The Home Buying Process
Shelter. It is our primary need. Today there are two ways for humans to obtain it. 1) You buy a home and pay your own mortgage and as time goes by likely gain equity dollars on your home, or 2) you rent and pay someone else's mortgage - unless they own the property free and clear - and they get the potential equity gain.
Most of us will start our decision-making process online. Info is gathered, areas and individual homes are checked out, mortgages might be researched. But it is one thing to gather info and another to assemble it into a sure-fire guide to a home purchase that takes into consideration the multiple steps and potential snags that can happen in the real (read: not online) world.
For this, you need a capable guide.
First, what is a Realtor? We are real estate professionals who belong to the National Association of Realtors (as well as the State Association and local real estate association) and follow a binding Code of Ethics. A real estate agent or broker who is not a member is not a Realtor, which is a trademark. They are also not bound by the Realtors Code of Ethics. The Code is a good thing. It sets forth ethical, professional and cooperative rules of fair dealing between Realtors and clients and Realtors and each other. It fosters the sort of behavior that everyone in a real estate transaction deserves.
The choice of which Realtor you use is a very important decision. Interview them. Do they know the process? How many homes have they successfully closed for buyers? If they are new, and many are, does their company training and mentoring make up for the experience they may just now be building?
Remember, this person is going to be your trusted guide. You will work with them to make your homebuying experience as smooth as possible. The decision on which Realtor to use is second only to that of which home to buy.
What is agency? Whew! This is simple and complicated at the same time. The best way to understand it is probably to read the information on the Agency Disclosure form. There are many kinds of agents. Put into the most basic terms, there are 1) Seller's (or Listing) agents, and 2) Buyer's agents. (Plus a couple other, less common types). Seller's agents work for - you guessed it - the Seller(s). And Buyer's agents work for the Buyer(s).
What are needs vs. wants? This is a bit more obvious. Needs are things that are necessary to have. Working from home? You need a space to do that in. Have a good size family? You need an island everyone can gather around. Buying a home without these is settling for a home that is less than adequate. Then there are wants. Maybe you want smart home features. But you can live without them and can add them later. Maybe you want a deck? But if you get all your needs met, you can live without that for now. Make two lists: one for things you can't live without (needs) and another for things that you would really like but won't be deal breakers if you find a home you love that does not have them. You will find these lists very helpful as filters to run each home you select for viewing through.
What about financing? How much home can I afford comfortably? It used to be that agents had financial calculators and ran numbers on different mortgage scenarios directly for the buyer. That was when there were just a handful of mortgage plans available and regulations for originating mortgages were alot simpler. That has changed. Now there are dozens if not hundreds of mortgage plans available, and there are stricter guidelines for obtaining them. Today, buyers get pre-qualified (and/or pre-approved) by mortgage originators.
What is the state of the real estate market, from a buyer's perspective right now?
These can be banks, credit unions, or more and more, financial institutions that just issue mortgages. Or they can be mortgage brokers who deal with a multitude of mortgage companies. You may have one you want to use, or you may take the suggestion of your agent concerning which bank to get prequalified by. Prequalification - where your income, debt, and credit history are analyzed - results in a prequalification letter where the amount you can afford is stated. Most agents will require a pre-qualification letter showing you can afford the home.
Note: Your Realtor may request that you talk to a mortgage institution about prequalifying before meeting with you. This is fine, as long as there is no obligation to use that bank. They are just trying to make sure you are able to purchase a home and not waste your time if you have to wait a bit before you can buy.
Prequalifying vs. Preapproval?
Prequalification is where a mortgage originator from a mortgage institution gathers basic information from you, often over the phone. Why do this? First, you will know the amount of mortgage a bank is willing to loan to you and from that the top price of homes you should look at. Second, many listing agents these days require a prequalification letter to present your offer to the seller. This does not mean you will automatically get a mortgage; it says that you are looking good to get one if everything checks out. Although most buyers use the prequalification bank, you still have freedom to choose.
Preapproval is where you make formal application for the mortgage. Everything pertaining to the buyer is checked out and if satisfactory, the bank commits to giving you the mortgage, contingent upon the actual home you choose. The advantage of preapproval really shows in multiple offer situations. Everything between offers being equal, many sellers will take the offer with a preapproval as opposed to a prequalification because they feel more assured that the preapproved buyer will get the mortgage.
