Buying a home is often the most important financial decision someone will make in their lifetime. It can also be a stressful process, especially for those who have never purchased a home before. In this article, we explain the home buying process in an easy-to-understand way.
Get a Pre-Approval Letter
If you are serious about buying a home, the first thing you need to do is get a pre-approval letter from a bank or mortgage institution. A pre-approval is a letter from a bank that states you are qualified to purchase to home after they have looked into your financial background.
The process of obtaining a pre-approval letter is fairly simple and generally takes 30 minutes to an hour. The bank will take some information from you such as:
- How much do you want to borrow?
- Where are you looking to purchase?
- What are your current levels of debt?
- How much do you earn?
- What is your credit score?
You will be required to provide proof to the bank for each item. Once they have all the information they need, they will typically send you a .pdf with your approval in a short amount of time. Once you have received this letter, you know you are a serious home buyer with the potential to make a winning offer on a home that sellers will take seriously.
Without a pre-approval letter, you will find it hard to be taken seriously in a real estate transaction.
Find a Real Estate Agent
Real estate agents play an important role in any real estate transaction. For the buyer, there is typically no cost to hire an agent and have representation through the closing. In most real estate transactions, the seller will hire a listing agent who will be paid a fee for their services. That same listing agent will typically split their commission with the buyer’s real estate agent.
From a buyers perspective, you get representation for the home buying process without the direct expense of having to pay for it.
The main things you get from hiring a real estate agent are the following:
- Help finding homes and setting up alerts for new homes to hit the market
- Fiduciary duty and commitment to always act in your best interests
- Negotiate on your behalf
- Understanding of the local market
- Work with the HOA on the approval process
- Work with title to meet deadlines
- Work with your lender to get the deal to the finish line
The main reason to hire an agent is that they are on your side. You have someone to hold your hand through the process and fight for your interests when needed.
If you are purchasing a property without an agent, you are likely at a large disadvantage compared to the seller who will likely have representation.
Start looking for homes
Once you have your pre-approval in hand, you can now start looking for homes more seriously than before. In today’s world of easy access to information, many buyers are looking towards Zillow.com and Realtor.com to get access to homes for sale. This is a perfectly good way to find homes.
An alternative to those was mentioned previously by using a local real estate agent. They will have more up-to-date information than Zillow.com or Realtor.com and can help create custom lists for you.
For example, a real estate agent can help remove homes from your search that may require a large membership fee. They can also remove communities that only allow 55+ residents to live there. There are many search options available to a real estate agent that is not provided on some of the larger home search websites.
Submit an Offer
Once you’ve found the right home, it’s time to submit an offer. In Florida, offers are prepared by real estate agents and are typically the actual contract on the home. If the seller accepts your offer, you would immediately be under contract on the home. You may want to hire an attorney to review your offer or consult with your agent. Make sure you understand everything in the offer, because that may become a binding contract.
The most important items to double-check in the contract are:
- Make sure the purchase price is what you want to offer
- Make sure you have an inspection period of at least 7-14 days
- Understand when you would need to make an escrow deposit on the home (more below on this)
- Make sure it accurately depicts how you will pay for the home (financing section)
Make an Escrow Deposit
If your offer is accepted by the sellers, you are typically required to make an escrow deposit on the home within a certain amount of time (typically only a few days). This escrow deposit is held by a third party, and the seller does not receive the funds. The funds are held by this third party up until the closing occurs. Review your contract to see when the payment is due.
It’s important to understand when your escrow deposit becomes non-refundable. Typically in a contract, you will have certain contingencies whereas a buyer you could walk away from the transaction. You may have a contingency for your inspection of the home, for an appraisal, for financing, etc. Once all your contingencies are waved, then money becomes a non-refundable deposit.
Understanding your contract and the deposit on your home is very important. If you are unsure of anything, speak with your real estate agent or hire an attorney to review it with you.
