How To Buy A Home
Buying Real Estate
Like so many things in life, when it comes to buying Real Estate, proper preparation is one of the keys to success. Don’t want to find yourself in a neighborhood you don’t like? Don’t want to be making mortgage payments on a house in which you are uncomfortable? Don’t want to waste your time falling in love with houses you can’t afford? In a word, prepare!
One of your most important tasks will be determining your needs. It can help to avoid either a nasty disappointment or the pain of buying more house than you need (or can afford). Distinguishing needs from wants will go a long way in preventing expensive mistakes in the house buying process. Establish some basic parameters and stick to them. When house hunting, it is easy to get swayed by the emotion of the moment–and end up with more house than will be financially comfortable.
Do your mortgage investigation early. Odds are strong that you will be working with Real Estate Agents when you buy a house. Before you go on a house search, familiarize yourself with how Agents work and most importantly, who they represent. Thousands of buyers have made the huge mistake of assuming that the Agent with whom they were working represented them in the transaction, when, in reality, the Agent represented the seller.
Want to save a lot of aggravation and possibly a great deal of money when you buy a house? Spend a few hours determining precisely what your needs are before you begin your house search.
Examples of NEEDS Examples of WANTS
Enough square footage for comfortable living Carpeting color, paint color, exterior color, roof color, etc.
Enough bedrooms to accommodate your family Pool or Jacuzzi (unless for medical reasons)
Adequate number of bathrooms Wood floors
Eat-in kitchen Bay windows
Garage or basement for storage needs Built-in entertainment center
Lot size to accommodate children’s play area Brass lighting fixtures
Adaptation for Handicapped Skylights
Proximity to a specific school A pretty view
If you haven’t already done so, investigate your housing needs and wants to determine what types of houses you should be considering.
Learn who The Players are in a Real Estate transaction so that you will know who is responsible for what.
Get your financial picture in focus as soon as possible. Get a copy of your Credit Report to see if there are problems or disrepencies that you need to deal with.
Familiarize yourself with the mortgage process.
Get Pre-Qualified from a Mortgage Lender. Do this first. Your Agent will need your mortgage qualification, and it will significantly strengthen your offer when you find a home. At LendingTree, you can submit a quick application, and within 2 business days get up to 4 offers from lenders so that you can compare terms and rates.
Find an Agent that you trust. It is important to do this before you go rushing off looking for homes or you may end up with no representation. See the Agent Representation section for an important discussion regarding who represents whom.
When you find an acceptable house, write a contract.
Negotiate your best deal.
Make a formal loan application.
Arrange for home inspection.
Arrange for closing agent or attorney.
Make moving plans–for an innovative and money-saving approach to moving, click here.
Secure final loan approval and commitment from the lending institution.
Do a final walk through of the house.
Final closing and settlement.
Move to your new home and begin enjoying it!!
Real Estate is never bought and sold on your own The vast majority of home buyers enlist the services of a Real Estate Agent, a Lender, a Professional Home Inspector, and a Closing Attorney or Escrow Agent. Knowing what each is responsible for will help your understanding of the process and eliminate confusion as you proceed.
Sellers: Familiarize yourself with seller motivations and psychology.
Real Estate Agents: An Agent may or may not be your representative. an Agent will arrange to show you houses that are available through a Multiple Listing Service. Without the use of an Agent, you will be limited only to those houses that are For Sale By Owner. The Agent will coordinate the offer, negotiations and the contract of sale.
Lenders: A broad term that refers to the person originating the loan
to familiarize yourself with these lenders, whether they be banks, mortgage companies, or brokers.
Home Inspectors: Responsible for a whole house inspection of a prospective property.
Closing Attorney or Escrow Agents: Handles the details of the closing, when everything is finalized and the buyer takes possession of the house. Will coordinate with the lender, title insurance company, Real Estate Agents, buyer and seller to make certain that everything is in order.
Summary: Advantages of Buying Real Estate
On Your Own or With an Agent
On Your Own With an Agent
You can try to find a For Sale by Owner who is willing to sell at a reduced price. A much wider choice of properties–every home that is listed with any Real Estate Agency.
You are completely in control of the pace of the process. If represented by a Buyer’s Agent, the availability of a Comparative Market Analysis to see how the price of the house compares with the current market.
For better or worse, you are your own representative. An Agent has experience in negotiation.
Can offer choices and suggestions in Home Inspectors, Closing Agents, etc.
The Agent can follow up in all of the details related to the Closing
When you speak of Real Estate Lenders, it can encompass a lot of territory: Banks, Savings and Loans, Credit Unions, exclusive Mortgage Companies, Mortgage Brokers and others. Any of them may be a good source of financing, depending on your personal situation.
Banks, Savings and Loans, Credit Unions: Their primary business is Full Service banking and offer mortgages as part of their product line. This may be your small, local bank, a large national bank, or your Credit Union. Note: Many Credit Unions do not offer mortgages. If you have a Credit Union available to you, check to see what their policy is.
Mortgage Companies: Their primary or exclusive business is the servicing of mortgages. Mortgage companies may be a separate entity, or they may be a subsidiary of a large bank.
