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You and your family have decided to buy a house. Now what?
Buying a home takes about six months from your search to the closing day at a minimum. There is a lot to consider when likely making the biggest purchase of your life. So you will need to make some effort to get things in order.
Pay special attention to the steps we outlined below. You will be working with key professionals—real estate agent, banker, title insurer, attorney, inspector—that will be part of this process. Mortgage rates happen to be at record lows.
However, Don’t Hurry! Ok, ready?
Step 1: Get your finances in order.
You will likely need a loan unless you have loads of cash to pay for your house. Hopefully, you have been budgeting and saving for a house purchase.
Review Your Credit Report
Review your credit file to make sure it is in good shape. You will need to check with the credit bureaus, Equifax, Experian, and TransUnion credit reports. Make sure your credit report is accurate. If not, make corrections to clean up your credit file. At the same time, look up your credit scores and see if there are ways you can raise your score.
You need a working estimate of what your ongoing monthly costs for your new home will be. The budget for your home will include the mortgage principal and interest cost, real estate property taxes, homeowner’s insurance, and mortgage insurance.
These costs could be at least 50% higher than what your current home costs are. You should look at current mortgage interest rate levels at www.bankrate.com. There are calculator apps to help you estimate your monthly payments. Look for a conventional fixed loan and consider a shorter term of 15 years versus 30 years. Your interest costs, and therefore your total home costs, will be lower. See our post on Making Better Money Tradeoffs, such as shorter-term loans.
Also, you are likely moving to a larger space. If so, you will need to calculate incremental utility costs (heating, A/C, electric, and water). These costs are different than the one-time costs associated with buying a house, which I will discuss below.
Step 2: Prequalify For A Mortgage – Takes About One Month.
Before you actively go house-hunting, it is a good idea to get preapproved for a mortgage. It will help to narrow your search. By doing so, it will save you some angst from the disappointment of finding a dream home out of your price range. The pre-approval letter may expire between 90 days and 120 days, giving you an idea about how long you should time your house search.
Many online mortgage providers, such as LendingTree, Lending Club, or Rocket Mortgage by Quicken Loans, streamline the process. Find three lenders in addition to your banker in your local area to speak to at this point.
Pre-Approved Letters Reflect Motivation
Keep in mind, getting prequalified does not guarantee a loan. However, it does help to have a preapproved letter for a mortgage. Lenders want to see motivated buyers who have made an offer with a pre-approval letter from a lender or mortgage broker in hand. The sellers expect this and even demand it, so this step is a must.
Go to a lender, either in person or online, complete a form, provide your financial information to the most minute detail. They are looking for a good income and good credit history to pre-qualify you. When you decide that you are ready to purchase a house, what do you do? Location.
You’ve narrowed down the locale, the state, and the city or town. Now what?
Step 3: Search for your home online and in-person*. This process can take two months or longer.
Early in this process, you may what to explore desirable areas. Driving around can be a fun part of the process or emotional as you move to the next stage of your life. You will need to consider your budget. Brace yourself from making an impulsive buy of a too big or too perfect home that will be difficult to afford.
Check on Zillow.com to get an idea of what you get for your budget in terms of floor plans, features, square footage. You may want to go to a couple of Open Houses.
*During the pandemic, it is likely you will see homes virtually.
Should I Get A Real Estate Agent?
You may have started thinking that you will do your search without a real estate agent and deal directly with the listing real estate agent. As you probably know, the seller usually pays the real estate agent. Still, engaging a real estate agent is very important.
The search can be overwhelming. Ultimately, you may decide to grab an excellent real estate agent after all. There are many pluses to this as a real estate agent likely knows the neighborhoods you are exploring. I recommend you interview a few real estate agents, so there is good chemistry. There is a lot at stake here for the buyers and agents.
Respect Your Agent
Once you have a real estate agent, make sure to understand the ground rules for working with your agent. You want your relationship to go smoothly. We hear some stories where the buyers are late to appointments or call the listing agent without their agent. Being late is a no-no. Respect your agent.
Unlike a rental arrangement, the seller pays both buyer’s and seller’s real estate agents. The agents split the commission per a written agreement. You should sign a representation letter so that you can be sure that the broker is representing your interests as the buyer, not his or her pocketbook.
Now you are ready to search for that new dream home. After seeing a “zillion” houses, you finally found the one for you and your family. The search can take two months or longer depending on the buyers, frankly.
