The Home Buying ProcessPutting together the pieces...
You’ve been looking at homes online, driving around and talking to friends and family. You’re beginning to think it’s time to take the next step. That’s what I’m here for. When you are ready to officially begin the process of investing in a home -whether you are a first-time homebuyer or an ‘old hand’ at it- allow me to be your personal guide -I would love to extend my first-class service to you.
In order to help you understand what is involved, I ask that we meet if possible early on in the process. From there, we can get down to the business of finding you your home. Included on this page is a step-by-step process of buying a home. Having foreknowledge of this process puts you in a much better position when it is time to tour homes, make an offer and finally close on your home. Each step builds on the previous one. I hope to make this an enjoyable and educational experience, so “Let the journey begin!”
Step 1: Analyzing Your Needs in a Consultation
The first thing we want to do is determine your “needs and desires” for your new home. What follows is the exact questionnaire I use with my clients:
1. What price range are you looking for?
2. When do you want to move into your new home?
3. Is this a first home purchase, relocation, a move-up, etc.?
1. What do you like about your current home?
2. What don’t you like about your current home?
1. How many people are in your household?
2. Does your new home need to accommodate any special needs?
3. Do you have pets?
4. Are there any other household considerations you should take into account in the home search?
1. What do you enjoy doing most when you are at home?
2. What room do you spend the most time in at home?
3. What lifestyle considerations are important to you?
1. What location do you prefer (think about what your ideal location would be like)?
2. Are there any secondary locations you would consider?
3. What other location considerations are important to you?
1. What style of homes are you interested in?
2. What size yard are you looking for?
3. Do you want a pool?
4. Are you looking for a home with a garage?
5. What other exterior features are important to you?
General Interior Features
1. How many stories do you prefer?
2. In general, how does the interior look (open, cozy, funky, etc.)?
3. How many bedrooms/bathrooms does the home have?
Room by Room Interior Features
1. What are your likes and dislikes for the master bedroom?
2. What are your likes and dislikes for the master bathroom?
3. What are your likes and dislikes for the secondary bedrooms?
4. What are your likes and dislikes for the secondary bathrooms?
5. What are your likes and dislikes for the living room?
6. What are your likes and dislikes for the family room?
7. What are your likes and dislikes for the kitchen (And, are the kitchen and family area adjoining or separate)?
8. What other rooms in the home are important to you to have (home office, separate laundry room, formal dining room, etc.)? What do these rooms look like?
9. What other interior features are important to you?
What are the five ‘Must-Haves’ of your ideal home?
There is no such thing as a 100% perfect house. It is very important that after you’ve thought about these questions, you write down your 5 “must-haves” and let me know what they are. When we see a home that has your 5 “must-haves,” that is, a 90 – 95% house, I’m going to suggest that you consider writing an offer.
Step 2: Buyer Agency Agreements – Exclusive Right of Representation
Because of the high level of service I provide, and to ensure that my clients continue to receive such service, as a Buyer Specialist I only actively work with a certain number of clients at any given time. It does a buyer no good if I am spread too thin. In order for me to best serve all my clients’ needs and interests, I ask that each prospective client agree to work with me exclusively. For the protection of all parties, a “Buyer’s Agency Agreement” specifies what the Buyer and Broker agree to do. Remember, the REALTOR who has a home listed for sale is in a contractual relationship with the seller. They have a fiduciary responsibility to act in the best interest of the seller, not you. As a buyer, you deserve the same type of relationship advantage with your agent.
Among other things, I will:
• Strive to locate the best home available to meet your needs and desires
• Exercise skill, care and professionalism in all aspects of the transaction
• Provide pertinent information as requested by you for desired properties
• Assist in making an objective evaluation of properties
• Provide price information on homes
• Keep you fully informed during all phases of the transaction, and represent you exclusively
I ask that you:
• Promptly inform other real estate professionals, owners and builders of this relationship
• Contact me first on all properties that you might be interested in
• Provide candid feedback on properties to assist me in serving your needs and desires
• Provide pertinent information, as needed, to expedite the transaction
• Keep me fully informed during all stages of the transaction
Here are some Do’s and Don’ts for being out and about:
Ads, Signs or FSBO’s
• DO write down as much information as possible, or save the ad
• DO call us for information so I can get details for you
• DO disclose immediately that you are represented by Schmidt Realty Co.
