A home purchase is not a frequent event and as experienced home buyers know, buying a home is a complicated process.
Whether you’re buying your first home or if this is one of many purchased in your lifetime, it’s important to refresh your memory, to start at the beginning and thoroughly understand each step in the home buying process.
You will find Mobile Buyer’s Broker.com to be rich in information. More to the point, it includes the Knowledge You Need to Make an Informed Real Estate Purchase decision.
Here is a quick overview to refresh your memory about the Home Buying Process. View the Video and then read the step by step guide to follow the process as it unfolds.
The following is a Step by Step Guide that will bring you through The Home Buying Process.
Source: Real Estate ABC.com
Step 1 – Visualize Home Ownership
Do you have 3+ years?
Life is unpredictable, but if the plan is to stay somewhere for less than three years, or you have a job that involves frequent or sudden moves, buying rarely makes sense. While there are exceptions, between moving, insurance, closing, and agent costs, not to mention property taxes, you’re often better off renting.
Do you know what you can afford?
Knowing what you can afford is your job, not your bank’s. In fact, it’s not just about what you can buy, but what you can maintain. So here’s the ABC rule of thumb. Don’t spend more than 20% of your pre-tax income on a house. Period. That includes monthly mortgage, insurance payments, and property tax.
A quick real world example from a real life homebuyer.
Maria and John have an annual salary of: $120,000
Which means, each month they’ve got: $10,000 before taxes
And, by now, they have at least $100,000 as a down payment.
Which means they can afford a $400,000 to $500,000 home.
Resulting in a monthly payment of $2,500
And a remainder, after taxes, of $1,750 for everything else.
The most important number in this entire equation? That $1,750 per month they’ve got for everything else. Not back to you: is it truly enough, given your life stage and lifestyle? Will it comfortably pay for all your expenses, including food, clothing, car, childcare, retirement savings, etc? If not, you must reconsider the cost of your home, or whether now is the right time to buy at all.
Use Michael Bluejay’s How Much Home Can You Afford Calculator
Do you know your credit rating?
Ah, the dreaded FICO score. You need a credit rating of at least 700 to qualify for a mortgage. To find out your score, don’t be fooled by websites charging you for that information. Everyone is entitled to their score for free, up to three times a year. To find out yours, go to Free Credit Report. If you FICO score is average or below average, there are steps you can take to fix it. It may even be worth postponing buying a house until you do.
by Robert O Deane
End of Step One
If you’ve gotten this far – planning to live somewhere at least 3 years, with a ballpark sense of what you can afford, and with an average or above average FICO score to boot – then it’s time to take the next step.
On to Step Two!
Step Two -Assess Your Buying Power
Get your own house in order.
That means you’ve got to pull together the most important financial and employment documents before even contacting a bank.
You will definitely need:
Your last 30 days of pay stubs. You’ll need to show 30 consecutive days worth to your lender.
Last 2 years’ W-2’s. Your employer gives you this at the beginning of every year for your tax returns.
Last 2 years’ bank statements. This includes all your accounts that show what cash you have on hand.
Recent investment & retirement account statements. Any assets you have are beneficial to get your loan approved, even if you won’t be using them to put toward your home purchase.
List of recent addresses. Be prepared to provide where you’ve lived and how long you lived there.
Information about long-term debts, like car loans, student loans, etc.
You may also need:
Your landlord contact info. Most loans don’t require this but it’s good to have available.
Last 2 years tax returns. This is usually only if you’re self employed or paid on commission.
Copy of your divorce decree. If applicable.
Proof of New Employment. This is you’ve just gotten a new job, for example, a contract.
Documentation of any other assets or sources of income.
Choosing A Lender
Time to talk money. As in, getting your hands on some. You have two good options here. For both options, try to do some online research and bring it with you as a reference.
A. Use a local bank
Upside: A local bank can handle the whole process in-house and close the loan with their own company’s name and fund. Plus, the employees generally understand the specifics of local properties.
Downside: You are locked into their interest rates and terms, which may or may not be the best overall deal.
B. Use a mortgage broker
Upside: A mortgage broker has access to lots of different types of loans and up-to-date interest rates. He/She “should” be seeking the best mortgage terms for you by accessing a network of lenders, including major banks and credit unions.
[blockquote]Downside: Mortgage brokers work on commission. This means they might be looking for the best deal for themselves, because some lenders pay higher commissions than others. Plus, there are plenty of online tools to compare rates, which means you don’t need to pay a broker for something you can do on your own.[/blockquote]
[quote_right]TIP: If you work with a broker, demand to know the various commission structures of each offer.[/quote_right]
Get a great agent.
Now is a good time to secure a Real Estate Agent, and let them know you’re ready to house hunt in earnest. And don’t worry—you’re not signing away your first born or anything. It just means this agent will start paying attention to what you’re looking for in Step Three, and start making recommendations.
