The Ultimate Guide to Buying a Home
You'll probably spend hundreds of thousands of dollars and make the most important financial purchase of your life when you buy a home, so it pays to go into the process armed with as much information as possible. Every state requires slightly different steps in the homebuying process, but overall they're basically very similar. Some federal programs regulate mortgages as well.
Find a Buyer's Agent First
Don't try to go it alone. Buying a home is an intricate process with a lot of interlocking pieces. You'll benefit from professional assistance, and it's a free service for you because sellers pay the agents' commissions.
But there are agents...and then there are agents. Choose wisely:
- Don't call the listing agent thinking they'll do whatever it takes to earn twice the commission under a dual agency arrangement—a situation in which the agent represents both the buyer and the seller in the transaction. By definition, you won't get individual representation. You'll either receive neutral representation or no representation at all.
- Interview agents until you find someone you trust and with whom you feel comfortable.
- Hire someone with experience. Possessing a real estate license is no guarantee that your agent is competent. Agents come from all walks of life and some are much better than others. Your best hedge against mistakes will be an agent who has been successful for years.
The Role of 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 don't have to work with an agent who also works with sellers unless you want to. There are buyer specialists in the industry.
You might look for someone with an Accredited Buyer's Representative (ABR) designation granted by the National Association of Realtors.
Also, consider these recommendations:
- A buyer's agent might ask you to sign a buyer's broker agreement, and that's okay but ask for an explanation of any terms you don't understand. The seller still pays the commission.
- 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.
Get Your Finances in Order
Line up your finances. Set aside a down payment and study the loan programs that are available. You'll know exactly how much you can pay and what it will cost you if you do your homework. Follow these important steps:
- Order your free credit report. Give yourself time to clean up any errors or mistakes you find there. You can dispute errors with the reporting agencies or with the creditors and get them removed.
- Try to reduce your monthly debt obligations now by paying down loan balances. Do not open new lines of credit or close old lines of credit.
- Find a lender. You might start with your own financial institution, then interview a few mortgage brokers. You might consider asking your real estate agent for a lender referral. Lenders aren't allowed to compensate agents for referrals, so your agent will refer only the top lenders who perform well. Compare rates and fees, and choose a loan product that you completely understand. If you're a freelancer or have non-traditional incomes sources, you might consider a non-qualifying mortgage.
- Pick your loan program. FHA loans carry competitive interest rates. They come with minimum down payment requirements and allow sellers to pay some or all of your closing costs. Some first-time homebuyer programs use FHA loans as part of their financing and also lend you money for closing costs or your down payment.
- Determine a down payment and start saving or finding other sources for that money. The more you put down, the lower your monthly mortgage payment will be. Your chosen loan program might stipulate the minimum down payment, but you can always pay more. The higher the down payment, the bigger your equity position, and you'll avoid paying for mortgage insurance if you can come up with 20% of the purchase price.
It's a good idea to get a preapproval letter from your chosen lender. Showing the seller that you're already preapproved for a loan gives you an edge during the offer negotiation.
Start Looking at Homes for Sale
Try to withhold judgment until you've toured a home in its entirety, and don't dismiss potential homes because of superficial issues that you can easily remedy with a coat of paint or some landscaping. You have a few options for finding suitable homes:
- 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 some will agree. Your agent might tour homes on their own every week and might have already identified homes that meet your needs.
- Narrow your search to homes that fit your exact parameters. This might be more difficult to accomplish in a market with tight inventory.
- Ask your agent to give you Multiple Listing Service (MLS) print-outs of comparable sales in your targeted neighborhood. An MLS is a database created by brokers that lists properties for sale, along with important features and details. You can take notes about each of the properties as you tour. Rate the homes you see 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 even overpriced homes with longer days on market. This is especially helpful in markets where your choices are slim.
- Observe open house etiquette. Tell the hosting agent if you're represented by a real estate agent if you visit the property on your own.
Tell your agent which online home listings you're 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. You might be able to rule some out without wasting time seeing those that simply won't work.
Make an Informed Offer
Homes that have already sold will provide you with adequate comparable sales so you'll know if a home is overpriced, underpriced, or priced just right. Sellers can ask any amount they want, but the price must be substantiated. Consider a few approaches after you've nailed down value:
- Write seller's market offers in seller's markets, and buyer's market offers in buyer's markets. A "lowball strategy" doesn't work in seller's markets.
- Select a home offer price based on the amount you feel a seller will accept or counter. This price is generally based on comparable sales, and your real estate agent will be able to guide you.