First, of course, is finding a home that fits your needs. What are they?
There is a difference between needs and wants. How many bedrooms do you need? How many baths will accommodate your household? Needs are the minimum requirements. Wants are features you would like to have, but that aren't absolutely essential.
Make two lists: one for needs and one for wants.
The most important thing is to be realistic as to what properties are available in the price range you are comfortable with. First, of course, you want listings you view to fill your needs. Can you fill all of them in the price range in the areas you desire?
Next, you want the homes you view to fill as many of your wants as possible.
Matching available homes to your needs and wants lists, while getting a feel for what is available in your chosen areas and price range, will help you narrow down the field of available listings to a handful of candidates to view in person.
As you work with your Realtor to do your needs and wants lists and narrow down all listings available to the best candidates to see, they should be getting a pretty good idea of what you are looking for too.
At this point, to review, you have chosen a professional to help you in your quest, your financing is in line, and you have a clear picture of your needs and wants. You are in good shape as a potential homeowner.
As you view listings, you will get a feel for what is currently on the market. The average homebuyer looks at 10-12 homes. Some less. If you and your agent are on the same page, you have eliminated listings that don't fit your needs without having to view them. The more targeted the homes you see are, the less you will likely need to see to find the right home.
Exciting! So many good things come from finding the right home. Besides the basics of a safe shelter, your home will add creativity, warm memories, and many other things to your life. But like with anything else, don't fall in love until you know it is yours. There are still a few hurdles (read down the rest of the Home Buying Process list). There are going to be decisions to make and it is important you make them well before you are handed the keys. So, and we know it is hard, ask the emotional part of your brain to sit down for a bit and let your rational, reasoning part take over.
If you are working with a Buyer's Agent, now is the time to research the value of the home and talk about how to approach making an offer. If you are working with an agent who represents the Seller, then skip this market analysis step. For them "the price is the price". (You may still be able to get a fair idea of the home's value by comparing it objectively online.)
When your Buyer's Agent does a market analysis, they are using comparable listings and sales to see if the price of the home is in the right ballpark, something they will share with you. This can be an ingredient in the next step - determining your negotiating strategy.
Caveat: a major factor in negotiating strategy is time. Is it a "hot" property? If it is a great property that is new to the market, has been shown alot and is priced correctly, it may sell very quickly. Why? Because a bunch of other folks may like the home as much as you do and none of you want to lose it.
Other factors to consider are how long the home has been listed, if there have been any price reductions and, if so, how many, any sort of info on the seller's motivation that might be available, the condition of the property, and more that your agent will likely discuss with you.
Do you love a hot property that you would be willing to pay full price for? Or are you satisfied with a property (not in love yet) that has been listed a while that you may put a lower offer in on?
New York State is an "attorney" state. This means that attorneys, instead of escrow companies (as many other states have), are used to close property. Real estate brokers and agents are forbidden, in NYS, from practicing law, so instead of drafting a purchase contract from scratch, we "fill in the blanks" on an already legally reviewed contract form. All contracts and addendums are subject (or should be!) to the attorneys' approval(s).
Here is a copy of the purchase offer form Coldwell Banker Faith Properties uses.
The whole idea of the purchase offer and any related addendums is to be the full legal written agreement between the parties (verbal is not legal in New York State). The purchase offer will cover:
- Identification of the property to be purchased.
- Identification of the Seller and Buyer.
- What items are included with the purchase. Generally, items attached to the property are included, but not always. The contract should also state which items are not included, and which are included but may not be in working order.
- The proposed purchase price and how it will be broken down into deposit(s) and balance at closing.
- How the purchase is to be financed - cash, mortgage, etc.
- Title documents - deed, survey, etc
- Information on closing and possession dates.
- Contingencies to contract - items that need to be satisfied before the contract can proceed to closing.
Also attached to the purchase offer form, if there are any contingencies, is the purchase contract addenda. This covers common contingencies such as home inspection, pest inspection, radon inspection, whether the financing is FHA or VA, whether the owner is financing the purchase, inspection of septic system if the property is on a septic system, tests of the water if the property is not on public water, whether the buyer has to sell a home to purchase this property, and any other pertinent contingency.
