Buying Step 1: Are You Ready to Buy a Home?
Knowledge and experience are the keys to successful real estate transactions. The Internet is an enormous library of valuable real estate related information. Doing your research to gather knowledge as well as working with local REALTORS®, whose expertise and experience can interpret and guide you through the information, can be essential to your success in buying a home that is right for you.
Planning is one of the keys to making the home buying process easier and more understandable. With research and planning, you'll be able to anticipate requests from lenders, lawyers and other professionals, and you’ll move more easily through the home buying process.
Do You Know What You Want in a Home?
Whether or not you are a first-time home buyer, you need to ask why you want to buy. Do you need to move, or is buying an option and not a requirement? What property features do you want that you do not have now? Do you have a purchasing time frame?
Whatever your answers, the more you know about the real estate marketplace, the more likely you are to effectively define and achieve your real estate goals.
Once you get an idea of what you want in a home, it is very helpful and practical to talk to an experienced REALTOR® who knows the local markets, current market conditions and the many facets of the complex business of real estate. An agent can answer your questions, give you a realistic picture of the market and help you clarify your real estate goals.
Do You Have the Finances to Buy a Home?
It is important to get prequalified for a mortgage before you begin your house hunting quest. This way, you will only view homes you can afford and get excited about.
Homes and financing are closely intertwined. Financing is the difference between the purchase price and the down payment and is commonly referred to as debt or the mortgage. There are a many different kinds of mortgages and different lenders, so be sure to shop around to make sure you get the mortgage that best meets your needs and at the best price.
In addition to a down payment, purchasers also need cash for closing costs (the final costs associated with completing the transaction). Some mortgage programs not only allow the purchase of a home with no money down, but also underwrite closing costs.
While some people purchase with little or no money down, it means higher monthly mortgage payments, so most homebuyers choose to put down some cash.
As for closing costs, in buyer’s markets, it may be possible to negotiate an offer that requires the owner to pay some or all of your settlement expenses. Speak with a REALTOR® for details.
Get Your Financial House in Order - Establish Your Credit
You need good credit to get a mortgage. For at least one year prior to purchasing a home, you should assure that every credit card bill, rent check, car payment and other debt is paid in full and on time.
Prepare yourself for the complex adventure of buying a home: do your research, work with a REALTOR®, plan ahead, know what you want, what you can afford and establish your credit. This will make your real estate experience run more smoothly.
Buying Step 2: Get a REALTOR® When You Buy a Home
Real estate is a tough business with a steep dropout rate, and although many people have earned real estate licenses, only a small percentage of them actively help buyers and sellers.
Real estate brokers and salespeople who belong to the NATIONAL ASSOCIATION OF REALTORS® (NAR) are bound together with a strong Code of Ethics, extensive training opportunities and a wealth of community information. NAR members are routinely active in a variety of community organizations. Active community involvement provides REALTORS® with a better understanding of the area in which they are selling.
Why Use a REALTOR® When You Buy A Home?
Buying and selling real estate is a complex matter. At first it might seem that by checking local real estate magazines or Web sites you could quickly find the right home at the right price. But a basic rule in real estate is that all properties are unique. No two properties - even two identical models on the same street - are exactly alike. Homes differ and so do contract terms, financing options, inspection requirements and closing costs. Also, no two real estate transactions are alike.
In the maze of forms, financing, inspections, marketing, pricing and negotiating, it makes sense to work with professionals who know the community and much more. Those professionals are the local REALTORS® who actively serve your area.
How Do You Choose a REALTOR®?
Many communities have independent real estate agents and realty brokerages. You can find a local REALTOR® in local advertising, on REALTOR.com® and other Web sites, and by referrals from other agents, neighbors, lenders, attorneys, financial planners and CPAs. Recommendations of past clients can be valuable.
Many buyers interview several REALTORS® before selecting one to work with. These interviews are a good opportunity to consider such issues as experience, track record, market knowledge, marketing approach, professional network, representation, certification and fees.
What Should You Ask a REALTOR®?
- What services do you offer?
- What type of representation do you provide? Different states have different forms of representation: some agents represent buyers, some represent sellers, some facilitate transactions as a neutral party, and in some cases different agents in a single firm may represent different parties within a transaction.
- What experience do you have in my immediate area?
- What is your track record?
- What is your market knowledge?
- What kind of professional network do you have?
- What are your certifications/designations?
- What is your fee? Fees are established in the marketplace and not set by law or regulation. In some circumstances, a buyer agent might ask you for compensation in addition to his/her commission.
