualification letter
(e) Check for the Earnest Money Deposit. This is a personal check written by you that literally means what it says – it is to impress upon the seller that you are “earnest” about buying their home. Keep in mind that when a contract is ratified, the seller will take the home off the market until settlement. If you are not willing to put up some of your own money as a measure of your good faith, you risk the seller not taking your offer seriously (and in laymen’s terms, what this is means is that your contract will essentially be ignored). The amount of this Earnest Money deposit will vary from transaction to transaction, but I have seen deposits that range from about 1% to 3% of the sales price.
6. Let’s Talk. Negotiating the Offer. Many times, I will write a short cover letter introducing ourselves to the seller. While they seller may not care about much more than the bottom line, I still make it a practice to try to put a bit of a human face on our offer. When competing against multiple offers on a home, you never know what will sway a seller one way or another.
Which leads me to my next point. The offer itself is a matrix of many factors and often price is simply one of many considerations to the seller. Granted, price is usually “the big one” but often sellers will be swayed by the number and type of inspections we include in the contract, the type of financing used by the buyers, the reliability of the lender, the settlement date and/or whether the purchasers will allow the sellers to “rent-back” after settlement. When we are doing our research into the home, I’ll do my best to get as much information about the seller as I possibly can, so we can write an offer that they will respect and consider seriously. If the seller counters our initial offer, you and I will sit down and go over all the terms and craft a reasonable response – hopefully to a successful meeting of the minds.
I aim to write clean offers, with clear and reasonable terms. When I present the offer to the seller’s agent, it is always presented with a cover letter, a personal note and with the utmost professionalism. No one wants to work with a rude jerk and in many ways, we need to see the seller’s agent as an ally, most especially if we are competing with other offers which is more and more common these days. I aim to make other agents WANT to work with me and my clients. As in most situations, it helps to be professional and courteous.
7. We’ve Ratified a Contract! Next Up, Contacting the Title Company, Lender and Home Inspector.
Once we have all agreed on the terms of a contract, the lender will quickly get to work on setting up your file and initiating the underwriting process. The lender will often ask for much more financial information at this point. Note: Once you have ratified a contract and the lender has pulled your credit, DO NOT, I repeat DO NOT purchase any big items (furniture, cars, office equipment, computers, etc) or open any other lines of credit. This type of activity will affect your credit and your debt to income ratios. A lender is often required to re-verify all of your financial information within a day or two of settlement and if anything at all has changed you could fail to qualify for your home purchase. The time between contract ratification and settlement is the time to hunker down, save money and not do anything that will rock the proverbial boat. Click here for a list of what NOT to do during this time. It’s the same list that I referred to above, but I want to make sure you see it. I do think it’s that important.
I will contact the title company on your behalf to provide them with all the documents they need and to coordinate a time for settlement. The title company is a neutral third party who will conduct your settlement, research the title on your new home to make sure it is clean and marketable (more on that here) and collect and properly disburse all funds at settlement.
Within a day of ratifying the sales contract, I will contact a home inspector to schedule a mutually convenient time for you to conduct your home inspection. We attend this together.
No home is perfect – even brand new homes! So, the inspector will find a laundry list of things at the home that are not necessarily as they should be. Does this mean they are serious problems? No. Will there occasionally be serious issues that we uncover? Yes. I tell people to take everything in stride, wait until the inspection is over and determine what repairs we can live with making, what repairs we believe the seller should remedy and whether there are any issues that we deem “dealbreakers.” If there are serious issues with the home that you truly cannot handle or do not want to handle, the home inspection contingency, when properly used, allows the buyer to void the contract.
Seasoned homeowners generally will feel more comfortable doing some repairs whereas first time homebuyers often feel that making repairs to a home can be a tall order and this may cause them some anxiety throughout negotiating the home inspection items. Don’t worry, whether you’re a first timer or purchasing your fifth house, we’ll work through it the best we can together and hope that we can reach a reasonable solution (in my mind, where each party feels that they have given some and gained some). The typical home inspection cost will range from $350 for a condo to $650+ for detached homes. Radon inspections will cost an additional $150. These costs are paid by you at the time of the inspection, not at settlement.