- Ask your agent to verify the price for you if you're considering a lowball offer. You'll want to present a reason for the seller to accept this type of offer. 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 these homes. Somebody has to win. Why can't it be you?
- Ask your agent to explain why if your offer is rejected, and don't repeat the same mistake with your next offer. The problem might be that you didn't offer enough.
It's normal for a seller to send back a counteroffer. This doesn't mean your offer offended them or that your agent did anything wrong. Some sellers issue counteroffers simply because they might have other points that weren't adequately addressed in the offer. A counteroffer isn't a kiss of death. It's a gateway to negotiations if you handle it right:
- Continue to negotiate if the seller counters at full price. You might find that continued negotiations result in a final offering price that's acceptable to both of you.
- Give the seller a reason to care about you. Share some personal information about your family during offer negotiation. You want to put your best foot forward and have your offer resonate with the seller on a personal level. Home sales are emotional and personal.
A counteroffer is a seller's alternative to rejecting your offer completely. Your offer can't be "reopened" after it's rejected, so a counteroffer effectively keeps negotiations alive for possible agreement down the road.
Make an Earnest Money Deposit
Purchase contracts typically contain a good faith deposit referred to as earnest money. This shows that a buyer is committed to the transaction. Most earnest money deposits are refundable if your offer isn't accepted, but you must follow the proper guidelines:
- Deposit your earnest money check with the appropriate party if your offer is accepted. Your agent might take care of this for you. Some states require that agents must hold onto the check personally or deposit it with the court.
- Your offer should contain contingencies that will return your earnest money deposit to you if you cancel the contract. Contingencies will usually specify a time period for performance. Common contingencies include that the property pass a home inspection, that it appraises for at least as much as the sales price, or that the property is insurable. You'll get out of the deal without penalty if the property fails in any of these respects.
The exact process for this varies by locality. The escrow officer will usually act a neutral third party to process your transaction by collecting or preparing documents, obtaining signatures, recording documents, and disbursing funds. Keep these elements in mind:
- Your agent or agent's transaction coordinator will open escrow and title, if the listing agent hasn't already done so.
- You should ask for the escrow officer's name, phone, email, and escrow file number. Give this information to your lender and to your insurance agent.
Obtain an Appraisal
Most purchase contracts contain a provision for an appraisal, making it a contingency of the contract. You aren't obligated to complete the transaction if the home doesn't appraise for the amount you offered to pay. Your lender will order the appraisal. Be aware that:
- Your lender will probably require an advance payment for the appraisal, although some will agree to pay for it as a promotion or incentive. It doesn't hurt to ask if this is possible.
- You should discuss options with your agent if you receive a low appraisal. It's natural for you to ask the seller to reduce the price, but that might not be the only or best solution.
Ask for a copy of the appraisal. You're entitled to receive it if you paid for it.
Comply With Lender Requirements
Your loan file is going to be huge. It contains your loan application, credit report, last two years of tax returns, payroll stubs, W2s, copies of bank statements, other financial documents, state- and federal-mandated forms, and that's just the tip of the iceberg. Be prepared for some obstacles:
- Lenders might ask for additional information. Do not balk or complain. They don't write all the rules. Underwriting has the last word. Being difficult could mean the difference between getting the loan or not getting the loan.
- Don't make home buying mistakes such as altering your financial situation while in escrow. Don't make any major purchases or acquire any additional debt.
- Your lender will submit your file for final underwriter approval. Being in underwriting is nerve-wracking and frustrating—you're holding your breath, waiting for approval—especially when it takes longer than 24 hours, and it could take as long as a week.
Acknowledge Receipt of Seller Disclosures
Sellers are required to deliver certain disclosures about the property to buyers within a time period specified in the purchase contract. It's the sellers' obligation by law to reveal everything a seller knows about the property, including material facts. This can be helpful in a number of ways:
- Read and question items you don't understand on the seller property questionnaire, the natural hazard report, the pest inspection and completion, and the preliminary title policy.
- You have 10 days to review for lead-based paint, which is a federally-required disclosure.
Read every document in its entirety. Few buyers understand every single term, so ask your agent to explain it to you if you encounter unfamiliar terminology.
Order a Homeowner's Insurance Policy
Get an early start on obtaining quotes for a homeowner's insurance policy because some insurance companies are reluctant to insure all homes in all neighborhoods, especially older homes or homes located in hazardous areas. There are a few things to be aware of:
- You might start with the company that insures your automobile because insurance companies will sometimes give you a discount if you maintain more than one policy with them.
