10 Steps to Choosing and Purchasing Your Home
1. Find a Qualified Buyer’s Representative
The first step is to find a Qualified Buyer's Representative. In recent years, most states have changed their laws regarding agency and now allow the buyer to be fully represented by their agent even though the seller pays the commission. That agent is known as a Buyer's Agent. Before this change, a buyer's agent represented the seller and the buyer had no real legal representation during negotiations. Most states realized that this was unfair and we now have full representation for the buyer. All the buyer has to do to get this free representation is sign a document making one agent the exclusive agent for that buyer. This document can certainly have an expiration date on it. There is simply no good reason whatsoever for a buyer not to have his own Buyer's Agent. There is absolutely no downside to having a Buyer's Agent. And it's free service!! The Buyer's Agent gets paid from the seller's proceeds, but has a legal duty to protect the buyer during all negotiations.
So, don't call 15 different listing agents about their listings. Get yourself a Buyer's Agent and let them do all the work for you. They can set up searches in the MLS based on your criteria that will send you email notifications of properties that match your parameters. They can show you all the properties that you want to see. We have access to the entire MLS. They will write the contract for you with all sorts of special clauses designed to protect you more than the standard contract. They will negotiate with the listing agent on your behalf, help you find a lender, set up home inspections, handle all of the paperwork, set up closings, and make sure everything gets done. Remember, they are not trying to sell you a home like a listing agent; they are trying to help you buy your dream home.
Well that's step one of the 10 steps. Now a plug for myself. I have the ABR designation for realtors. This means that I'm an Accredited Buyer's Representative. That designation comes from REBAC, the Real Estate Buyers' Agent Council, a subsidary of the National Association of Realtors.
2. Lender Assesses Your Credit and Finances
Preapproval – Determine what monthly payment you can afford and are comfortable with and get pre-approval letter
Shop rates, fees, and types of mortgages
Step 2 is to get a lender and get qualified. Make sure you start talking to lenders before or while you start looking at homes. We can suggest some that our clients have had success with. Your lender needs to figure out how much you're qualified for and what kind of rate that your credit score is going to give you. This is going to have the biggest effect on your monthly payment. The lender that does this can also give you a prequalification letter. You are not obligated to ultimately use that lender. You may choose another later. But having a prequal letter is almost a prerequisite for making an offer on a home these days. For good realtors, it's a prerequisite for them showing you property. Ultimately, it also makes your offer stronger than someone who is not prequalified.
Choosing the right lender can save you a lot of money. A good buyer's agent can certainly save you lots of money during the negotiating process. It's up to you to negotiate with the lenders until you get one that you're comfortable with and one that is willing to cut their fees to help you. From my experience, they will never give you their best deal the first time. Kind of like a car dealer, you have to haggle. I know it's a pain, but a lower interest rate can save you money every month for 30 years!! That adds up. Not only that, but they will also negotiate their fees. They have ways of cutting the application fee, the appraisal fee, the credit report fee, the origination fee, etc. Here's how you do it. You must go to a minimum of 3 lenders. Get a quote from the first one and take it to the other 2. The quote is called a good faith estimate. The other 2 will beat the first one. Then you take those 2 back to the first one, and so on. You can do this a couple or 3 times until they run out of negotiating room. During this time, you will get a feel for who you can trust. Also, require them to give you quotes on the exact same kind of loan with the same parameters. They will try to play with attorney fees and insurance fees to make their quote seem better. These fees for other things are on their good faith estimate. Make them all play by the same rules by using the same numbers for the fees that aren't theirs. Having said that they should all play by the same rules and use the same kind of loan, let me say that some lenders can be more creative than other ones. There are some great programs out there for first time buyers, teachers, doctors, etc. All my lender friends are going to hate this. They don't want you to know that you can negotiate.
3. Assess Your Wants and Needs
Tell us about your family and your real estate goals
Single family, condo, # beds/baths, sqft, garage, lot size, age, style, neighborhood, schools, etc
Step 3 is where you tell your buyer's agent exactly what you're looking for. We do an assessment of wants and needs. What are your goals for buying a home? Do you want a single family home, condo, townhome? How many beds and baths do you need? Is square footage or lot size important to you? Do you need a garage? How important are the age, style, neighborhood, schools, etc? Refining the search is most important in buyer's market like the one we're in now. There's too much to choose from. You should be able to find exactly what you want. That will change when we move to a seller's market. Buyers will be so accustomed to having so much to choose from, they won't believe it when the agent tells them that there's only 3 homes in their price range to choose from and they can forget about all the other parameters.
