Let's say one morning you wake up and realize that you're ready to buy a home. You're tired of paying rent with nothing to show for it, and you figure that it's time to get into a home of your own. But you have reservations.
After all, if it's your first time, you've got questions. You might be a little nervous that you'll mess up, and it's normal to feel that way -- you are probably about to spend hundreds of thousands of dollars and make the most important financial purchase of your life.
So it pays to come into the home-buying process armed with as much information as possible.
Every state requires slightly different steps to buying a home, although they are basically very similar. Here are the basics.
Consider If Buying a Home Is Right for You
Many people harbor secret fears about buying a home, and some of those fears are justified. Not everybody is cut out to own a home, and if you're one of those people, it's better to find this out now than when you're under contract.
- Compare Renting vs. Buying. You might decide that renting is better for you than buying, because buying a home has its drawbacks.
- Contemplate some of the reasons to buy. There are tons of benefits to buying and owning real estate; keep these in mind if you start to get cold feet.
- Should you buy a home before getting married? If you are buying a home with a partner or significant other before tying the knot, you need to think ahead and consider potential financial consequences.
- Ask yourself if you plan to stay with the same job or remain in the same city. If you're a carefree person who desires the ability to move elsewhere should the urge hit, you might not be able to leave on a whim or quit your job if you own a home.
Find a Buyer's Agent to Help You
Whatever you do, don't try to go it alone. Buying a home is not as easy as it looks. You will benefit from professional assistance, and it's a free service for you. Not to mention, agents often see all the new listings before they are available online.
Do not call the listing agent in hopes that agent will do whatever it takes to earn twice the commission under dual agency. Agents are more ethical than the public gives them credit for. On top of which, you won't get individual representation; you would either receive neutral representation or no representation at all.
Ask friends for a recommendation to a Realtor. Search for agents in your area on a search engine, look at agent websites, read reviews, and peruse blogs (as many agents write about their real estate market). Try to find a buyer's agent.
- A buyer's agent will represent only you and have a fiduciary responsibility to look out for your best interests. You might be better served by an agent whose sole practice is buyer representation. There are buyer specialists in the industry. You do not have to work with an agent who also works with sellers, unless you want to.
- Buyer's agents may ask you to sign a buyer's broker agreement, but it is the seller who pays the commission. I know it sounds odd that a seller would pay your agent, but that's generally how it works.
- Interview agents until you find an agent you trust and with whom you feel comfortable. Possessing a real estate license is no guarantee your agent is competent. Agents come from all walks of life and some are much better than others. Try to hire experience. Your best hedge against mistakes will be an agent with experience.
- Once you have settled on an area, try to hire a neighborhood specialist. An agent who routinely sells homes in the area where you want to buy might have more knowledge that could help guide your decision to buy, over an agent who can't find the house with two maps and a flashlight.
Get Your Finances in Order
Line up your financing, set aside a down payment and study the loan programs that are available. By doing your homework, you will know exactly how much you can pay and what it will cost you. Little is more disheartening than to learn in the middle of a transaction you cannot close.
You might ask your real estate agent for a lender referral. Lenders are not allowed to compensate agents for referrals, in case you are wondering. This means your agent will refer only the top lenders who perform well because your agent wants YOU to win.
- Order a Free Credit Report. Give yourself time to clean up a credit report that contains mistakes. Dispute errors. Try to reduce your monthly debt obligations now by paying down those loan balances. Do not open new lines of credit or close old lines of credit.
- Find a Lender. Check out places to get a mortgage and compare rates and fees. You might start with your own financial institution, then interview a few mortgage brokers and choose a loan product you completely understand. Realize everybody charges about the same rates, so pick a lender you trust, who communicates well and promises to meet your anticipated closing date.
- Determine a Down Payment. The more you put down, the lower your monthly mortgage payment. There are at least a dozen places to find a down payment, only one of which is your own bank account. Your chosen loan program may stipulate the minimum down payment, but you can always pay more. The higher the down payment, the bigger your equity position.
- Pick your loan program. Consider FHA Loans. FHA loans carry competitive interest rates, come with minimum down payment requirements and allow sellers to pay some or all of your closing costs. Some first-time home buyer programs utilize FHA loans as part of their financing and also lend you the money for closing costs and / or your down payment.
