The Home Buying Process

Explained from A to Z

Most people don't pay cash when they buy a home. If this was a necessity then very few would ever be able to afford to buy a home. Instead, you get a loan from a bank and make payments on the loan every month for 15 - 30 years or until the loan is paid off.

Most homebuyers also make a cash down payment of 3 to 20% of the sale price. The higher the down payment you can make, the easier it is to get a loan, the lower the interest rate is, and the lower the monthly payment is. But if you can't afford to make a down payment (or don't want to), you have the option of selecting a down payment assistance program.

Get Pre-Approved – First order of business when deciding to buy a home is to get pre-approved for a loan. Notice that I did not say pre-qualified! What’s the difference?  A pre-qualification is just a letter stating that you’ve spoken to a mortgage lender and based on the information that you’ve given them, you may be qualified to buy a home. A pre-approval is a letter stating that based on the information received through a credit check and asset verification you are pre-approved for a loan. I always recommend getting pre-approved as oppose to pre-qualified. This way you can avoid wasting time searching for something if it never was attainable in the first place.

Find a REALTOR – Click here to find a great realtor! OK seriously, finding a great realtor to help you in your home search is critical. Most people don’t realize it but there is actually a difference between a realtor and a real estate agent. A realtor is held to a much greater standard and code of ethics. A real estate agent is just a person with a real estate license.

Go House-Hunting – This is the second best part of the whole process (getting the keys to your new home is the best part). Now that you've had your credit pre-approved and know how much you can afford, it's time to go house-hunting.  You may look at one house or two dozen before you find the one that's right for you.  Just keep an open mind, and focus on the things that are really important to you, and you're sure to find a place where you'll feel at home.

House-hunters should keep in mind the familiar adage about the three most important features of a home: location, location, location.  That's because finding the right home for you and your family has as much to do with the neighborhood as with the home itself.  In fact, you'll probably notice during your search that a home in one area costs much more than a similar home in another. Factors like safety, school quality, and proximity to shopping and entertainment all contribute to demand for homes in a given neighborhood. 

Beyond price, what you look for in a neighborhood probably has a lot to do with your personal situation.  How far are you willing to commute to work?  How close do you want to be to family and friends?  Do you have young children who would enjoy a nearby playground?  Picturing your day-to-day life in a certain neighborhood is a good way to predict whether you will feel comfortable there. 

You may want to look beyond the traditional detached single-family home.  Condominiums, town houses, and duplexes can be more affordable options, especially if you're looking in a densely populated area.  These types of housing may not offer as much yard space or privacy as single-family homes, but those may not be as important to you as the chance to own a home in the neighborhood of your choice. 

If you've looked and looked for your dream home without success, or if you want to be the very first owner of a brand new home, consider building.  You'll have more opportunity to customize the home's features and design, more up-to-date appliances and building materials, and usually a builder's warranty to cover problems that come up in the first year. 

Make An Offer - You’ve been out house hunting for weeks, you feel as though you’ve seen all that you can see and now you want to put in an offer to purchase the home of your dreams. So how much do you offer the seller? Your REALTOR should give you a CMA (Comparative Market Analysis). This is a list of similar homes nearby that have sold recently, and for how much.  Although you can't directly compare the home you want with the homes on the list without ever having been in them, you can use the list of comparable sales to get a general idea of the neighborhood's price range. 

In addition to sale prices for other homes, there are several ways you can determine a good amount to offer:

• The condition of the house.  Is the home in move-in condition, in need of paint and other cosmetic improvements, or a fixer-upper that needs some real work?
• The market.  If you are in a buyer's market — where there are more homes for sale than there are people to buy them — prices are probably stable or falling.  If you are in a seller's market — where there are more buyers looking for homes than there are homes for sale — prices are probably moving upward.
• Your threshold.  If you've gotten a credit pre-approval, you know how much you can borrow for your home purchase.  Of course, you may not be comfortable paying as much as you've been approved to borrow, so think carefully about your financial situation before making an offer.

Get a Home Inspection and Appraisal - When you are making what is likely the largest investment of your life, you should know as much as possible about what you are buying.  That's why it's a good idea to have a home inspected before you make your purchase.  Most purchase contracts contain provisions for a home inspection to be performed within a certain timeframe, and sometimes they specify what action the buyer and seller may take if problems are uncovered. 

It's very important that you choose a qualified inspector who has plenty of experience with residential homes.  Contact a national or state association of home inspectors to find out what certifications it requires for membership and if there are any members in your area.  You may also want to ask your real estate agent for a list of reputable companies. 

At a minimum, the inspector should examine the following:

• Exterior structural components, including the foundation, roof, siding, and chimney.
• Interior structural components, including the basement or crawlspace, attic, flooring, and ceilings.
• Major systems, including heating, cooling, plumbing, and electrical.

You should make every effort to be present during the inspection so that you will have an opportunity to ask questions and see first-hand what the inspector looks at.  You should receive an inspection report with descriptions, and possibly photographs, of any problems with the home. 

A real estate appraisal helps to establish a property's market value (the likely sales price it would bring if offered in an open and competitive market).

Your lender will require an appraisal when you ask to use a property as security for a loan, they want to make sure that the property will sell for at least the amount of money that they are lending.

Don't confuse a comparative market analysis, or CMA, with an appraisal. Real estate agents and realtors use CMAs to help home sellers determine a realistic asking price. Experienced agents often come very close to an appraisal price with their CMAs, but an appraiser's report is much more detailed and is the only valuation report that a bank will consider when deciding whether or not to lend the money.

Find an Attorney - The legal consequences from mistakes or omissions during the buying process can cause major headaches. You might have heard differing opinions about whether or not you need a residential real estate attorney. It’s a good idea to get one.  

An attorney who specializes in residential real estate will review your purchase contract, work with your mortgage loan officer, the seller’s attorney and both agents to make sure that the dates are set for home inspection, mortgage commitment and other contingencies.

Your attorney will also review important documents, including the deed, bills of sale (for personal property, such as appliances) legal descriptions, mortgage loan documents, plat of survey, and title and title insurance policy. The attorney should attend the closing.

Only an experienced professional attorney, who is closely familiar with these documents, can catch all the problems or mistakes and save you future expenses to correct them. Once you begin to go through the process and understand the steps and procedures, you will be glad that you have another seasoned pair of eyes looking out for your legal interests. Click here for a series of questions to ask your prospective real estate attorney.

The Closing – You’ve found your home, agreed on a price with the seller, had the home inspected and appraised, and now you’re ready for the closing where you will officially take ownership of the property.  Welcome to the end of the home buying process and the beginning of your homeownership journey.

The closing date will depend on when the seller is ready to move out, when you are ready to move in, and when all of the mortgage details have been finalized. 

Tip: You may want to request a closing date near the end of the month in order to minimize the amount of interest you have to prepay on your mortgage. 

Despite all the new technologies that are streamlining the mortgage process, the closing phase remains very paper-intensive.  You will have to review and sign a hefty stack of documents, some of them in duplicate and triplicate.  You may also have to pay for any closing costs, including:

• Lender fees, such as an appraisal fee, credit report fee, origination points, and discount points
• Third-party fees for services not provided by your lender, which may include a settlement fee, title insurance, and attorney’s fees
• Prepaid items that must be paid to your lender in advance, such as prepaid interest, hazard insurance, and deposits to set up an escrow account

After all of that is said and done… it happens… you finally get to receive the keys to your new home…YOU’RE A HOMEOWNER!!!

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