Buying a home can be one of the most important decisions a person will make in his or her lifetime. A buyer is required to make several legal and financial commitments. For the first-time buyer, and even some veteran homeowners, this process can be confusing. Therefore, it is vital that the prospective buyer understand the process that must take place between the initial decision to move and the eventual possession of the new home.
A first step in making an intelligent choice is to decide exactly what you want in the new home. It might be helpful to detail the features of the "ideal" home, then decide what you would forego if you have to scale back. Establishing your priorities will help you to evaluate homes and to describe agents what you are looking for.
Before going out and seriously looking at homes, you might call some lenders to get an idea of current mortgage rates. Loan terms will help determine how much you will be able to afford.
When you apply for a mortgage loan, the lender will apply certain criteria to determine how large a loan to make. The amount depends mainly on your income and how much debt you currently have. You can run through a similar analysis to provide an estimate of your loan limit.
You will need to do some information gathering. First try to get an idea of the prices being asked for homes on the market. Read the classified ads and visit new home subdivisions. You may even pick up variations between certain locations. You should begin to select neighborhoods that appear desirable. A neighborhood can be favored because of the style of homes there, convenience to work or other points, or its reputation for retaining property values. If you know where you would like to live, you can save much time when you begin to look at houses.
There are several sources for available homes. Some owners try to sell their own homes without the aid of an agent. Check classified ads and for sale signs in front yards for these offers. Builders often advertise open house showings and may provide sales offices on the premises. Real estate brokerage firms represent many home sellers and also advertise with newspaper ads and yard signs. Still another way homes are being sold is through the Internet. However, a visit to the brokerage office allows you to find out about a large number of homes on the market by looking through exclusive and multiple listings with an agent. (Exclusives are homes that are offered through a single broker; multiple listings are offered in cooperation with all brokers who are members of the service. The agent can also help you narrow down the list to the location, features, and price you desire. In addition, the agent can provide an inspection tour of available homes.
After finding the home you wish to buy, you can make an offer by submitting a sales contract. This document's name can vary from state to state. For example, in Texas it is an earnest money contract. The contract states what you are willing to pay (usually it is not necessary to offer the full asking price), when you would like to take possession, and under what conditions the sale will be completed. These conditions generally include a provision that you are able to obtain financing at certain specified terms. This frees you of the obligation to go through with the purchase if you are turned down for a loan. Another common provision is that the house is free of defects over a specified amount of repairs that the seller agrees to make before closing. Other contingencies can be included, such as a provision that you must first sell your current home.
Your offer will be accompanied by a check to signify serious intent. This earnest money is typically less than five percent of the price of the home and is forfeited if you back out of the contract. If the deal falls through because of one of the conditions in the contract, your deposit is returned. The contract is not binding until the seller signs it. The seller may accept your offer by signing the contract, reject the offer by sending it back, or propose a counter offer by modifying the contract and signing it. Since a counteroffer is a substitute offer, it constitutes a rejection of the contract. If the counteroffer is acceptable, you may initial the contract to validate it. Alternatively, you may make another counteroffer; or you may reject the counter offer, refuse to negotiate further, and take back your earnest money. This negotiation can go back and forth until an agreement (or an impasse) is reached. Also, until a contract is signed by both parties, the seller may entertain offers from other buyers.
The sales contract designates the date at which property ownership will change. This is called a closing. In the meantime financing will have to be arranged. Since this generally takes from three to eight weeks, a loan application should be filed soon after signing the sales contract.
Most home mortgage loans are made by lending institutions, such as savings and loan associations or banks, and mortgage bankers. Information on available terms can be obtained by calling a number of these lenders. There may be several types of loans available. Compare terms since they may vary significantly among lenders.
When a lender and loan type decision has been reached you can prepare to make a loan application. Take some time to gather information on your current income, major debts and available cash (or assets that can be converted to cash readily). If you are self-employed or work on commission, you may need income tax returns for the last three years to establish your income.
When you visit the lender, you will need to take along a copy of the sales contract. You will fill out an application form stating your income, debts, and assets. You will also sign forms that allow the lender to verify some of the information you have provided (such as salary and account balances). There will also be a nonrefundable fee of at least $200 to cover the cost of an appraisal and credit review.
During the next several weeks, the lender analyzes your application to determine if a loan commitment can be issued. The home will be appraised to see if it is worth enough to cover the loan. Your credit history will be reviewed. Your income and debt will be evaluated to see if the lender will check to see if you have enough cash to make the required down payment on the house. If you require mortgage insurance, you will apply for it during this period.
The final decision to make the loan is usually made by a loan committee that meets periodically. If the decision is favorable, you will be given a commitment for the loan sometimes with a locked-in interest rate. The commitment is good for a stated period from the time of the application, and the rate is good for a shorter period. For example, the commitment for the loan might be good for six months, with the rate valid for 45 days.
In the time before the closing, there are several things that must be done. Ways in which this transpires can vary. In many areas it is customary for the seller to arrange for a title search and, at closing, purchase a title insurance policy in the name of the lender and/or buyer. This policy assures good title and protects against claims of ownership or partial interests. The buyer must arrange for a hazard and liability insurance policy to be written for the new house. Such a policy is required for the mortgage loan. A new survey will be made of the property to make sure no building is encroaching on surrounding property. A termite inspection is typically required. The buyer may exercise the right under the contract to hire a housing inspector to report any non-functioning equipment or unsafe building condition. Recall that the sales contract may require the seller to repair any broken component up to a certain dollar limit. Such repairs should be completed before closing.
In some cases it may be necessary for the buyer to move into the house before the closing. Possibly a lease has expired or a previous house has closed before the buyer takes possession. If the new house is vacant, the buyer may arrange with the seller to rent the house in the interim. This is usually done at a nominal rental rate or may even be rent-free, particularly if the buyer is merely storing possessions but not actually living in the home.
In any event, the buyer must obtain the seller's agreement to the arrangement, preferably in writing. The buyer should also check with his or her insurance carrier to see if the policy covers the possessions while in the new house.
On closing day, all parties will meet and execute the necessary paperwork to pass title of the property. Closing generally takes place at the offices of the title insurance company. The buyer and seller are present or represented, along with legal counsel, if required. Also present will be the real estate broke, if one has been involved, and a representative of the mortgage lender. Closing day is considered the first day of ownership for the buyer, and all benefits and responsibilities are conferred at this time.
At the closing, the seller delivers a deed to the home, signifying passage of legal title to the buyer. The deed is a document that describes the title conveyed and acknowledges the identity of the new owner. The buyer provides any down payment required and signs the mortgage documents releasing the borrowed funds to the seller. These documents include a note acknowledging the debt and promising to repay the loan in a specific manner and a mortgage pledging the home to back up the borrower's promise. The seller then uses a portion of the money to retire any existing loans on the property (except for those that are assumed by the buyer), pays the expenses of sale, and receives a check for the balance.
Most of the costs associated with the sale are paid at closing. The agents receive their commissions and the attorneys their fees. There also may be costs involved in inspections, surveys and various legal requirements. The one-time premiums for title insurance are paid. The lender may require payments toward setting up an escrow for the payment of future property taxes, insurance premiums and interest to cover the time from closing until the end of the month. From that point on, mortgage interest is paid at the end of the month as part of the regular monthly payment. In most cases, property taxes are due toward the end of the year. To adjust for this, the seller pays the buyer a prorated share of the tax.
Source: Barron's Real Estate Handbook, Third Edition