- Get a Preapproval Letter. Showing the seller you are already preapproved for a loan gives you an edge during offer negotiation.
Look at Homes for Sale
This is truly the fun part, the (relatively) non-stressful part of buying a home. Try to withhold judgment until you have toured a home in its entirety. And don't dismiss potential homes because of superficial issues that could easily be remedied by a coat of paint or some landscaping. Go inside and look.
- Ask your agent to look at homes for you before showing them to you. Not every agent will have the time for this extra service, but in some instances, agents will agree. Or an agent might tour homes on her own every week and have already viewed homes that meet your needs.
- Narrow your search to those homes that fit your exact parameters to find that perfect home. This might be more difficult to accomplish in a market with tight inventory, for example.
- Ask your agent to give you MLS print-outs of comparable sales in your targeted neighborhood. With printouts in front of you, you can take notes as your tour. Rate homes on a scale of 1 to 10. This will help to shorten your list to the best homes for you.
- Consider all homes on the market, including fixer-uppers, REOs, foreclosures, short sales and those overpriced homes with longer DOM. You will find this approach helpful when your choices are slim.
- Observe open house etiquette. If you go to an open house on Sunday, tell the hosting agent if you are represented by a real estate agent.
- Tell your agent which online home listings you are interested in previewing and ask for additional input. Your agent can gather more information than the notes provide in MLS by talking to the listing agent, and will get more insight than you could, so don't call the listing agent yourself. Let your agent earn his or her paycheck and do this for you.
Make an Intelligent and Informed Offer
Part of the problem of looking at homes for sale is you are not viewing homes that have sold. Only the sold homes will provide you with adequate comparable sales to know if a home is overpriced, underpriced or just right. Sellers can ask any amount they want, the price needs to be substantiated.
- Consider writing seller's market offers in seller's markets and buyer's market offers in buyer's markets. Cannot stress the importance of this enough. Your "lowball strategy" picked up from a popular TV show does not work in seller's markets, for example.
- Select a home offer price based on the amount you feel a seller will accept or counter. This price is generally based on the comparable sales, with input from your real estate agent.
- If you are considering a lowball offer, ask your agent to verify this price for you. You will need to present a reason for the seller to accept this type of offer, and it can't be based on whim.
- Prepare for multiple offers if the home is considered desirable in a hot location. Don't shy away from multiple offers. Somebody has to win. Why can't that buyer be you?
- If your offer is rejected, ask your agent to explain why and don't repeat that mistake with your next offer. Also, don't automatically blame your agent. Maybe the problem is you didn't offer enough? If your agent steered you wrong, you need to engage in a frank discussion with that agent.
Negotiate Counter Offers
It is considered normal for a seller to send a counter offer. It doesn't mean your offer offended the seller or that your agent did anything wrong. Some sellers issue a counter offer because they like to have the last word.
- Expect the seller to issue a counter offer. Even if you offered list price, the seller might have other points that were not adequately addressed to the seller's satisfaction in the offer. A counter offer is not the kiss of death; think of it as the gateway to acceptance.
- If the seller counters at full price, continue to negotiate. Even if you offered less initially, you might find that continued negotiations could result in the final offering price that is acceptable to both of you. The first counter is not always the last.
- During offer negotiation, share personal information about your family to give the seller a reason to care about you. Especially if there are other offers, you will want to put your best foot forward and have your offer resonate with the seller on a personal level. No matter what, home sales are emotional and personal.
Make an Earnest Money Deposit
Purchase contracts typically contain a good faith deposit, called an earnest money deposit. It shows a buyer is committed to the transaction when a buyer is willing to place a deposit into escrow. Most earnest money deposits are refundable.
- When your offer is accepted, deposit your earnest money check with the appropriate party. In California, where I'm a broker, we typically have 3 days to make the deposit.
- Do not ever make your check payable to the seller. I don't care what anybody says, do not pay the seller directly. Good ol' boys ways of doing business and handshakes have a way of coming back to bite.
- Your offer should contain contingencies that will return your earnest money deposit to you if you cancel the contract. Usually, the contingency periods will specify a time period for performance.