• DO immediately present my business card to the agent or owner. Tell them you are exclusively represented by me. If they require you to be accompanied by me-
• DON’T call the owner’s agent or owner or approach them if you drive by Open Houses
• DON’T view the home, but call me immediately to set an appointment
• DON’T disclose any information regarding your needs, motivation, likes or dislikes. These disclosures could weaken your negotiating strength
• DO disclose immediately that you are represented Schmidt Realty Co.
• DO immediately present my business card to the agent or builder. Tell them you are exclusively represented by me.
If they require you to be accompanied by me-
• DON’T view any of their homes, but call me immediately to set an appointment. If they do not require you to be accompanied by me, register with them with me as your agent
• DON’T enter the sales office if there is a sign requiring your agent to be with you. Call me to show you the properties.
These suggestions are for your protection. The buyer agency agreement, once signed by you becomes a valid, legal contract. For this reason, it is important to understand what is written on the agreement. I would be happy to provide you with a sample Buyer’s Agency Agreement. Just contact me to ask for one.
Step 3: Securing a Mortgage Loan
Many buyers apply for a loan and obtain approval before they find the home they want to buy. Why? Pre-qualifying will help you in the following ways:
1. Generally, interest rates are locked in for a set period of time. You will know in advance exactly what your payments will be on offers you choose to make.
2. You won’t waste time considering homes you cannot afford.
Pre-approval will help you in the following ways:
1. A seller may choose to make concessions if they know that your financing is secured. You are like a cash buyer, and this may make your offer more competitive.
2. You can select the best loan package without being under pressure.
How Much Can You Afford?
There are three key factors to consider:
1. The down payment
2. Your ability to qualify for a mortgage
3. The closing costs associated with your transaction.
Down Payment Requirements: Most loans today require a down payment of between 3.5% and 5.0% depending on the type and terms of the loan. If you are able to come up with a 20-25% down payment, you may be eligible to take advantage of special fast-track programs and possibly eliminate mortgage insurance.
Closing Costs: You will be required to pay fees for loan processing and other closing costs. These fees must be paid in full at the final settlement, unless you are able to include them in your financing. Typically, total closing costs will range between 2-5% of your mortgage loan.
Qualifying For the Mortgage: Most lenders require that your monthly payment ranges between 25-28% of your gross monthly income. Your mortgage payment to the lender includes the following items:
1. The principal on the loan (P)
2. The interest on the loan (I)
3. Property taxes (T),
4. The homeowner’s insurance (I).
Your total monthly PITI and all debts (from installments to revolving charge accounts) should range between 33-38% of your gross monthly income. These key factors determine your ability to secure a home loan: Credit Report, Assets, Income, and Property Value.
The Ten Commandments When Applying for a Real Estate Loan
1. Thou shalt not change jobs, become self-employed or quit your job.
2. Thou shalt not buy a car, truck or van (or you may end up living in it)!
3. Thou shalt not use charge cards excessively or let your accounts fall behind.
4. Thou shalt not spend money you have set aside for closing.
5. Thou shalt not omit debts or liabilities from your loan application.
6. Thou shalt not buy furniture.
7. Thou shalt not originate any inquiries into your credit.
8. Thou shalt not make large deposits without first checking with your loan officer.
9. Thou shalt not change bank accounts.
10. Thou shalt not co-sign a loan for anyone.
Step 4: Selecting and Viewing Properties
How to Buy a Great House
You’ve thought about what you are looking for in your next home. Now you need to think about the areas you are interested in. There are many factors to consider when selecting a neighborhood that is right for you. Below are just a few of the many factors — you may think of others that are important to you. Neighborhoods have characteristic personalities designed to best suit single people, growing families, two-career couples, or retirees.