- What disclosures should I receive? State rules require agents to provide extensive agency disclosure information, usually at the first sit-down meeting.
What Should You Expect When Working with a REALTOR® to Buy a Home?
Your REALTOR® will explain the options available to you, describe how he or she typically works with individuals and provide you with complete agency disclosures (the details of your relationship with the agent) as required in your state.
Your REALTOR® will work with you to find listings and homes that match your requirements. You will get detailed information on current market conditions, financing options and negotiating issues that might apply to a given situation. But remember that since market conditions can change and the strategies that apply in one negotiation may be inappropriate in another, this information can vary from situation to situation.
During your time in the marketplace, your REALTOR® will keep you updated and alert you to each step in the transaction process. Agents will also help you find a conveyance lawyer, an inspector, as well as recommend other professionals in their network. Your agent will help you understand, evaluate, write and deliver offers and counteroffers.
Your REALTOR®’s expertise and experience is a valuable resource in a complex undertaking of buying a home. Your realtor will help you every step of the way.
Buying Step 3: Get Loan Preapproval
Few people can buy a home for cash. Most buyers, especially first-time purchasers, require a loan. Real estate financing is not just about getting a loan, it’s about getting the loan that's right for you. In other words, a mortgage with the lowest cost and best terms.
Get a Preapproved Mortgage
Start the mortgage process well before bidding on a home. REALTORS® can often recommend a mortgage source, or a mortgage broker who’ll shop around for you. There are many mortgage options and lenders so it pays to shop around. By meeting with lenders - either face to face or online - and researching loan options, you will find which programs best meet your needs and how much you can afford.
Preapprovals are also recommended for another reason: purchase forms often require buyers to apply for financing within a given time period. By meeting with loan officers in advance and identifying mortgage programs, it won't be necessary to quickly find a lender, do a check credit and rush into a financing decision that may not be the best option.
What is Preapproval?
"Preapproval" means you have met with a loan officer, your credit files have been reviewed and the loan officer believes you can readily qualify for a given loan amount with one or more specific mortgage programs. Based on this information, the lender will provide a preapproval letter, which shows your borrowing power. You can visit as many lenders as you like and get several preapprovals, but keep in mind that each one does a new credit check, and too many credit checks could adversely affect your credit rating.
Although it is not a final loan commitment, the preapproval letter can be shown to listing brokers when bidding on a home. It demonstrates your financial strength and shows that you have the ability to go through with a purchase. This information is important to owners since they do not want to accept an offer that is likely to fail because financing cannot be obtained.
How Do You Get Preapproval?
Real estate financing is available from numerous sources, including mortgage brokers, mortgage companies, banks, online lenders and, in some cases, individual REALTORS® themselves. A REALTOR® may suggest one or more lenders that are known to offer competitive programs and deliver promised rates and terms.
To get preapproval you must complete a written application and provide supporting documentation, such as recent pay stubs, rental checks and tax returns for the past two or three years if you are self-employed. During the prequalification procedure, a loan officer will describe the type of paperwork required.
A loan officer will carefully review your financial situation, including your credit report and other information, then suggest programs which most closely meet your needs
Doing your legwork and researching mortgages and lenders ahead of time, and getting a preapproved mortgage gives you a clear idea of what you can afford, tells sellers you are serious and means that you don’t have to rush the financing once you find a home that you want to buy.
Buying Step 4: Target Your Search, Look at Properties and Choose a Home
Millions of homes are sold each year. There's no shortage of housing options, but with so many choices the challenge becomes finding the property which best meets your needs.
The housing market is complicated because the stock of homes for sale is always in flux. Even if you could have a complete list of every home for sale at a given moment in a given community, such a list would become quickly obsolete as new homes become available and listed properties are sold.
In effect, buyers are looking at a dynamic market. So it is important to know as much as possible about the choices in preferred markets, and the way to do that is by working closely with a local REALTOR® who is familiar with local markets and current real estate trends. Also, REALTORS® have access to all homes on the market, including those that have not yet been advertised.
Determine What You Want in a Home
A home is more than just a collection of bedrooms and bathrooms. Several properties - each with four bedrooms, three baths, and the same price - may well have radically different designs, commuting distances, lot sizes, tax costs, interior dimensions, exterior finishes, neighborhoods, etc.
First, list the features and benefits you want in a home. Consider such things as pricing, location, size, amenities (extras such as a pool or extra-large kitchen) and design (one floor or two, colonial or modern, etc.).