Open Escrow/Order Title Commitment or Prelim
The escrow officer will prepare escrow instructions. The exact process here varies by locality -- for instance, in southern California they are signed upon inception, while in northern California are signed at closing. The escrow officer will act a neutral third party to process your transaction by collecting or preparing documents, obtaining signatures, recording documents and disbursing funds.
- Your agent or agent's transaction coordinator will open escrow and title, if the listing agent hasn't already done so.
- Ask for the escrow officer's name, phone, email, and escrow file number. Escrow officers are bound by confidentiality.
- Give this information to your lender and your insurance agent. Get an early start on obtaining quotes for a homeowner's insurance policy as some insurance companies are reluctant to insure all homes in all neighborhoods.
Obtain an Appraisal
Most purchase contracts contain a provision for the appraisal, making the appraisal a contingency of the contract. This means if the home does not appraise for the amount you offered to pay, you are not obligated to complete the transaction. The lender will order the appraisal.
- Your lender will require an advance payment for the appraisal. Every so often, a lender will, as a promotion or incentive, agree to pay for your appraisal. Ask about it.
- If you receive a low appraisal, discuss options with your agent. As a buyer, it is natural for you to want the seller to reduce the price, but that might not be the only solution.
- Ask for a copy of the appraisal. If you paid for the appraisal, you are entitled to receive it.
Comply With Lender Requirements
Your loan file is huge. It contains your loan application, credit report, last two years of tax returns, payroll stubs, W2s, copies of bank statements and other financial documents, in addition to state- and federal-mandated forms.
- Lenders may ask for additional information. Do not balk or complain. They don't write all of the rules, underwriting has the last word. It could be the difference between getting the loan or not getting the loan.
- Do not make home buying mistakes such as altering your financial situation while in escrow. Please do not make any major purchases or acquire any additional debt. It can stop you from buying a home.
- When the file is complete, the lender will submit it for final underwriter approval. Being in underwriting is nerve-wracking and frustrating, especially when it takes longer than 24 hours, but it could take a week.
Acknowledge Receipt of Seller Disclosures
Sellers are required to deliver certain disclosures about the property to the buyer within a particular time period specified in the purchase contract. It is the sellers' obligation by law to reveal everything a seller knows about the property, including material facts.
- Read and question items you do not understand on the TDS, Seller Property Questionnaire, natural hazard report, pest inspection/completion and other documents such as a preliminary title policy.
- Realize you have 10 days to review for lead-based paint, which is a federal disclosure.
- Read every document in its entirety; ask questions about all seller disclosures. If you encounter unfamiliar terminology, and few buyers understand every single term, ask your agent to explain it to you. There are no dumb questions when buying a home.
Order Homeowner's Insurance Policy
You might start with the company that insures your automobile. Sometimes insurance companies will give you a discount if you maintain more than one policy with that company. In addition to homeowner's insurance, you might also consider flood insurance or earthquake coverage.
- Order your homeowner's insurance early. As mentioned earlier, not every insurance company will insure every home, especially older homes or homes located in hazardous places.
- Sometimes previous claims by a homeowner can make it difficult to get insurance. A C.L.U.E. report will disclose previous claims and can be obtained online for about $20.
- Get replacement coverage. It doesn't cost that much more to obtain replacement coverage, which will rebuild your home if it is destroyed. Sadly, many victims of wildfires did not carry replacement coverage.
In most states, the purchase contract gives a buyer a certain number of days to conduct inspections, including a home inspection. You might also consider a pest inspection, chimney inspection or sewer inspection. If you uncover a major defect that you cannot accept, you are often free to cancel the contract.
- Hire a reputable home inspector. Not every state requires inspectors to possess any licensing or credentials. A home inspection is for your edification and is not a laundry list to present to the seller to repair.
- Bring a home inspection checklist with you. You will want to make sure every area of concern has been inspected and your questions addressed.
- Attend the home inspection. Do not follow the home inspector around, like a Zillow book wrongly suggests, or the home inspector will silently curse you under his or her breath. Let the inspector do the job of inspection in peace. Wait until the home inspector is finished before asking questions.