Some banks might offer you the option to get pre-qualified instead of pre-approved. Don’t do it. Pre-qualification may be faster and less hassle, but it’s a statement of opinion. Pre-approval is a statement of fact. Being pre-approved will make you more attractive to sellers since they will be able to complete the transaction sooner and with more confidence.
[quote_right]TIP: Don’t forget to ask when your rate or pre-approval expires (usually within a month or two). And if you’re not looking to close on a house for at least 6 months, don’t bother doing this yet. You’ll only have to do it again.[/quote_right]
End of Step Two
By now you should have chosen a bank for your mortgage, gotten pre-approved, and selected your agent. On to Step Three!
Step 3 – House Hunt in Earnest
Know What You Want
You’ll enjoy the process of house-hunting if you spend just a minute figuring out what you want and what you need. The definition of a want is something you’d like to have and that you yourself could change over time, such as paint color, hardwood floors, or a state-of-the-art kitchen.
Know What You Need
A need is anything that you absolutely must have and that you cannot easily change, such as number of bedrooms, tons of storage, or neighborhood safety.
Tour Each Home Like A Pro
We want you to see the potential and the pitfalls in any home you visit. We are working on an ABC Touring Checklist which will includes all the questions your agent will be asking herself or himself while they show you each property, and those you should be asking yourself.
End of Stage Three
[blockquote]Over the next few weeks and months, you’ll probably see dozens of houses with your agent. We know how exhausting this process can be. The key to success is being as straightforward as you can about what you liked and didn’t like about each property. With a little luck, soon you might be ready to make on offer on a place you love. So on to Step Four, to make sure you’re doing that in the smartest possible way.[/blockquote]
Step 4 – Make an Offer and Negotiate
Check Out What Others Have Offered For Similar Houses
Before you make an offer, your agent will send you a list of “comps”. A comp will tell you what similar homes nearby were recently sold for. This lets the market tell you if your offer is appropriate.
Fill In A Purchase Offer Form
A purchase offer is a written proposal stating what you are willing to pay for the home. But it contains more than just your bid. Let’s go through each element of a purchase offer in turn.
Your agent will help you make a offer within a smart range, based on comparison prices, your comfort level, and current market conditions.
So what are market conditions, anyway? Market conditions vary nationwide from place to place and neighborhood to neighborhood. The first thing you need to know is whether your particular neighborhood and town are in a buyer’s, seller’s, or balanced market. Your agent will be able to tell you, but in short:
You’re most likely to get the house and even additional concessions. But be careful — that doesn’t mean it is always smart to make a really low offer, which risks insulting the seller and taking you entirely out of consideration.
Forget the wrangling and go for the house. You’ll feel lucky to get it.
Both buyer and seller are likely to feel good about the transaction. They will each gain and give up something in the spirit of compromise during the negotiation.
Also called your “earnest” deposit, your deposit should be no more than 2% of your offer price. But in cases where you suspect there are multiple bids on the property, offering a larger deposit may help send the message that you are a reliable, serious buyer. If your offer is accepted, the deposit will be applied to your down payment and/or closing costs.
Home Inspection Contingencies:
Since the inspection usually takes place after the offer is accepted, you need to state that the entire deal is contingent upon an acceptable inspection report.
If you like and the seller allows it, you can also include a contingency to ensure you get the mortgage deal and rate you are expecting.
Title Claim Contingencies:
Your Title Company will do a title search to make sure the property does not have any other legal claims against it and that the seller holds a clear title to it.
Proposed Closing Date:
You must also state your desired closing date, usually the day before you’d like to move in.
The offer will also include an expiration date (most of the time it is usually 14 days from the submitted proposal), at which time the offer becomes invalid if the seller has not responded.
Remember, while this may feel a little scary, the proposal does not become a binding contract until both parties agree to the terms and provide their signatures. So while you should make this offer in good faith, you still have the opportunity to think on it a little more.
Submit your offer and wait
So you’ve submitted (or are about to submit) your offer. What might happen next? Usually one of three things.
Scenario #1: The Seller Accepts Your Offer
Congratulations, your offer was accepted! Now what? Once you and the seller have both signed the document, your agent and your lawyer will take it from here. Your lawyer will deposit your earnest deposit and will hold it in an escrow account until the property closes.
We then start 2 things:
1. Inspection: We have 10 days to get inspection and Jane will help you get it scheduled. Once performed, you will have a detailed report of the condition of the property, and determine whether things need fixing by the seller.
2. Lending: We also turn all the paper work over to the lender that you have chosen to do your loan.
Scenario #2: The Seller Counters Your Offer
Very often the seller will want to negotiate. Don’t worry, your agent will help you do this effectively. But remember two things:
1. Negotiation is business. If you make it personal, you lose the ability to do it well.
2. It’s not always about money. There are many levers to pull beyond offer price. For instance, if you need to raise your offer price, you may ask the seller to cover some or all of your closing costs or to make repairs that wouldn’t normally be expected. Or you may keep your offer the same, but offer to increase the speed of closing. You have more leverage than you think.