Next, determine your priorities. If you can't get a home at your price with all the features you want, then what features are most important? For instance, would you trade fewer bedrooms for a larger kitchen? A longer commute for a bigger lot and lower cost?
Last, consider your future needs. If you'll need a larger home later on, maybe now is the time to buy a bigger house rather than moving or expanding in the future.
Target Your Search
Know what your want and target your search in preparation for working with a REALTOR®. NATIONAL ASSOCIATION OF REALTORS® (NAR) statistics show that a high percentage of buyers now research their options online and elsewhere for about six months on average before consulting a REALTOR®.
Basic targeting measures, such as general location and affordability, can help you refine your search and focus on homes that offer the most desirable features.
Target your desired neighborhood. All neighborhoods and communities have a unique character and value. One community may be well known for historic homes while another offers both suburban living with easy access to downtown office areas. Determine which neighborhood(s) will work for you so you do not waste time looking where you would not want to live.
Look for Homes
Your REALTOR® will find you home listings based on your criteria. You can also look for homes online, in local papers and real estate guides and by driving through neighborhoods that you’ve targeted.
Look at as many homes as possible both locally and online so you can make a sound decision when you choose a home. You may want to keep a file with information on each of the homes you like. Your REALTOR® can help you determine the pros and cons of the properties you are interested in.
If you are buying a condo, it is important that you and your agent review the strata minutes to determine whether there are any critical structural or mechanical defects. Also, take a close look at the current financial statements to make sure the finances are sound.
Choose a Home
A house is shelter. But a home is far more: it's where you live, relax, entertain friends, raise families, and work. A home is where you spend much of your life, so take your time to choose a house you can become your home.
Don’t make hasty decisions, especially about financing. Be sure you can really afford the home you choose.
Buying Step 5: Offers, Counteroffers and Negotiation
When you are ready to buy, you will need to make a written offer. REALTORS® have standard purchase agreements and will help you put together a written, legally binding offer that reflects the price as well as terms and conditions that are right for you. Your REALTOR® will guide you through the offer, counteroffer, negotiating and closing processes.
How Much Should You Offer?
You sometimes hear that the amount of your offer should be x percent below the seller's asking price or y percent less than you're really willing to pay. In practice, a successful offer depends on the basic laws of supply and demand: If many buyers are competing for homes, then sellers will likely get full-price offers and sometimes even more. If demand is weak, then offers below the asking price may be in order. Your REALTOR® will help you determine a suitable offer price and terms.
Terms and Conditions
While much attention is given to offering prices, a proposal to buy includes both the price and terms. In some cases, terms can represent thousands of dollars in additional value for buyers - or additional costs. Terms are extremely important and should be carefully reviewed; they may include an escrow deposit, contingency deadlines for inspection and/or mortgage approval, payment of closing costs, etc.
Contingencies and “Subject to” Clauses
Buyer offers often contain contingencies or “subject to” clauses that must be met before the contract is considered binding. This gives you time to take care of final details. Contingencies can include the following:
- approved financing
- buyer selling an existing home
- satisfactory home inspection report
- test results for environmental factors including radon, mold and water quality
- termite inspections
Work with your REALTOR® to determine which contingencies you should include for your home buying situation. You will likely be required to include a time clause, also called a kick-out clause, which limits the contingency to a short time period (say 12, 24 or 48 hours) should the seller receive another acceptable offer.
How Do You Make an Offer?
When a home is made available for sale the owner is essentially making an offer to buyers: for a given number of dollars and other terms you can acquire this home. Buyers, in turn, can respond with several options:
- accept the offer
- decline the offer
- make a counteroffer
The process of making offers varies around the country. Typically, you complete a written offer that the REALTOR® will present to the owner and the owner's representative. The owner, in turn, may accept the offer, reject it or make a counteroffer.
What is a Counteroffer?
A counteroffer is nothing more than a new offer with different terms. Offers and counteroffers reflect the back-and-forth activity of the marketplace. It's a common, efficient and practical process, but also one that may contain tricky clauses and hidden costs. Because of this, and because counteroffers are common, it's important for buyers to remain in close contact with a REALTOR® during the negotiation process so that any proposed changes can be quickly reviewed.
How Do You Negotiate?
No aspect of the home buying process is more complex, personal or variable than bargaining between buyers and sellers. This is the point where the value of an experienced REALTOR® is clearly evident because he or she knows the community, has seen numerous homes for sale, knows local values and has spent years negotiating realty transactions.