Consider a Request for Repair
The seller is not obligated to fix anything, not even lender required repairs. Some appraisals might contain what is called "conditions," which are defects of some sort that need to be corrected before the lender will fund the loan. Either party can take steps to satisfy loan conditions, this is negotiable.
- If the home inspection turns up significant and unexpected problems, you can sign a request for repair by asking the seller to either address those issues, give you a credit toward closing costs or lower the sales price. Realize the seller might say no and determine whether you can live with that kind of response.
- Realize no home is perfect, and the inspector will find faults. Don't expect everything on the home inspection report to be fixed nor allowed for in the sales price.
- Be reasonable. I know this is a tough one because it's subjective to some people, but being reasonable means making rational inquiries. Your agent can guide you.
Not every listing agent will ask for a release of contingencies, but those are the lazy agents. To fully protect a seller, most listing agents will demand the release of all contract contingencies by the date those releases are due.
- By default, California C.A.R. contracts give buyers 17 to 21 days to remove contingencies. The contingencies do not expire at the end of a specified time period, contrary to popular belief.
- Try to make sure your loan is firm and the appraisal is acceptable before removing your loan contingency. If your lender can't confirm your loan, you might still need to remove the loan contingency, if you are contractually obligated to.
- If you refuse to remove contingencies, the seller can issue a Notice to Perform and then unilaterally cancel the contract.
Do Final Walk-Through
The purpose of the final walk-through inspection is to essentially ensure the property is in the same condition as when you last viewed it. If you discover exposed damage to the hardwood floors, for example, after the seller has removed furniture or removed rugs this is the time to ask for some sort of compensation.
- Do not pass up doing a final walk-through. You might be tempted to forgo this formality, but those who choose that option often regret that decision. You can learn from your own mistakes but learning from others is far preferred.
- Make sure toilets flush and there is no water leaking from the removal of the refrigerator or washing machine. Turn on all lights, operate all appliances.
- Inspect the property to make sure it's in the same condition as when you agreed to buy it. This is not a license to demand more repairs unless you find a new defect not previously disclosed.
- If you find a serious issue, address it now before you close. Due to the urgency of some situations, you might find a fast solution that will not hold up closing. Try to avoid financial arrangements that could change your closing disclosure or your loan docs could need to be redrawn.
Sign Loan and Escrow Documents
If you cannot physically come to the escrow company, the escrow officer may send a mobile signer to you. You will probably pay extra for this service but for many buyers, it is a beneficial service. Mobile notary signers will come to your home, office or any other place you designate.
- As with many other aspects of the home-buying process, procedures for escrow vary by locality. For instance, In southern California, you will sign escrow documents shortly after opening escrow; in northern California, you will sign escrow documents along with your loan documents near closing.
- Bring a valid picture ID. Make sure the name on your ID is the same name as on your loan documents. If you've recently married and changed your name, this could cause a problem.
- Be prepared to spend at least 30 minutes to an hour signing loan documents. You will probably be presented with at least 100 pages to sign.
Deposit Balance of Funds
This is where the rubber meets the road. Now that you have checked out the home to ensure it meets your expectations and your loan is ready to close, this is when you deposit the rest of the down payment and closing costs.
- Bring a certified check payable to escrow. You cannot deposit cash nor a personal check. Personal checks are acceptable if there is adequate time to clear prior to closing.
- Expect escrow to pad the amount, so you will receive a refund after closing. Escrow can mail you the check or wire the refund to your bank.
- Consider asking your bank to wire the funds directly to escrow, saving you the hassle of physically delivering the cashier's check to escrow.
Escrow has closed when the title company receives confirmation from the Recorder's Office that the documents have been recorded. This date will be a few days after you have signed your escrow and loan documents. Same-day closings rarely happen.
- Your property deed, seller's reconveyance and deed of trust will record in the public records. Later, weeks after closing, you will receive the original deed in the mail.
- The title company will notify your agent when your transaction records, and in turn, it is common for your agent to call you. Many agents are very excited when it's time to hand over keys on the doorstep to you.
- After recordation, unless your contract specifies otherwise, the property is yours. Change the locks immediately, and enjoy your new home!
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.