SCOUT THE NEIGHBORHOOD!
It is important that you scout the neighborhood in person. You live in more than your house.
• Talk to people who live there.
• Drive through the entire area at different times of the day, during the week and on weekends.
• Look carefully at how well other homes in the area are being maintained; are they painted, are the yards well cared for; are parked cars in good condition, etc.
NEIGHBORHOOD FACTORS TO CONSIDER:
• Look for things like access to major thoroughfares, highways, and shopping.
• Listen for noise created by commerce, roads, railways, public areas, schools, etc.
• Smell the air for adjacent commerce or agriculture.
• Check with local civic, police, fire, and school officials to find information about the area.
• Research things like soil and water.
• Look at traffic patterns around the area during different times of the day and drive from the area to work.
• Find out if the neighborhood is near parks, churches, recreation centers, shopping, theaters, restaurants, public transportation, schools, etc.
• Find out if the neighborhood belongs to a Homeowner’s Association.
How to View Homes
Now you know the type of home and neighborhoods that meet your needs and desires. It’s time for us to go out and personally visit these homes. When viewing potential homes, it can quickly get overwhelming; the more you see at one time, the less you remember about them individually. That is why it is very important that each home you visit is compared to the same standard.
THINGS TO CONSIDER AT EACH PROPERTY WE SEE:
• Lot Size
• Square Footage
• Number of Bedrooms
• Number of Bathrooms
• Living Room
• Dining Room
• Family Room
• Openness of Home
• General Interior Condition
• Architectural Style
• Swimming Pool
• General Exterior Condition
• Convenience to Work
• Convenience to Shopping
• Convenience to Schools
• Convenience to Day Care
• Nearby Recreational Facilities
• General Appearance of Houses in the Area
• House Value Relative to the Area
We have a convenient checklist available that you can take to each property. It has room for notes plus space to compare against your 5 ‘Must-Haves.’ Just contact me and I’ll send it out to you.
Step 5: Writing an Offer to Purchase
Once you have found the home you wish to purchase, you will need to determine what offer you are willing to make for the home. It is important to remember that the more competition there is for the home, the higher the offer should be – sometimes even exceeding the asking price. Remember, be realistic. Make offers you want the other party to sign!
To communicate your interest in purchasing a home, I will present the listing agent with a written offer. When the seller accepts an offer it becomes a legal contract. When you write an offer you should be prepared to pay an earnest money deposit. This is to guarantee that your intention is to purchase the property. So have your checkbook with you. After I present your offer to the listing agent it will either be accepted, rejected, or the seller will make a counter-offer. This is when I will negotiate terms of the contract if necessary. The step-by-step contract procedure for most single-family home purchases is standard. The purchase agreement used is a standard document approved by our local real estate board. The purchase agreement or contract constitutes your offer to buy and, once accepted by the seller, becomes a valid, legal contract. For this reason, it is important to understand what is written on the contract offer.
I would be happy to provide you with a sample Purchase Agreement. Just contact me to ask for one.
Step 6: Inspections and Warranty Programs
Whether you are purchasing a resale property or building a new home, I highly recommend that you have a professional home inspector conduct a thorough inspection. In the case of building a home, the inspector will schedule several inspections throughout the process. The inspection(s) will include the following:
• Heating and Air Conditioning
• Roof and Attic
• General Structure
• Well and Septic
The inspection is not designed to criticize every minor problem or defect in the home. It is intended to report on major damage or serious problems that require repair or, if left unattended, could negatively impact the home in the future. Should serious problems be indicated, the inspector will recommend that a structural engineer or other professional inspect it as well. Your home cannot “pass or fail” an inspection, and your inspector will not tell you whether he/she thinks the home is worth the money you are offering. The inspector’s job is to make you aware of repairs that are recommended or necessary.