8. Everyone Holds Their Breath… Appraisal. When you ratify the sales contract, the lender will begin to collect all sorts of information to underwrite your loan. As I mentioned earlier, you will be required to submit documents to the lender (W-2s, 1099s, Tax returns, pay stubs, bank statements and any type of documentation necessary to support assets). Within a week of ratification, the lender will order an appraisal of the property. The appraisal is generally completed within two weeks of when it is ordered and helps establish the property’s market value and protects the lender in the event that the home needs to be offered for sale. (In other words, the lender would like to know that the property will sell for at least the amount of the loan).
You pay for the appraisal at the time the lender orders it – in other words, UPFRONT, not at settlement. Be prepared for this expenditure. Depending on the lender, the type of appraisal provided and whether you need it to be rushed, the cost will range anywhere from $450 to $800+. If the property appraises at or above the contract sales price, sellers will breathe a huge sigh of relief and buyers will sign a notice which notes a satisfactory appraisal and removes the appraisal contingency from the contract. This means that buyers cannot void the contract based on an unsatisfactory appraisal.
9. Purchase Home Insurance. As a condition of underwriting your loan, the lender requires you to purchase one year of homeowner’s insurance upfront. (often called Hazard Insurance). This cost varies with the property, of course, but you pay for the policy at settlement – the day you close on your home. The cost of the policy is rolled into your closing costs, not something you actually pay upfront.
So, while you are required to arrange for a year’s worth of homeowner’s insurance on the home PRIOR to settlement, you actually pay for it AT settlement. The way you accomplish this is to call your insurance company about two weeks after we ratify a contract, inform them you are purchasing a home and then provide them with the name and number of your loan officer. The loan officer will take it from there and you will be charged for the policy at settlement. I remind all my clients to do this, as it can easily be overlooked in the flurry of providing documents, inspecting the home, and dealing with all the little things that invariably pop up during this complicated process.
10. Finalizing Your Financing Details. During the last few weeks before settlement, we will be working quite closely with the lender to clear up any remaining conditions on your loan. These could be related to further documenting your assets, signing required forms or satisfying any conditions raised by the appraisal (such as any repairs that may be necessary to the home) and providing any documentation requested based upon your unique situation. During the day or two before closing, the lender will re-verify your employment and run your credit one more time. (Hint, do not start a new job at this time, please). If anything has changed between contract ratification and this date, you may no longer qualify for the loan and lose the house and your earnest money deposit. My list of Do’s and Don’ts is no joke.
During this time you’ll also make final arrangements to have your downpayment and closing costs ready. You may bring the money to the settlement company on your closing date in one of two ways.
(1) In the form of a certified check made out to the settlement company, or
(2) You may wire the funds directly from your bank to the title company.
11. Conduct a Final “Walk-Through” at the Property. This is your chance to see the property one last time before you sign the settlement documents. We visit the property a day or two before settlement to verify several things.
First, we would like to make sure that the property is in substantially the same condition as of the date of the home inspection. The sellers have not destroyed or removed or replaced anything without our knowledge. (Hint, it happens). In addition, we make sure that everything that was operable as of the home inspection date is still operable and in the condition we expect. Also, we verify that all items that should convey are in place.
Second, for any items that we asked the sellers to repair as a result of our home inspection, we verify that those have been completed.
Third, we verify that the sellers have complied with the terms of the contract, which requires that the home be broom clean (hint, that is a relatively low standard) and empty of all remaining belongings, trash and debris.
12. Attend Settlement. Provided all goes well at the Walk-Through, now your job gets pretty easy. We’ll go to the settlement company to sign all your loan documents as well as those documents that convey title (ownership) from the sellers to you. There will be lots of documents to review and sign. The settlement attorney will explain every document to you. Once the ink is dry; Congratulations! You’ll be handed the keys to your new home.