Mortgage Brokers: Mortgage Brokers do not do the actual lending, but act as a middleman between you and the lender. They can do the loan shopping for you, since they will represent several–or many–different lenders.
Attorneys and Closing Agents
One of the most important Players in a Real Estate transaction is the person(s) who will be bringing everything together at the time of Closing: The Attorney, Closing (or Escrow) Agent. Although actual procedures will vary from state to state and province to province, some of the duties that will be assumed by the Attorney or Closing Agent will be:
Coordination with the buyer, the seller, and the Real Estate Agents involved in the transaction.
Preparation for transfer of the title or deed. Legally preparing for taking the house out of the seller’s name and putting it into the buyer’s name.
Coordination with the lending institution. Receiving all paperwork from the lender to be signed by the buyer.
Review of the Contract of Sale. Determining that contractual obligations are met by both the buyer and the seller.
Responsible for filing with the proper government agency (e.g., the county) of all items, such as the deed, that will become matters of public record. Legally filing the change of ownership from the seller to the buyer.
Title Search. Arranging to make certain that the title or deed is good and marketable.
Receipt, verification, and delivery of various funds.
Verification and review of the various insurances associated with the ownership of Real Estate.
Probably one of the reasons that buying a home is such an emotional experience is because not only do you have the actual house buying to deal with, but for most home buyers you also have the mortgage process to encounter. This can be a smooth and almost uneventful process, or an unnerving one. A great deal depends on the preparation of the buyer as well as the selection of an efficient mortgage company.
What a Mortgage Payment Consists of
1) Principal: The repayment of the original amount borrowed on a monthly basis.
2) Interest: The cost of borrowing the principal amount, repaid on a monthly basis.
3) Taxes: Real Estate taxes paid to a local government agency.
4) Insurance: Homeowners insurance on the home. Also any mortgage insurance, which is paid to protect the mortgage company.
The total of these items is known as the PITI (Principal/Interest/Taxes/Insurance) payment.
When it comes to Real Estate matters, the 3 most important aspects of an effective negotiation are:
CMA’s–Comparable Market Analyses
Once you have found a home that you are prepared to buy, the first step in your process of negotiation is to determine the fair value for the home. Your Agent can be of great help here, since Real Estate Agents have access to the information that you need: Comparable Market Analyses (CMAs). A CMA will show exactly what properties similar to the one in which you have an interest have sold for. These analyses are based on fact, rather than opinion, and that information will always be of more value to you. Generally, CMAs will list houses in a particular location that are currently on the market, have sales pending on them, have expired from the market, and have sold. Be forewarned: it is primarily the SOLD properties that you need to be concerned with. What houses are on the market for is not always a good indication of what their value is, those that have pending sales will only tell you what the listing price is (not what it is going to sell for) and those that have expired because they haven’t sold may indicate that they didn’t move because they were overpriced.
Just having the right information is not enough. You must prepare yourself in order to use it effectively. The most important factor in your preparation is your emotional frame of mind. Buying a house is emotionally charged enough, without adding more fuel to the fire by letting your emotions override your common sense. It is not unusual to be excited–in fact, it is normal–but you must keep your excitement in check or you will lose the value of all the information you have gathered.
In addition to your emotional frame of mind, your financial frame of mind should be in order. An offer to purchase will carry a lot more weight if you have no dangling financial problems and you have been pre-qualified for a mortgage.
You can’t be afraid to let it go. You must convince yourself that if the price is not to your liking (or worse, above your budget), you will be able to walk away. It is important for you to set a realistic limit and then stick to it. Overpaying for a house is epidemic among buyers who let their emotions rule their better judgment. It becomes very easy to regret paying too much for a house when you make a mortgage payment every month. Unlike a product that you overpay for once when you buy it, a house reminds you every 30 days that you made a mistake!
Finally, plan your work and work your plan. Organize your information and have it quickly available. When it comes time to make an offer, you don’t want your ammunition scattered on scraps of paper in the back seat of your car.
Don’t throw away all of the information gathering and preparation you have done by making a ridiculous offer on a well priced home. Nothing will turn a seller off more than a low ball offer on a house that has been realistically priced. Often, negotiations will stop, rarely to be revived again. If they are re-opened, the sellers generally will show their displeasure at the initial low offer by locking at or near the listing price.
An example: Mr. and Mrs. Buyer have been looking at houses for months. Finally, they find the perfect house, which is an ideal match for their needs and wants. The house is listed at $155,000. Mr. and Mrs. Buyer have a CMA in hand that shows average selling prices in the neighborhood to be in the $148,000 to $153,000 range. Ignoring the information they have, they make an offer of $120,000. Mr. and Mrs. Seller, annoyed at the low offer, counter offer at full selling price, $155,000. The Buyers, still convinced that they can steal this house, make a 2nd offer of $125,000. The Sellers, now very frustrated, do not move from their $155,000 price. Suddenly, there is word that another offer is forthcoming, this time from Mr. and Mrs. Smith. In fear of losing the house, Mr. and Mrs. Buyer up their offer to $154,000 (still needing some concession) and the Sellers accept. Consider, though, that a realistic first offer in the $150,000 range (remember, the CMA showed $148,000 to $153,000) may well have been accepted by the Sellers. If this were the case, the Buyer’s paid $4000 more than they had to.