Once we know more about you and your family and what you're looking for, we can search the MLS and find a list of homes that match your criteria. Moreover, we can set up an automatic search that will notify us by email as soon as any new listing comes on the market that matches your criteria. This automatic notification is extremely important in a seller's market so that someone else doesn't beat you to the punch.
4. Shop For a Home
MLS search criteria
Auto-email notification of new listings that match your criteria
Viewing homes – no more than 5 in one day
Lead Based Paint Disclosure
HOA(Home Owners Association) or Regime and their fees
Once you have expressed your wants and needs to your realtor in step 3, he can set up an autosearch for you on the MLS. This will automatically email you listings that match your criteria. This is a much better tool than the average internet search. Unlike the average internet search, it will sort out the active listings that are currently under contract. It will also notify you of price changes on properties that match your criteria. As you look through the listings, you can decide which ones you'd like to take a look at. Your realtor will then set up appointments for the showings. It's best not to look at more than 5 in any one day. It gets a little confusing if you try to do more than that. After each home you look at, you should decide whether or not you like it better than the best one you have seen so far. That way you're only comparing 2 homes, the one you just looked at to the best one you've seen previously. Once you've decided on a home, your agent will get you a copy of the Seller's Disclosure Statement and, if applicable, the Lead Based Paint Disclosure. The Seller's Disclosure Statement is required from all sellers. It is a list of any defects in the property that the seller has knowledge of. The Lead Based Paint Disclosure is only necessary if the home was built prior to 1978. The agent should also check to see if there are any regime fees or Home Owners Association(HOA) fees or covenents. Condo regime fees may include things such as insurance, pest control, cable, etc. Once you have decided to make an offer on a home, we can move to step five which is writing the contract and negotiating the offer.
5. Negotiate Terms of Contract
Contingencies: financing, appraisal, inspection(buyer’s cost), termite letter(seller’s cost), home warranty, insurance
Closing costs, pre-paids, buy-downs
Counteroffers and amount of time offer is good for
Ratified contract – legally binding agreement
Once you have finally chosen a home to make an offer on, you will need to sit down with your realtor and fill out a contract. Most of it is standard, but filling in the blanks is an art best dealt with by a highly competent realtor. Many things are negotiable. Most important may be price. Where you start may depend on many factors. How badly do you really want this particular home? How well is it priced? What can you afford? What kind of market is it, how many other people are looking at this home, and how many other homes would you be satisfied with? It's possible that making a strong price offer will help you acquire other negotiations such as closing costs.
The next negotiable item is the amount of earnest money. This will be held in a 3rd party escrow account until closing and credited back to you then. If anything out of your control causes the contract to fall through, you will be refunded your earnest money. The amount depends a little on the price of the home. The more you put down, the more serious you seem to the seller.
Most of the time, there are many contingencies put in the contract to protect the buyer. Examples of these include contingent upon financing, appraisal, inspection, termite letter, and your ability to obtain insurance. You certainly don't want to be forced to buy the property if the bank won't give you a loan, or if it doesn't appraise for as much as the bank will give you, or if the condition of the property is much worse than you thought, or if it is found to have termites, or if you cannot obtain insurance at a reasonable price. Of course, your contract looks weaker to a seller as you increase the number of these contingencies.
Another very important negotiable item is closing costs and prepaid items. These generally costs a buyer about 3% of the purchase price. Closing costs include money to the bank for the loan and money to an attorney for title searches, title insurance, and paperwork. Prepaid items include insurance and taxes. The bank wants you to pay for your insurance a year in advance and 3 more months on top of that. They also want you to pay some of your property taxes in advance. In fact, part of your monthly payment will include a portion to be set aside by the bank so they can pay your T&I for you at the end of the year. This is called an escrow account. The amount of extra prepaids that they collect at closing for T&I will be held in this escrow account to protect the bank. On a $200,000 home, 3% would amount to $6000. That can be a lot of money for buyers to come out of pocket with at closing. One way to alleviate this burden at closing is to have the buyer get a loan for $206,000 and have the seller pay for the buyer's closing costs and prepaid items. Essentially, the buyer has financed these extra costs into the cost of the home.
Another negotiable item is a home warranty. Many sellers offer this upfront. Most others are willing to buy one for one year for the buyer.
