Are you ready to buy a home?
FIND A REALTOR®
What’s the difference between a real estate agent and a REALTOR®? All real estate agents, by law, are licensed. Real estate agents who belong to the National Association of Realtors (NAR) use the official designation, REALTOR®.
NAR members are held to higher standards than those mandated by law and must follow the organization’s professional code of ethics. If they don’t follow the rules, they’ll be booted from the association and may not use the REALTOR® trademark.
As a buyer, you’ll be looking for representation from a buyer’s agent. (The seller is represented by a seller’s agent or listing broker.) A buyer’s agent only represents you and your best interests. That means they look for potential issues with a home you want to buy and negotiate the sale on your behalf to make sure the deal is fair.
GET A MORTGAGE PRE-APPROVAL
Getting a loan pre-approval, before any other step in the home buying process, is a good thing. It demonstrates to your real estate agent and home sellers that a lender has reviewed your financial profile. An offer you make to a seller will carry much more weight than an offer from another buyer whose credit-worthiness has not yet been evaluated.
Here are some of the documents you’ll need to get pre-approved:
Borrower Identification: All borrowers and co-borrowers must provide a state-issued driver’s license, photo ID card or a valid passport.
Tax Returns: You’ll need to submit two years of tax returns and any W-2 forms if you work for a company. If you are self-employed, you’ll need a profit & loss (P&L) statement, federal tax statements and balance sheets for the last two years. You might also be asked to give a copy of your business license or a letter from your accountant.
Pay Stubs: You’ll need to provide the most recent 30 days of pay stubs or most recent P&L statement.
Bank Statements: You’ll need to provide two months of your most recent bank statements. Provide a complete statement, including pages that are blank. Be sure that your account numbers are clearly visible as well. Send copies of all your bank statements from your savings, checking, brokerage, 401k, IRA, Roth and 403b accounts.
Other Documents: Depending on the lender and your circumstances, you might need to provide the following: mortgage gift letter, bankruptcy discharge paperwork, divorce decree, pension statement, Social Security/disability statement and Home Owners Association (HOA) Statement. Also, if you own other properties, you may be asked for current mortgage statements and a homeowner’s insurance declaration. Whew!
At the end of this process, you’ll receive a pre-approval letter which is your “golden ticket” when it comes to home shopping. The letter shows to the seller that you are financially able to purchase their property. Depending on the market and the seller, some sellers will not entertain any offers without a pre-approval letter. What’s more, some sellers will not allow buyers to view their home in-person without a bank letter.
Since financial circumstances could change while your application is in underwriting, the approved amount that you’re asking to borrow could change; thus the letter is not a guarantee to lend.
FIND A HOUSE
Of course, the best part of the home buying process is looking at potential homes! With most houses up for sale listed on the internet, home shopping is easier than ever. However, all this information can make the home buying process overwhelming.
Here is how to narrow down your choices. First, be sure that you have a discussion with your agent about the neighborhood and features you are looking for, including your “wants” and “needs” for a new home. Does the age of the home matter? How many bedrooms do you need? Are you looking for a large backyard? Does it matter if you move to a busy street or do you prefer a cul-de-sac? Single garage or multiple? With most listings online, why bother having this conversation? Well, not all homes for sale are listed online. “Pocket listings” are homes for sale that are not yet publically available. Your agent might be able to suggest properties not yet posted.
Also, research neighborhoods with resources like Great Schools and Walk Score; they will help you uncover the quality of local schools, access to public transportation, and community amenities like nearby shopping centers and restaurants.
After you find a neighborhood that interest you, begin searching for homes based on your pre-approved loan amount. If it is a seller’s market, be cautious falling in love with homes that are out of your price range; the chances of buying at a lower price in a hot market is not very likely.
If the market is cool (buyer’s market), you will have better luck negotiating the final price, so you can search homes for listing prices a little higher than your pre-approved loan amount. Your agent can provide information about the current market temperature to help guide you.
When you see homes that interest you, be sure to let your agent know. They can see if there’s additional information available before you venture inside. If you are looking in an area where home inventory is low, your loan pre-approval will come in handy – you’ll be able to move quickly with an offer.