Real estate bargaining typically involves compromises by both sides. It's not war; it's not winner-take-all. Instead, negotiating should be seen as a natural business process: buyers should be treated with respect, and owners should never lose sight of either their best interests or their baseline transaction requirements, which must be met before the home can be sold.
There are a lot of considerations, not just price, in making and negotiating offers. This is where the working with an experienced REALTOR® can guide you to a win-win negotiation.
Buying Step 6: Home Inspections
An offer to buy a home can include a “subject to” clause that is dependent on a home inspection. Not all buyers elect to include this clause because they may be purchasing a new home that is already under warranty, they may know enough about homes and building that the inspection is unnecessary, or they may want to save money.
Home inspections give you a professional assessment of a home’s condition. With such a major purchase as a home, an inspection gives you peace of mind in knowing whether there are any deficiencies that need to be dealt with now or in the future.
When writing your offer, include a clause that purchase is contingent on a satisfactory home inspection. Also include a clause for a final preclose walkthrough to ensure the property is in the condition you have agreed to and that any required fixes have been made.
Types of Inspections
A number of inspections are common in residential realty transactions. They include
- structural inspections (which may also include the foundation, roof, boiler room, furnace, heating, plumbing, appliances, etc.)
- termite inspection
- property boundary survey
- preclose walkthrough
Structural inspections are particularly important. During these examinations, an inspector comes to the property to determine if there are material or physical defects and whether expensive repairs and replacements are likely to be required in the next few years. This is the kind of inspection discussed in this article.
Condos: Review Strata Minutes
For condos, it’s crucial for the buyer and buyer’s agent to closely review the strata minutes. The agent will often do this beforehand because they know what to look for. Any structural or mechanical issues and potential special assessments based on structural problems found in reviewing the strata minutes can be brought to the attention of the inspector in advance, so he or she can keep an eye out for these issues and for associated problems.
Finding an Inspector
Your REALTOR® should be able to advise you on which types of inspections you need and where to find a licensed inspector. You can also look in the yellow pages or online for home inspection associations and home inspectors. Be sure to shop around and find an impartial inspector, as this can often be an issue.
Be aware that new home builders or sellers may try to prevent inspections and make final settlement walkthroughs difficult by not allowing enough time to schedule and carry out an inspection. Be suspicious if the owner refuses to have an inspection done.
Time must also be allowed for you to receive and review the inspection report. You may choose to forego an inspection, but then you also choose to forego finding any issues that may cause major problems and expense in the future.
Inspections for a single-family home often require two or three hours, and buyers should attend. This is an opportunity to examine the property's mechanics and structure, ask questions and learn far more about the property than is possible with an informal walk-through. The buyer agent should be present so that questions and issues can be discussed and noted. The listing agent may sometimes be present.
After the Inspection
After inspection, the buyer may decide to proceed with the offer as is, make a counteroffer with terms that address any issues found in the inspection, or withdraw their offer.
Inspectors can also offer suggestions for making appropriate and cost-efficient repairs.
Final Walkthrough Inspection
Before you close on your property, do a final walkthrough to ensure everything is in the condition specified in the sale agreement and that any repairs that were agreed to based on the inspection report have been made as arranged.
Buying a home is a major investment and doing inspections gives valuable professional assessments that allow the buyer to make an informed decision on whether or not their investment has any significant defects.
Buying Step 7: Do a Title Search and Finalize Your Financing
Do a Title Search
After making an offer, you need to do a title search on the property you wish to buy. Your agent or a lawyer can do this for you. Typically, all homes listed on an MLS are required to have this done by the listing agent and your agent can obtain a copy. If not, title records are kept at local courthouses and detail real estate ownership (sometimes over hundreds of years) in the local community.
These records are important because they provide proof that the owner has valid, marketable and insurable title to the property they are selling. Equally important, such records enable buyers to provide proof of ownership when they in turn sell the property.
Title insurance is necessary because even though the history of property ownership has been checked, it's possible that the records contain errors, unrecorded claims or flaws in the review itself. Title insurance is paid at closing.
Finalize Your Financing
Often, the cost of real estate financing is greater than the original purchase price of a home (after including interest and closing costs).
Now that you’re offer has been accepted and there is valid title to the property you are purchasing, it is time to finalize your preapproved financing. Your mortgage broker or REALTOR® or loan officer can help you select the mortgage option that is best for you. Because there are so many mortgage options and lenders, it’s a good idea to shop around for a mortgage just as you shopped around for a home.
Buying Step 8: Get Homeowner Insurance
Homeowner insurance protects homeowners in the event of catastrophe. If something goes wrong, insurance can be the bargain of a lifetime.