The seller may be willing to negotiate completion of repairs or a credit for completion of repairs, or you may decide that the home will take too much work and money. A professional inspection will help you make a clear-headed decision. Regardless, be advised that the seller must be given the opportunity to make repairs.
In addition to the overall inspection, you may wish to have separate tests conducted for termites or the presence of radon gas. In choosing a home inspector, consider one that has been certified as a qualified and experienced member by a trade association. I recommend being present at the inspection. This is to your advantage. You will be able to clearly understand the inspection report, and know exactly which areas need attention. Plus, you can get answers to many questions, tips for maintenance, and a lot of general information that will help you once you move into your new home. Most important, you will see the home through the eyes of an objective third party.
NEW HOME WARRANTIES:
When you purchase a newly built home, the builder usually offers some sort of full or limited warranty on things such as the quality of design, materials, and workmanship. These warranties vary in coverage terms beyond the purchase date of the home. At closing, the builder will assign to you the manufacturer’s warranties that were provided to the builder for materials, appliances, fixtures, etc. For example, if your dishwasher were to become faulty within one year from the purchase of your newly built home, you would call the manufacturer of the dishwasher – not the builder. If the home builder does not offer a warranty, BE SURE TO ASK WHY!
RESALE HOME WARRANTIES:
When you purchase a resale home, you can purchase warranties that will protect you against most ordinary flaws and breakdowns for at least the first year of occupancy. The warranty may be offered by either the Seller, as part of the overall package, or by the agent. Even with a warranty, you should have the home carefully inspected before you purchase it. A home warranty program will give you peace of mind, knowing that the major covered components in your home will be repaired if necessary. Ask me for more details about home warranty packages.
Step 7: Title Companies and Their Role
Now that you have decided to buy your home, what happens between now and the time you legally own the home? A Title Company may handle the following items. NOTE: In different parts of the country, attorneys, lenders, escrow companies and other persons who are independent of title companies perform some or all of these functions.
Earnest Money – An agreement to convey starts the process once it is received at the Title Company. Once you submit the loan application, it is usually subject to a credit check, an appraisal, and sometimes, a survey of the property.
Tax Check – What taxes are owed on the property? The Title Company contacts the various assessor-collectors.
Title Search – Copies of documents are gathered from various public records: deeds, deeds of trust, various assessments and matters of probate, heirship, divorce, and bankruptcy are addressed.
Examination – Verification of the legal owner and debts owed.
Document Preparation< – Appropriate forms are prepared for conveyance and settlement.
Settlement – A Closing (or Escrow) Officer oversees the closing of the transaction: seller signs the deed, you sign a new mortgage, the old loan is paid off and the new loan is established. Seller, agents, attorneys, surveyors, Title Company, and other service providers for the parties are paid. Title insurance policies will then be issued to you and your lender.
Title Insurance – There are two types of title insurance:
1. Coverage that protects the lender for the amount of the mortgage,
2. Coverage that protects the equity in the property.
Both you and your lender will want the security offered by title insurance. Why? Title agents search public records to determine who has owned any piece of property, but these records may not reflect irregularities that are almost impossible to find. Here are some examples: an unauthorized seller forges the deed to the property; an unknown, but rightful heir to the property shows up after the sale to claim ownership; conflicts arise over a will from a deceased owner; or a land survey showing the boundaries of your property is incorrect. For a one-time charge at closing, title insurance will safeguard you against problems including those events an exhaustive search will not reveal.
Step 8: Closing on the Property and Taking Possession of your New Home
A few days before closing, we will arrange to have all utilities transferred into your name, About a day before closing, I will schedule a final walk-through of the property with you. This is done to make sure that the home has remained in good condition, is clean and everything you negotiated into the sale has been left with the home.
WHAT IS A REAL ESTATE CLOSING?