When viewing homes, be sure to balance your “needs” vs. your “wants.” Sure, you might want a swimming pool, but if you need three bedrooms and the property you are looking for only has two, are you still willing to move there? At the same time, look beyond homes with unfavorable paint colors or unkempt landscaping – these things can easily be remedied.
Put together a “short list” of homes you like the most. The easiest way to do this is to give each of them a rating from 1 to 10 before viewing them in person. Then rate each of them after the first visit. After viewing several homes, keeping track will help recall what you liked and didn’t like about each property, further narrowing your list as you go along.
MAKE AN OFFER
Sellers can list homes at any price. Of course, that doesn’t mean it’s in line with what the market will bear. Your real estate agent can help you formulate a fair, data-driven purchase offer by checking their local Multiple Listing Service (MLS) for prices of recently sold, similar homes in the neighborhood. You may find that asking prices are over-inflated or right on the money. Conversely, a review of recent sales data can help uncover an asking price that is on the low side – a potentially great deal.
You may have heard folks talk about seller’s markets and buyer’s markets. Just like all other products and services, real estate conforms to the economic law of supply and demand.
- A glut of housing inventory can drive prices downward, giving leverage to buyers (buyer’s market).
- The scarcity of inventory can drive prices up (seller’s market).
Market dynamics affect not only price but the amount of competition from other buyers. In a seller’s market with high demand and low inventory, houses for sale might receive multiple bids, further complicating matters.
When you are ready to present an offer, your agent will put together standardized Residential Purchase Agreement (RPA), a legal document that gives the seller a written notice of your intent to purchase the property. Some contracts are short and sweet with the intent to negotiate further while others are long and detailed.
The purchase contract will include: the property address, offer price, down payment amount, a mortgage contingency provision (see below), an earnest money deposit, a time limit by which the seller should respond to you, an expected date of completion (when you plan to take “possession” a.k.a. the move-in date), the name of the escrow or title agent holding the earnest money, items in the home you expect to be included (like appliances, light fixtures, etc.), another list of items that you are willing to pay for or have thrown in for the purchase price (like draperies, hot tubs, etc.), an agreement that the buyer is responsible for paying items like the utility bills, property taxes, etc. through the sale date and any other item your agent thinks is reasonable.
Seller Disclosures: Sellers must reveal any known issues with the property, additions or modifications like remodel projects.
Inspection Period- Allows you to have the condition of the home evaluated by a professional before completion of the sale. Inspectors will check the soundness of the structure and internal systems, usually within a few days of the date of signing the agreement.
An inspector will determine whether the roof is still in good shape, that there are no leaky pipes, look for damage done by rodents or pests, etc. No house is perfect, and inspectors will produce a report of the findings. If anything is out of line, like water damage, you can request that the seller fix the issue before going forward with the sale.
Appraisal: If you plan to finance the house with a loan instead of paying cash, your lender will require an appraisal of the home’s value. Since a lender can refuse to make a loan based on the value of the house, all well-constructed offers include an appraisal contingency. Meaning, you can back out of the deal should the appraisal come in low and financing falls through.
Counter Offers: Even if you make what you feel is a fair offer for the home, do not be surprised or offended if the seller makes a counter offer. This is normal and happens often.
Counter offers may deal with one or more conditions outlined in the original offer, things like price, the proposed move-in date, or appliances you’ve requested to keep with the home. Whatever the case, if you are okay with their counter offer, you are on your way. If not, it’s your turn to reply with a counter offer. The ball keeps bouncing back and forth until both parties agree to all conditions (or disagree, in which case it’s time to move on to the next house that interests you).
Appraisal: A professional appraiser determines the current market value of the property. As mentioned above, lenders will insist the home is worth what you’re paying for it.
Homeowner’s Insurance: Shop around for best price and coverage. Be sure that you are familiar with what the policy will and won’t cover. Standard insurance will usually cover any damage to the house, but most will require a separate policy for floods or earthquakes.
Final Walk Through: The buyer has one more chance to view the home before closing day to see if the sellers did what they promised that they would do to get the house ready (repairs, all personal items removed, etc.)
Closing Day: Closings are held at the title/escrow company or attorney’s offices. This is when the note, deed, bill and title documents are signed. When all the paperwork is executed, proceeds are released to the seller.