Insurance and warranty coverage should be in place for the sale closing. Insurance policies and warranties have limitations and individual programs have different levels of coverage, deductibles, costs and "endorsements" (additional forms of coverage that may be available). For details, speak with REALTORS®, insurance brokers and home builders.
There are various forms of insurance associated with home ownership, including the major types listed below.
Title insurance: Purchased with a one-time fee at closing, title insurance protects owners in the event that title to the property is found to be invalid. Coverage includes "lenders" policies, which protect buyers up to the mortgage value of the property, and "owners" coverage, which protects owners up to the purchase price, i.e., protects both the mortgage amount and the value of the down payment.
Homeowners' insurance provides fire, theft and liability coverage. Homeowners' policies are required by lenders and often cover a surprising number of items, sometimes including such property as wedding rings, furniture and home office equipment.
Flood insurance: Generally required in high-risk, flood-prone areas, this insurance is issued by the federal government and provides coverage for both property and contents. Your REALTOR® will know what coverage you require.
Home warranties: Buyers of new homes want assurance that if something goes wrong after completion the builder will be there to make repairs. But what if the builder refuses to do the work or goes out of business?
Home warranties bought from third parties by home builders are generally designed to provide several forms of protection: workmanship for a short term; mechanical problems, such as plumbing and wiring, for a short term; and structural defects for a long term.
Home warranties for existing homes are typically one-year service agreements purchased by sellers. In the event of a covered defect or breakdown, the warranty firm will step in and make the repair or cover its cost.
Buying Step 9: Signing the Deal: Closing / Settlement / Escrow
It might seem as though once a sale agreement has been signed that the buying process is complete. Not only is it not over yet, but some of the most complex aspects of a real estate transaction now begin.
Once a contract for the purchase of a home has been accepted, a series of inspections and checks are typically required to satisfy buyers and lenders. REALTORS® can help buyers complete the transaction process by assisting with the many requirements found in a typical sale agreement. The REALTOR® also helps the buyer prepare for closing, that is, finalizing the sale.
What’s in a Sale Agreement?
A sale agreement sets a purchase price for the home and a series of terms and conditions. For instance:
- Contracts routinely depend on the ability of a buyer to obtain financing and/or sell their current home, which is why most sellers prefer buyers with mortgage preapproval letters.
- A growing percentage of transactions involve a home inspection, or a physical review of the home by a trained and independent observer. Generally the buyer’s agent arranges the inspections, which the buyer typically pays for.
- Lenders will establish numerous conditions before granting a loan. They will want a title exam, title insurance to protect against title errors, termite inspections, surveys and an appraisal to assure that the home has sufficient value to secure the loan.
When Should You Close?
With online transaction management now available, closings can occur within a week in some areas - at least in theory. In practice, it takes time to arrange financing, conduct inspections, obtain appraisals, locate replacement housing, contact movers, pack and actually move.
While instant closings are not practical, neither are closings too far in the future. The problem with closings much past 60 days is that loan rates are difficult to lock in. If mortgage rates go up, it's possible that the buyer will no longer be able to afford the home and thus the deal may fall through.
The result of these considerations is that most homes close 30 to 45 days after a sale agreement has been signed.
What Happens during Closing?
Before closing, buyers typically have a final opportunity to walk through the property to ensure that its condition has not materially changed since the sale agreement was signed.
“Closing” is also known as "settlement" or "escrow." It is usually a brief office meeting to sign the paperwork needed to complete the sale transaction. All necessary papers have been prepared by closing agents, title companies, lenders and lawyers. This paperwork reflects the sale agreement and allows all parties in the transaction to verify their interests.
Settlement is increasingly computerized and automated. One of the best parts of settlement is that there is very little that buyers and sellers need to do. In many cases, buyers and sellers don't need to attend a specific event; signed paperwork can be sent to the closing agent via overnight delivery. Some areas have services that allow most of the transaction to be completed online. If buyer and seller are present, they may be at the same table, or they may complete their papers separately.
Whatever the process, the outcome of the closing is the following:
- Property title is transferred from seller to buyer.
- The buyer receives the keys.
- The seller receives payment for the home.
- From the amount credited to the seller, the closing agent subtracts money to pay existing mortgage and other transaction costs.
- Deeds, loan papers, and other documents are prepared, signed and filed with local property record offices. Usually the closing agent also completes the paperwork needed to record the loan.
- Transfer taxes are paid and other claims settled (including closing costs, legal fees and adjustments).