Submit an HOA Application
If your home belongs to a governing body typically a homeowners association(HOA), then your contract will usually stipulate when you need to apply for approval.
This can often be very quick after the contract execution, so be prepared to submit this quickly. Either your real estate agent or the sellers’ agent should provide you with the documentation required to apply. Applications to an HOA typically require a fee to be paid as well.
When applying to an HOA, take your time and provide everything necessary with your application. The HOA approval process can often be lengthy and if the buyer fails to submit something required with the application there can be a delay of closing. You don’t want to be in a position asking the seller to extend the closing date because you incorrectly submitted the HOA application.
Begin Your Home Inspections
Once you are under contract on your home, it’s time to hire a home inspector. What home inspectors typically inspect are:
- Structural issues
- HVAC systems
- Evidence of mold or water damage
As the home buyer, you may want to do your own inspections as well. You could take this time to take a further look at the local schools, for example, or maybe look into the local property taxes, what homeowners insurance would cost, or whether or not you need flood insurance. Anything that you can think of that may change your mind on the home, now is the time to figure that out and take a closer look.
Apply for The Loan
Once you are under contract for the home, it’s time to apply for the actual loan. In the financing paragraph of your contract, there is usually a deadline on when you need to apply for the loan. Make sure not to miss that deadline.
Since you already have a pre-approval with a bank, you can return to that bank and formally start the loan application process. It would be wise to also contact other lending institutions at this time now as well to try and get the best mortgage rate available to you.
Hire an appraiser
Part of buying a home is hiring an appraiser to come and tell you what they think the value of the home is. If you are working with a bank for financing, the bank would typically order the appraisal, but you pay for it. If you are paying cash for a home, you can decide whether you want an appraisal and would need to hire someone on your own.
An appraisal is done for two reasons:
Protect The Bank
The appraiser would provide a value of the home to the bank, so they know how much its worth and how much they can lend against the home.
Protect The Buyer
The appraisal also protects the buyer to know you have not over-bid on a home. If the appraisal comes back less than what you are paying, it’s often a chance to go back and renegotiate the price of the home. A seller has a hard time saying no to renegotiating on a low appraisal because it’s unlikely a new buyer would receive anything higher.
Negotiate if Needed
Sometimes in the middle of a transaction, there will be a need to renegotiate on a home. Something may come up in the inspection that you were unaware of when you made your offer. For example, maybe the inspector found a broken water heater that will cost you $2,000 to replace. Or maybe the electrical panel is old and not up to local code any longer. Things come up during transactions that require renegotiating. This is where you need a real estate agent on your side to fight for your interests.
Make sure you know what sort of concessions you need from the seller prior to the expiration of your inspection period. This is very important. Once your inspection period has expired, it’s very difficult to negotiate any seller concessions.
Perform a Final Walkthrough
A day or two before closing on the home, you want to perform a final walk-through of the property to make sure you are buying what you expect to buy. You don’t want to walk into your new home just to find that there is new damage to the home from the time you last saw it.
A final inspection is usually done with your real estate agent and is critical before closing on the home.
Review Your Closing Documents
Prior to closing, either your agent, attorney, or title company will provide you with your closing documents. You will want to review these closely with whoever is representing you. It’s v important is to review the settlement statement. This breaks down what you are paying for the home, all fees involved including credits from the seller, lender fees, title fees, etc. Look for any mistakes in the numbers.
You will also want to closely review your mortgage and promissory note from the bank, to make sure it’s what you expect. Things like the loan term, interest rate, etc.
Sign and Close On Your Home
That’s it, you’re done! Time to sign on the dotted line. Today many closings are happening remotely right at your home. Your title company or attorney may send a notary directly to your current location and have you sign everything there. Or, you may be asked to visit an office to sign. Either way, this is the last step of purchasing your home, well except for getting the keys and actually taking your first step into your new home!
Disclaimer: Real estate laws vary state-by-state, and contracts vary as well. Consult with your real estate agent and attorney. This is meant as a guide, and not legal advice.