[quote_right]Tip: There are plenty of things to negotiate beyond price. Discuss with your agent or bank other levers you could pull if increasing your offer doesn’t feel right or isn’t an option.[/quote_right]
Scenario #3: The Seller Rejects Your Offer Completely (even after a few back and forths)
[blockquote]Here are 5 common reasons sellers reject offers on their homes:
1. Simply too low: For most sellers, the bottom line is paying off their mortgage. If your offer won’t cover the mortgage, they cannot accept it.
2. Their plans changed: People put their homes on the market because they need to move, they want to upgrade their home, or they can no longer afford their home. If the circumstances change, they may not need to sell their home.
3. Their own deal fell through: Perhaps your seller was buying another house contingent on the sale of their property. If something went wrong with that deal, they may not be able to sell their home to you.
4. You asked too much of them: The seller may not have the time or money to make any repairs they think are insignificant.
5. Timing was off: Perhaps you want to close too soon or would like to move in to the home before closing.
Don’t get depressed it this happens. There are a lot of homes on the market, and you may ultimately find a home that fits your lifestyle even better. Losing a sale (or even two or three) is valuable experience that will only help you in the future.[/blockquote]
Contact Your Mortgage Professional
As soon as your offer is accepted, you should contact your Loan Officer with a copy of the Sale Agreement and lock in your rate. Since you were clever enough to get pre-approved, you’ve already filled out a mortgage application. Assuming you are staying with the same lender, your Loan Officer will be able to pick up where you left off.
Don’t worry. Buyer’s remorse is a common phenomenon at this stage. If you’ve getting cold feet, revisit your Wants and Needs list. Your agent can help you review it with a sober eye to see whether any trepidation you’re currently experiencing is truly worth a pause.
End of Step Four
You’ve done it. You found a house and made an offer. But as the saying goes, it ain’t over till it’s over. These last few steps can make the difference between a happy turning of the key, and having to start all over.
On the step five!
Step 5 – Prepare for Closing
Set Up An Inspection
Given that you are probably not a builder or contractor, you’ll need to hire a home inspector to check out obvious—and not so obvious—flaws.
Unfortunately, inspectors can vary widely in quality, and finding a great one can potentially save you thousands or even hundreds of thousands of dollars. Your agent most likely has put together a list of inspectors he/she has used and trusts.
Based upon what your inspector finds, you may be negotiating with the seller to pay for any major repairs that are required, or even reducing your offer price. Your agent will help you decide which approach makes the most sense in your particular case.
Arrange For An Appraisal.
Your mortgage lender or loan officer will send an appraiser to determine the value of the home. Given the lender has a large stake in the deal, it is an important aspect of the process—they want to make sure the house is worth the amount you have agreed to pay for it. If it meets appraisal (meaning it is worth at least as much as the purchase price), you are on your way to closing on your mortgage.
Ok, we’re almost there. At this point, your mortgage lender or loan officer will request any final paperwork from you (they will most likely need to reconfirm that your employment is still current and investigate whether any other aspects of your application have changed).
Attend your (first) closing
This is when you close on your mortgage, not your house. The loan underwriter will now review the appraisal and your income & asset documentation. Once the loan is approved, the underwriter signs off on it and loan documents are ordered. An Escrow officer then calculates the costs & credits for all parties.
Order Homeowners Insurance
Call your insurance agent at least 2 weeks before closing to discuss what policy you will get & ensure that there will not be problems getting insurance.
Walk-through & Verify Repairs
You should visit the home 1 to 2 days before closing to make sure the property is in the same condition as when you put the offer on it. You will also want to verify that any repairs have been done properly.
End of Step Five
You are in the home stretch. If you haven’t already, this is time to confirm with your movers and start changing utilities. And start packing! Before you know it, you will be a homeowner.
Step 6 – Close and Collect Keys
The loan underwriter will now review the appraisal and your income & asset documentation. Once the loan is approved, the underwriter signs off on it and loan documents are ordered.
Attend your (second) closing.
Stuff You Need To Bring With You:
Your homeowner’s insurance policy.
Cashiers checks for the amounts due.
Stuff The Seller Needs To Bring:
Proof of any inspection.
Proof of any warranties.
A signed deed for the house.
Stuff You Will Need To Review:
Money you owe the seller (remainder of down payment, prepaid taxes, etc).
Money the seller owes you (unpaid taxes and prepaid rent, if applicable).
Binding Sales Contract (prepared by the seller; your lawyer should review it)
Stuff You Will Need To Sign:
The mortgage (agreeing that if you don’t make payments, the bank takes it back and sells it, reclaims the money you owe plus expenses).
A mortgage note (promising to repay the loan).