Step 4: Always Negotiate With The Seller
This step is complicated with some parallel tracks.
Now The Negotiations Begin
You can negotiate the price, the timing of the closing, the outdoor furniture, and other details.
Everything Is Up For Negotiation,
Sometimes there are contingency clauses designed to protect the buyer in individual events. These clauses could be a down payment, usually between 3% and 10% of the house price. The down payment may be returned to the buyer if:
- the buyer cannot get satisfactory financing;
- the appraisal value done by the buyer’s lender comes in below the agreed-upon price, or
- the home fails inspection.
Make a written offer for the purchase of the home.
Before accepting an offer, there usually is a counteroffer. The agent will submit a written offer once you are comfortable with a price. That offer should be subject to a formal contract review and approval by your attorney (more to come on that). Your bid is also subject to home inspections by a qualified professional.
Home Inspection Is Needed
Once your offer is accepted, you will want to have a home inspection before signing a contract.
Your broker should have a list of competent licensed home inspectors. They are usually civil engineers, retired building inspectors or experienced contractors.
You should expect a DETAILED report of the inspector’s inspection of the house, from the roof to the basement. The information should highlight the defects and deficiencies that the inspector discovers throughout the house. Ask the inspector for repair estimates and how they would rank the repairs based on their urgency. This report should be written and delivered to you in a few days.
The home inspection could be a means to negotiate the price downward
The findings can help you negotiate preclosing repairs the seller will pay for or get a price reduction. It also gives you an idea of the work that you will need to address in the future. The inspector should also conduct a termite inspection and provide you with a wood-boring insect certificate. Your lender will require this certificate.
Depending on where you live, you will want a radon gas test. Radon is a dangerous, odorless gas that tends to get trapped in basements and crawl spaces. It quickly breaks up, but you first have to discover it. An older house, pre-1978, may have lead paint residue. After 1978 lead paint was no longer in use in the US.
Ask your inspector to check for lead paint. Buyers can move forward with a satisfactory inspection and an agreed price for the house. The next stage is the transaction deal memorandum or “The Deal Sheet”.
While this is all happening, the agents are generating a transaction deal memorandum for the parties.
Step 5: Hire An Attorney And Formally Apply For A Mortgage Loan
Once you make an offer for the house, you will want to hire an attorney. Their role is to write a contract of sale through the home’s closing.
Typically the seller’s attorney will draft and present a printed form of a contract of sale, a seller’s rider, and a lead paint disclosure. Your attorney will then provide a purchaser’s rider in response. Riders are common additions for most purchase agreements containing provisions such as a buyer’s obligations and special conditions relevant to the deal.
The purchaser provides the down payment, which is a show of earnest money or good faith deposit. Attorneys review many of the documents in an exchange between the buyers and sellers.
Among those key documents that will need to be reviewed by your attorney are:
- mortgage loan estimate
- title documents
- closing disclosure
- title or uniform settlement statement
- closing costs.
After you sign the purchase contract, you will formally apply for a mortgage loan.
Getting a mortgage loan can take time, even though you have preapproval from a lender. That preapproval letter speeds up the process for getting a formal loan but could expire before you found your desired home. It is a good idea to consider more than one lender. You will likely want a lock-in agreement for your mortgage, especially if the interest rate is changing. These agreements are usually for 30-60 days.
Step 6: Prepare For The Closing
Once you have made an offer, you will need to engage an attorney to represent you in the title’s negotiations and the closing. With that in mind, we will explore the contract process through the eyes of a New York residential deal. In many states, attorneys are minimally involved, if at all. A contract is a fill-in-the-blank form prepared by the brokers and a title company. This step takes place within one month of the closing.
Step 7: The Closing
There is some nervous excitement when you reach this step. Several key people attend the closing. They are the buyers and sellers, their respective attorneys, the buyer’s and seller’s real estate agent, the lender’s representative (either a paralegal or an attorney), and the title company’s representative, usually called a closer.
At the closing, the buyer signs the mortgage documents, the seller signs the deed, transferring the title to the buyer. The buyer writes big checks in exchange for the keys to the buyers’ new home.
You did it! Time to celebrate!
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If you own your own home, how was your home buying experience? Please share your thoughts with us. We want to hear from you!
With a passion for investing and personal finance, I began The Cents of Money to help and teach others. My experience as an equity analyst, professor, and mom provide me with unique insights about money and wealth creation and a desire to share with you.