A “closing” is where we meet with some or all of the following individuals: the Seller, the Seller’s agent, a representative from the lending institution and a representative from the title company, in order to transfer the property title to you. The purchase agreement or contract you signed describes the property, states the purchase price and terms, sets forth the method of payment, and usually names the date and place where the closing or actual transfer of the property title and keys will occur. If financing the property, your lender will require you to sign a document, usually a promissory note, as evidence that you are personally responsible for repaying the loan. You will also sign a mortgage or deed of trust on the property as security to the lender for the loan. The mortgage or deed of trust gives the lender the right to sell the property if you fail to make the payments. Before you exchange these papers, the property may be surveyed, appraised, or inspected, and the ownership of title will be checked in county and court records. At closing, you will be required to pay all fees and closing costs in the form of “guaranteed funds” such as a Cashier’s Check. Your agent or escrow officer will notify you of the exact amount at closing. It’s always a good idea to bring your checkbook to closing in case of minor last-minute discrepancies.
WHAT IS AN ESCROW ACCOUNT?
An escrow account is a neutral depository held by your lender for funds that will be used to pay expenses incurred by the property, such as taxes, assessments, property insurance, or mortgage insurance premiums which fall due in the future. You will pay one-twelfth of the annual amount of these bills each month with your regular mortgage payment. When the bills fall due, the lender pays them from the special account. At closing, it may be necessary to pay enough into the account to cover these amounts for several months so that funds will be available to pay the bills as they fall due.
You have closed on your new home and now you are ready to move! Think about your move as a series of small projects that you can begin while your home is under contract. Your move will progress as your contract and closing progress. That way, when the day comes to physically move your belongings, most of the details will be taken care of. Keep detailed records – some moving expenses are tax deductible! Keep detailed records of all moving expenses if your move is job related. Many expenses, including house-hunting trips, are tax deductible. If your move is 35 miles or more from your home, you can deduct your family’s travel expenses, including meals and lodging; the cost of transporting furniture, other household goods and personal belongings; food and hotel bills for up to 30 days in the new city if you have to wait to move into your new home; and the costs associated with selling your old home or leasing your new home. Note: There is a ceiling on deductions which is outlined in detail in the IRS’s Publication 521, “Tax Information on Moving Expenses,” available free from the IRS offices. I have several checklists available to help you prepare for you big day. Just contact me to ask for them.
Step 9: Helping Children Cope with a Move
Many times during the process that I have gone over in previous posts, your children kind of get lost in the shuffle. Moving to a new home is a big deal to you, but it is an even bigger deal to them. Here are a few tips you might consider to make your move a smoother, more enjoyable experience for your kids:
- Show your children the new home and their new room prior to moving. If this is not possible, pictures or videos will help them visualize where they are going.
- Assure your children that you won’t forget their friends.
- Make a scrapbook of the old home and neighborhood.
- Throw a good-bye party. At the party, have their friends sign a t-shirt.
- Have your children write good-bye letters and enclose their new address. You may wish to call the other children’s parents so that they will encourage return letters.
- When packing, give your children their own boxes and let them decorate them.
- Start a scrapbook for your new home.
- Visit your children’s new school, park, church, etc… Take a camera.
- Help your children invite new friends over to your new home.
- Let your children choose a new favorite restaurant. This will help them feel in control of their new environment.
- Encourage your children to send letters about their new home to their friends.
- Involve your children in groups, sports, and activities like the ones they used to participate in.
- Remember, even if you only lived in a home for a few years, to a young child it is nearly their entire lifetime.
Home Buying Primer: Real Estate Glossary
Acceptance: The date when both parties, seller and buyer, have agreed to and completed signing and/or initialing the contract.
Adjustable Rate Mortgage: a mortgage that permits the lender to adjust the mortgage’s interest rate periodically on the basis of changes in a specified index. Interest rates may move up or down, as market conditions change.
Amortized Loan: a loan that is paid in equal installments during its term.