The moral: An unrealistic offer on a house that meets your needs and is priced correctly could end up costing more than it would with a realistic offer.
An offer in a Real Estate purchase is a good deal different than one in other negotiations in which you many participate. A Real Estate offer can become a legally binding contract: If you offer to buy a house at a certain price and with certain terms, and the seller agrees and notifies you of their acceptance, you have bought a house! Yes, the closing and escrow details may still need to be finalized, but an offer can turn into a contract in a matter of hours, so it is important that you understand the potential consequences of an offer.
Any concessions made by the seller
The amount of buyer’s earnest money or deposit that accompanies the offer.
Financing contingencies (subject to you securing an acceptable mortgage)
Inspection contingencies (subject to an inspection report that is acceptable to you)
Time and date of settlement and possession
Once the perfect home has been found, it is time for the house buyer to take the step that makes so many of us tremble with fear: the sales contract. To take some of the mystery out of the house sales contract, we will discuss what the contract involves and the components of most Real Estate sales contracts.
What: A legal description of the property as well as the street address.
How much: The selling price.
Mortgage contingency: Subject to obtaining a mortgage (if applicable) and the specifics of the mortgage–amount, rate and term. Application to be made in X number of days.
Deposit: How much money accompanies the contract and who will hold it
Closing: When and where.
Inclusions and exclusions: What is and is not included in the sale of the property.
Home inspection: Contingency for and to be done in X number of days.
Warranties: Any that are included with the house and description of the warranty.
Condominium: If the property is a condo, other provisions will apply
Well and Septic: If applicable, they must be tested (and pass).
Termite and Pest inspection: Who will pay and if there is infestation or damage, who will repair.
Possession Date: When the buyers take possession of the house–before, at or after closing.
Acceptance: How long the sellers have to respond to the offer with either acceptance or a counter-offer.
Arbitration: Any provisions for arbitration of disputes.
Insurance: Whose insurance covers the property up until the closing date.
Property Disclosures: Notices of any property disclosures concerning the house.
After you have found a property that meets your budget and needs, the next step is to determine whether the physical condition of the property will be acceptable. All Real Estate is definitely not created equal–there is a great variance in the way individual homeowners maintain their properties. In addition, you need to be aware of any hidden defects that could substantially affect the value of the home. The only way to safely determine the condition of a property is to take advantage of every opportunity you have to inspect it.
It is the proverbial signing on the dotted line: the process of which will put the title to the house in your name, verify homeowners’ insurance on the property, commit in writing to the terms of the mortgage, and usually, put the keys to the house in your hands. In general, you will leave the closing and go to your new home as a homeowner. The weeks and months of anticipation are all settled in the short amount of time that you spend at the closing.
What items will we need?
The following are the most important items that you will need prior to or at closing and some hints regarding them:
A Closing cost estimate: This should first be given to you by your Agent at the time of the contract, and then given to you by the Lender, a Good Faith Estimate, shortly after the application for the loan. This should give you a reasonably close estimate of funds you will need at the time of closing.
Homeowners’ Insurance Policy: This must be secured prior to the date of closing.
Settlement Statement: You should have a copy of the Settlement Statement before the date of Closing. Generally this will not be available until one or two days prior to the actual Closing, but it is important to have it because it gives you the total amount of cash you will need at Closing and also how those various funds will be dispersed. In addition, it gives you an opportunity to iron out any discrepancies prior to sitting down at the Closing table. Your Agent should also have a copy for review.
Start asking for the settlement statement 4 or 5 days before the scheduled closing. This will save you having to chase it down the night before your closing.
Certified Funds: On the day of Closing you will need certified funds for closing costs and down payments. This is an important reason for needing a copy of the Settlement Statement a day or two in advance–so you know the amount of funds needed and so that any problems can be handled in advance.
One of the primary activities at the closing or escrow is the verification of all of the insurance that is needed or desired when buying Real Estate.
Title Insurance: Insures that the title or deed to the home is good and marketable. This is only issued after a successful title search. Title Insurance would most likely protect you, for example, if an unknown additional seller (for example an ex-wife or husband) suddenly surfaced months or years after you took possession of the property.
Homeowner’s Insurance: Insures the home against damage or theft. This insurance will be structured to protect both you, as the owner, and the lender. There can be a good deal of variation in policies. See the section on saving money on homeowner’s insurance for hints on getting the most insurance for the least amount of money.
Personal Mortgage Insurance (PMI): This insurance, although paid for by you, protects the lender against a loss should you default. It is present and required on the majority of loans that have less than a 20% downpayment. Recent changes in laws affecting PMI will make it easier to get this insurance removed when the equity in your home reaches 20%.
Do not confuse PMI with mortgage life insurance, which would pay off your mortgage should you die before it is paid off. Mortgage life insurance can be purchased through your Insurance Agent, but is not required.