Another item that some sellers offer is a buy-down. For a certain amount paid to the bank, the seller or buyer can buy down the interest rate for the either one year, two years, etc. This can be important to a buyer that really needs to keep his monthly payment down for the first year or two.
Once the contract is written up and sent to the listing agent and the seller, they can either accept your terms or make a counteroffer. You can then accept their counteroffer or make one of your own. Once both sides have agreed to all items on the contract, we say that it is ratified and it becomes a legally binding agreement. Once this has been achieved, you can move on quickly to step 6 of purchasing a home. That will be obtaining a mortgage. Hopefully, you have already laid some of the groundwork for this.
6. Obtain a Mortgage
Must be obtained within time frame in contract. Apply immediately upon ratification.
Banks are better than brokers
Types: Fixed, adjustable(ARM), amortized(Principal and interest), interest only, PMI(private mortgage insurance), 80/20 and other piggybacks, VA, FHA
Don’t finance furniture, cars, or other major purchases during approval process
Good Faith Estimate
Once you have a ratified contract on a home, you must start working on obtaining your loan. Actually, you should have laid some of the groundwork for this in step #2. There will be dates on the contract that will restrict your time frame for obtaining the loan. Try to obtain your loan directly from a bank. Using mortgage brokers can lead to all sorts of problems and extra fees and should be avoided if possible. There are many types of loans. The most popular is a 30 year fixed amortized convential loan. Your monthly payment will include interest to the bank for the loan and some principal payment that lowers the amount of principal that remains to be paid. At the beginning of the loan, an extremely large percentage of your payment is interest while only a very small portion goes to paying down the principal. This will change every month. Over time, you will finally reach a point where your principal portion is larger than your interest portion. Another type of loan is one with an adjustable interest rate, also known as an ARM. Initially, the interest rate is lower than a convential loan, but after a predetermined time(3-5 years), the rate fluctuates within certain guidelines. Since the rate can go up and change your monthly payment, this can be quite risky. However, it can be the right thing if you know that you're going to sell your home before the rate changes. Even risker is the interest only loan that does not include any amount to reduce the principal payment. This is only of interest for those willing to bet that the value of their home is going to significantly increase while they own the home.
Generally, banks like for you to make a down payment of at least 20% of the purchase price. However, with homes at $200k and above, this would mean a $40k down payment. Since most people don't have that kind of money to put down, we are seeing loans for as much as 100% of the purchase price. In the case where you have less than 20% to put down, the bank will penalize you by forcing you to pay an extra monthly fee added to your payment that is called Private Mortgage Insurance(PMI). This makes them feel a little better about the fact that they are loaning you such a high percentage of the purchase price. This extra fee will go away once you have made enough payments to reduce the amount of principal left on the loan to 80%. If you make your payments on time, you can possibly apply to have the PMI removed before that point. Some banks have programs that reduce or waive PMI if you meet certain restrictions or if the property qualifies. One of these is called the Community Committment Program.
Who the bank gets the money from can be important. They may be a local bank and have the ability to make the loan themselves, but more likely, the money will actually come from higher lending institutions such as Freddie Mac, Fannie Mae, or FHA. FHA has become a very popular type of loan in the last year. In the past, it has been reserved for those with less than stellar credit and had lots of restrictions and fees. However, FHA has relaxed many of the restrictions and you can usually get a lower interest rate.
Now, here's the hard part. All lender fees are very negotiable. If you don't make them compete with each other, they will charge you far too much. It's unfortunate, but that's the way it is. They will reduce their fees and possibly their rates if you have them compete with each other. Here's how you're going to do that. Go to one and get prequalified and then they will give you an estimate of the costs and the monthly payments. Once you have that Good Faith Estimate, you take that to 2 other lenders and you ask them what they can do for you. They will beat the numbers given to you by your first lender, even if your first lender is your best friend. You then take the new good faith estimates back to the first lender and the first lender will reduce their price to beat these new estimates. You can do this about 2 or 3 times until they won't budge anymore. Then you select the best deal that works for you, keeping in mind who you are most comfortable with. Everyone hates this part of the process, but it will save you money.
Finally, once you have a ratified contract, don't finance any major purchases such as furniture or cars during the approval process. This could have a negative effect on your qualification for a loan.