Appraisal: an estimate of real estate value, usually issued to standards of FHA, VA and FHMA. Recent comparable sales in the neighborhood is the most important factor in determining value
Appreciation: an increase in the value of a property due to changes in market conditions or other causes. The opposite of depreciation.
Assumable Mortgage: purchaser takes ownership to real estate encumbered by an existing mortgage and assumes responsibility as the guarantor for the unpaid balance of the mortgage.
Bill of Sale: document used to transfer title (ownership) of PERSONAL property.
Cloud on Title: any condition that affects the clear title to real property
Consideration: anything of value to induce another to enter into a contract, i.e., money, services, a promise.
Deed: a written instrument, which when properly executed and delivered, conveys title to real property.
Discount Points: a loan fee charged by a lender of FHA, VA or conventional loans to increase the yield on the investment. One point = 1% of the loan amount.
Easement: the right to use the land of another.
Encumbrance: anything that burdens (limits) the title to property, such as a lien, easement, or restriction of any kind.
Equity: the value of real estate over and above the liens against it. It is obtained by subtracting the total liens from the value.
Escrow Payment: that portion of a mortgagor’s monthly payment held in trust by the lender to pay for taxes, hazard insurance and other items as they become due.
Fannie Mae: nickname for Federal National Mortgage Corporation (FNMA), a tax-paying corporation created by congress to support the secondary mortgages insured by FHA or guaranteed by VA, as well as conventional loans.
Federal Housing Administration (FHA): an agency of the U.S. Department of Housing and Urban Development (HUD). Its main activity is the insuring of residential mortgage loans made by private lenders. The FHA sets standards for construction and underwriting but does not lend money or plan or construct housing.
<FHA Insured Mortgage: a mortgage under which the Federal Housing Administration insures loans made, according to its regulations.
Fixed Rate Mortgage: a loan that fixes the interest rate at a prescribed rate for the duration of the loan.
Foreclosure: procedure whereby property pledged as security for a debt is sold to pay the debt in the event of default.
Freddie Mac: nickname for Federal Home Loan Mortgage Corporation (FHLMC), a federally controlled and operated corporation to support the secondary mortgage market. It purchases and sells residential conventional home mortgages. <
Graduated Payment Mortgage:< any loan where the borrower pays a portion of the interest due each month during the first few years of the loan. The payment increases gradually during the first few years to the amount necessary to fully amortize the loan during its life.
Lease Purchase Agreement: buyer makes a deposit for future purchases of a property with the right to lease property in the interim.
Lease with Option: a contract, which gives one the right to lease property at a certain sum with the option to purchase at a future date.
Loan to Value Ratio (LTV): the ratio of the mortgage loan principal (amount borrowed) to the property’s appraised value (selling price). Example – on a $100,000 home, with a mortgage loan principal of $80,000 the loan to value ratio is 80%.
Mortgage: a legal document that pledges a property to the lender as security for payment of a debt.
Mortgage Insurance Premium (MIP): the amount paid by a mortgagor for mortgage insurance. This insurance protects the investor from possible loss in the event of a borrower’s default on a loan.
Note: a written promise to pay a certain amount of money.
Origination Fee: a fee paid to a lender for services provided when granting a loan, usually a percentage of the face amount of the loan.
Private Mortgage Insurance (PMI): ee Mortgage Insurance Premium. Second Mortgage / Second Deed of Trust / Junior Mortgage / Junior Lien: an additional loan imposed on a property with a first mortgage. Generally, a higher interest rate and shorter term than a “first” mortgage.
Settlement Statement: a financial statement rendered to the buyer and seller at the time of transfer of ownership, giving an account of all funds received or expended.
Severalty Ownership: ownership by one person only. Sole ownership.
Tenancy In Common: ownership by two or more persons who hold an undivided interest without right of survivorship. (In event of the death of one owner, his/her share will pass to his/her heirs.
Title Insurance: an insurance policy that protects the insured (buyer or lender) against loss arising from defects in the title.