- You might also consider flood insurance or earthquake coverage, depending on your location.
- Sometimes previous claims by a homeowner can make it difficult to get insurance. A C.L.U.E. report—a claims information report offered by the consumer reporting agency LexisNexis—will disclose previous claims and can be obtained online.
Consider getting replacement coverage. It doesn't cost that much more to obtain, and it will rebuild your home if it's destroyed.
The purchase contract gives a buyer a certain number of days to conduct inspections in most states, including a home inspection. You might also consider a pest inspection, a chimney inspection, or a sewer inspection. You're often free to cancel the contract if you uncover a major defect, but again, it helps immeasurably to understand the process:
- Not every state requires inspectors to possess any licensing or credentials.
- A home inspection is for your edification and isn't a laundry list to present to the seller to repair.
- Attend the home inspection, but don't follow the inspector around. Let them do their job in peace. Wait until the inspector is finished before asking questions.
- Bring a home inspection checklist with you. You'll want to make sure every area of concern has been inspected and that your questions are adequately addressed.
Consider a Request for Repair
Some appraisals might contain what are called "conditions," defects of some sort that must be corrected before the lender will fund the loan. Either party can take steps to satisfy loan conditions. The seller isn't obligated to fix anything, not even lender-required repairs, but you have options:
- You can sign a request for repair by asking the seller to address those issues if the home inspection turns up significant and unexpected problems. You might ask the seller for a credit toward closing costs or to reduce the sales price.
- No home is perfect, and the inspector will find faults. It's almost guaranteed. Don't expect everything on the home inspection report to be fixed nor allowed for in the sales price.
- Be reasonable and make rational inquiries. Your agent can guide you.
Not every listing agent will ask for a release of contingencies, but this should be done to fully protect the seller. Most listing agents will demand the release of all contract contingencies by the date those releases are due. Some things to keep in mind:
- State rules and timelines can differ. For example, California contracts give buyers 17 to 21 days to remove contingencies, but you could have less time depending on your location.
- Make sure your loan is firm and the appraisal is acceptable before removing your loan contingency. You might still have to remove the loan contingency, however, if your lender can't confirm your loan. This, too, can vary by state.
The seller can issue a Notice to Perform, then unilaterally cancel the contract if you refuse to remove contingencies.
Do a Final Walk-Through
The purpose of a final walk-through inspection is to ensure that the property is in the same condition as it was when you last viewed it. Accidents can happen. This is the time to ask for some sort of compensation if you discover damage to the hardwood floors after the seller has removed furniture or removed rugs. Be alert for other problems as well:
- Make sure the toilets flush and there's no water leaking from the removal of the refrigerator or washing machine. Turn on all lights, and operate all appliances.
- This isn't a license to demand more repairs unless you find a new defect that wasn't previously disclosed.
- Address it now, before you close, if you find a serious issue. You might arrive at a quick solution that won't delay closing due to the urgency of some situations. But try to avoid financial arrangements that could change your closing disclosure, or your loan documents might have to be redrawn.
Sign Loan and Escrow Documents
The escrow officer might send a mobile signer to you if you can't physically go to the escrow company to take care of this. You'll probably pay a little extra, but it's a beneficial service. Mobile notary signers will come to your home, office, or any other place you designate. Be aware that:
- Procedures for escrow can vary by locality.
- You'll need a valid photo ID.
- The name on your ID must be the same as on your loan documents. This could cause a problem if you've recently married or divorced.
You'll spend at least 30 minutes to an hour signing all the loan documents. You'll probably be presented with at least 100 pages to sign.
Deposit the Balance of Funds
Deposit the rest of the down payment and closing costs after you've checked out the home to ensure it meets your expectations and when your loan is ready to close. Some considerations here include:
- Bring a certified check payable to escrow. You can't deposit cash or a personal check. Personal checks are usually only acceptable if there's adequate time for them to clear prior to closing.
- Expect escrow to pad the amount. You should receive a refund of some of the money 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 a certified check.
Escrow closes when the title company receives confirmation from the Recorder's Office that the documents have been recorded. This date will usually be a few days after you've signed your escrow and loan documents. Same-day closings rarely happen. General recording rules include:
- Your property deed, the seller's reconveyance, and the deed of trust will record in the public records.
- You'll receive the original deed in the mail weeks after closing.
- The title company will notify your agent when your transaction records, and your agent will call you.
- Unless your contract specifies otherwise, the property is yours after recordation.
That's it. You're done. Change the locks immediately, and enjoy your new home!