Basic Steps to Home Purchase
The more informed you are, the simpler your home purchase process will be. To help familiarize you with the process, here are some of the steps you are likely to encounter.
It may seem backwards to shop for a mortgage first, before you shop for the house; however, there are several good reasons to consider this:
- First, before your shop for a house, it's best to know how much you can comfortably borrow. This is directly related to how much house you can afford.
- Second, shopping for a mortgage first will allow you to get "pre-approved" for the amount you'd like to borrow. This means the lender has reviewed your credit, income and assets and has agreed to lend you the funds subject to terms and conditions. Sellers like pre-approved buyers because it is more likely the deal with go through.
Look at the selling prices, not the asking prices. You can get the information from a local real estate agent, local newspaper or town/county government. There are also on-line resources to review selling prices. Concentrate on homes in the neighborhoods you are interested in living in and the size and style you want. Try to locate at least 3 closed sales that are similar to homes you would be interested in purchasing to help you determine a fair offer price when you locate a home.
A down payment is typically 5%-20% of the purchase price of the home. Home programs that are targeted to first time home buyers or low to moderate income borrowers may be available with little or no money down. Try to put away as much as possible to cover a down payment, closing costs and provide a cushion after closing for emergencies.
You are not required to have a real estate agent, but a good agent can help you through the buying process and save you time and money. Ask your friend for referrals, read reviews and check with your state licensing board to make sure the agent is properly licensed and doesn't have any complaints filed against him or her. The goal is to find an agent you can feel comfortable with.
Be practical, take your time and look at a wide variety of houses. Don't feel pressured to make an offer on the first home you see. Weigh the pros and cons of each home and refer back to your research on selling prices before making your offer
You don't have to offer asking price, but if you offer too low a seller may decline your offer. Your real estate agent should be able to help you determine a fair offer based on market conditions and the seller's circumstances. If the house has been on the market for a long time, the seller may be more willing to negotiate.
A good faith deposit is typically required when making an offer. This shows the seller that your offer is serious. The amount of the deposit can vary based on the custom in your location. Often a small initial deposit is presented with the offer, with an additional deposit due after acceptance or after a home inspection contingency is satisfied.
Now that you have made an offer, you need to wait for the sellers and their agent to reply to the offer. If the sellers think your bid is too low, the sellers may counter-offer at a higher price. The proposal may go back and forth a few times before all parties come to an agreement.
The Seller's agent will send the contract to your agent for review. Read it carefully. You may want to consult a real estate attorney regarding the final contract terms before you sign.
Go over the contingencies carefully and ensure any contingencies that are important to you are inserted in the contract. Common contingencies include a financing contingency, which allows you to void the contract if you are unable to obtain financing, an appraisal contingency which allows you to void the contract if the appraisal comes in less than the purchase price and an inspection contingency, which allows you to void the contract if the home fails an inspection. The closing date will also be listed as a contingency. You may add any contingency you choose, but keep in mind the seller may reject the contract if he or she is unwilling to accept those terms. In some states, the contingencies are included in the offer. Be mindful of the dates associated with the contingencies. If you have a financing contingency and are denied after the financing date in the contract, your ability to void the contract may be terminated and you could lose any contract deposit you have paid.
Once all parties have agreed to the terms of the contract, the final agreement must be signed by everyone. In some cases, an additional contract deposit is required. The contract deposit goes into an escrow account with the real estate agent or an attorney. The seller or the buyer does not have access to these funds prior to the closing. If you breach the contract, it is likely the seller will be entitled to any deposit monies in escrow.
If you were already pre-approved with a lender, contact the lender and submit the signed purchase agreement as soon as possible. Depending on the date of your documents, you may need to update your application or financial information that was provided at the time of pre-approval. If you were not pre-approved, shop for a lender and submit your application as quickly as possible. Time is of the essence if you have contingencies in the contract with associated dates. A violation of the contingencies could result in a forfeiture of any deposit funds.
Finalize your loan amount and terms with the lender once the final purchase price has been determined. Closing costs can vary based on loan program, the amount of down payment, your credit score and the type of property you are purchasing. Within 3 business days of submitting a complete application, the lender must provide you with initial loan disclosures and send them to you. One of these is the Loan Estimate, which lists all of the costs you will be expected to pay as part of the transaction. The lender must also provide you with the booklet "Your Home Loan Toolkit". This can be a valuable tool to help you understand the disclosures. Don't be afraid to ask questions. Your loan officer should be able to review the disclosures with you and answer any questions about the disclosures or the mortgage process.
Respond quickly to any requests for additional information or documentation.
Lenders will typically allow you to float or lock the interest rate. A rate lock is your protection against a rate increase, but if rates go down, you will not get the lower rate. In most cases, the rate must be locked a week to 10 days before closing. Pay attention to what is happening in the financial markets to determine when it makes sense to lock.
Any changes during the course of processing your loan may require additional disclosures. Review each Loan Estimate carefully and ensure you understand the reason for any changes.
Once all conditions of your loan are satisfied, the closing can be scheduled. The lender is required to provide a Closing Disclosure to you a minimum of 3 business days prior to the closing. The Closing disclosure outlines all fees and charges due at the closing and a required cash to close amount. Compare the Closing Disclosure to your most recent Loan Estimate. The "Your Home Loan Toolkit" booklet received with your initial disclosures is a good resource when reviewing the closing disclosure.
Obtain a bank check for your required funds to close the day before closing. Most closing agents will not accept a personal check or cash.
The day of the closing, all loan documents will be reviewed and signed and funds disbursed to the appropriate parties. The seller will transfer the deed to you at closing and the transfer will be recorded in the local land records.