7. Prepare for the Close (Transfer of Ownership)
Hazard and/or Flood Insurance
HO6 policy for condos
Hire attorney to search records, record documents, set up survey if recent one doesn’t exist
Make appointment for closing
Negotiate Home Inspection repairs and re-inspect
Set up transfer of utilities, change of address
HUD Settlement Statement
Final walk through
As soon as you get a ratified contract in step #5, you can begin working on the mortgage in step #6 and preparing for the closing in step #7. As well as obtaining a mortgage, you need insurance and a closing attorney. The bank will require a certain level of insurance on the home. You should certainly shop around for insurance. Their rates will vary widely. A new thing that has started recently is that they charge you now based on your credit score as well as the cost to replace the home. You do not have to insure the land of course, but you will need liability insurance as well as hazard insurance. Liability insurance covers you in case someone gets injured while on your property. Hazard insurance covers fire, wind, hail, etc. You may need separate flood insurance as well depending on what flood zone the property is in. If you are buying a condo or townhouse, the insurance may be included in the regime fee. If so, you will still need a policy to cover the personal property contents you have inside the condo.
After you have negotiated the home inspection repairs, you should arrange to hire a closing attorney. This should be someone who does a lot of real estate closings. They will search the court records of the property, record all the documents involved, set up a survey if a recent one doesn't exist, coordinate with your lender and create the HUD settlement statement that shows all of the costs involved. Many times, the closing attorney will also have a title insurance company that will provide you with title insurance. This covers you and the bank in case there was something overlooked in the court records. Many of the attorney's fees are negotiable as well. Don't forget to actually make an appointment with the attorney for the closing. They get booked up near the end of the month.
As you get near the closing date, make sure to set up the transfer of utilities and change your address with the post office.
On the day of closing, you should do a final walk through of the home with your realtor to make sure everything is alright before you go to closing.
After we get a ratified contract, many of these steps will have to worked on simultaneously. This step involves hiring the closing attorney and actually setting up the closing. I don't recommend you do this until you are past the home inspection phase. You don't want to put the attorney to work until you are past that phase. Once both sides have agreed on the repair addendum, call your attorney and set up a closing date and time. They get busy toward the end of the month when most closings occur and you want to go ahead and book an appointment. Of course, you should have already called a few and found out their prices and found who you were most comfortable with. They will probably be providing you with title insurance as well, so ask them about that. Most closing attorneys own a title insurance company. It seems like a conflict of interest, but apparantly it's not. It just makes things easier. Title insurance is required by your lender. They are going to want to make sure they have title to the property even if the attorney missed something in the records.
The attorney will do a title search and make sure that there is a clear title to be conveyed. He will also record the sale in the court records after closing. His fees are part of that 3% of purchase price for closing costs and prepaid items. Attorney fees and lender fees make up most of the closing costs.
The attorney will coordinate to pay your chosen insurance company and the property taxes. He will also prepare the HUD settlement statement that shows all final costs to both the buyer and seller. You should receive this HUD statement for review at least 24 hours before closing, but it depends on how well your lender gets the closing instructions to the attorney. On the HUD statement, you will find the final amount that you are supposed to bring to closing. This will have to be in certified funds usually made out to the attorney. You also need to have your driver's license at closing.
Your realtor doesn't have to be at closing, but should make every effort to be there in case there are problems. Finally, you should make sure you get all the keys to the property and any instructions about security alarms.
After the closing, you can move into your new home. In step #7, you should have already set up the transfer of utilities and change of address. Once you move in, you may want to change all the locks. Who knows how many people might have keys to your home!?
Finally, if you are going to live in the home, make sure to apply for the 4% property tax rate. Many times the county will just charge you the 6% rate for renter occupied property if you don't make this application. That makes your taxes 50% more than they should be. Many people forget to do this. If you are over 65 years old, you can also apply for the Homestead Exemption which also reduces your property taxes.
Keep all your paperwork for your home in one place so that you can retrieve it when necessary.
You did it! You're going to get a big tax break now. You get to deduct the interest that you pay each month off of your federal tax return. In the first few years of your loan, the majority of your payment is interest. This can be a lot of income tax savings. You may also get to deduct some of your closing costs and property taxes.
Keep any and all paperwork for your home. When you go to sell it, you won't have to pay any income taxes on the gain as long as the gain is less than $500,000 for a married couple($250,000 for a single person) and you have lived in the home for at least 2 of the last five years. It's the only thing I know of where you can make that kind of profit and not have to pay any income taxes. You can buy a home, sell it in 2 years, and make a huge profit without paying income taxes on the profit!!