Whew! It is alot of paperwork, yes, but has all proven to be important when setting forth the agreement between the buyer(s) and the seller(s).
By the way, only agreements in writing are enforceable in New York State. Any and all of the agreement between the seller(s) and the buyer(s) must be in writing.
The purchase offer is just that, an offer. It can be accepted, rejected or countered.
Once the purchase offer is submitted to the listing agent for presentation to the seller, it will become apparent what path needs to be taken, for a mutually agreed upon contract, called the "meeting of the minds".
Whether the purchase was accepted as is or was countered back and forth until it reached acceptance, this is a major step on the way to buying this property. The buyer and seller are in agreement, and the transaction now moves forward to attorney approval.
Offer Is Rejected
Whether the seller rejected the offer because they felt it was too low pricewise or for some other reason, or whether the offer was one in a multiple offer situation that was not chosen, this usually - but not always - means back to looking for homes.
It is absolutely, strongly suggested that all parties use an attorney. Because of legal paperwork that needs to be generated on the seller's side, they pretty much have to use one. Buyers sometimes try to save money by not using one. This is a bad idea. Purchasing a home is a big event in most people's lives. If there was ever a time you needed protection, it is here. A buyer's attorney is going to make sure the title is free of all problems (clouds). Titles can have alot of problems in many different forms. Some are solvable (though often a pain to solve), and some could be disastrous to your ownership of and/or to the possible future salability of the property. Your attorney is also going to look over the Closing Disclosure for your mortgage and make sure that everything is in order, and you are not overcharged.
Want to save money by using the bank attorney? Just know that the bank attorney is there to protect the interests of the bank which are mainly to see that the mortgage is paid. What happens in ten years when your mortgage has been paid down alot and a problem with the title is discovered? The title insurance policy protects the bank. Any errors missed by the bank attorney will only cover the balance of the mortgage - your equity dollars might be in jeopardy.
To have total confidence, use your own buyer's attorney and consider getting a "fee title" policy which will protect your interests (equity, etc.) outside of any interests of the bank.
The contract you and the seller signed contains contingencies that provide for tests and inspections to be done on the property. A contingency is something that must be satisfied before the contract can proceed.
The most common inspection is the home inspection. In New York State, professional home inspectors must be licensed. To be licensed they must go through special training. Use a home inspector! Do not be tempted to use a friend who is a contractor. While they might have great experience building and repairing homes, they probably do not have the all-around knowledge an experienced home inspector has when it comes to the general condition of a home.
The home inspector will be looking for major issues. These are things that might be major concerns about the condition of the home, some might even be safety issues. They are things that may exceed the limits written into the inspection contingency in the contract and call for reopened negotiations. Accent on the words "safety" and "major" here. All homes, even new ones, may have small things that need correction. These are maintenance issues. A good home inspection will find these and at the same time, give you pointers on how to keep things in tip top shape once you are a homeowner. Most of the time, these do not exceed the monetary thresholds in contracts for correction.
Another common test is for radon. This is a radioactive gas that seeps up from deposits in the earth. It is everywhere in very low quantities. Sometimes in homes, depending on where they are built, this odorless and colorless gas can become concentrated to levels that are harmful to health. The generally accepted level for safety in the U.S. is 4 picocuries per liter. Over this, mitigation (installation of a system that blows out the concentrated gas) may be called for. The higher the reading, the more harmful. All installed mitigation systems should reduce the radon level to 4 pcl or lower, and it is advised to use a Radon company who guarantees their system's effectiveness to at least the first homeowner who buys the home.
The inspections and tests are done and everything has worked out, so the transaction is full speed ahead. Now formal mortgage application occurs. This should happen promptly to meet the dates in the contract. Buyers should receive or ask for a list of everything they need to bring to the application, then assemble all of it and bring it. The more complete the required information is at application, the sooner the mortgage commitment letter will be issued, increasing the chances of getting it by the date stipulated in the contract. At this point, buyers should read our Ten Commandments When Applying for a Mortgage Loan so they can avoid doing anything between application and closing that will jeopardize their getting the mortgage. The mortgage process can take a while. Credit is checked and rechecked. Bank balances are checked, as are the source of the funds for the down payment. Regulations from the mortgage market that most mortgages are sold to (Freddie Mac, Fannie Mae and others) and/or from the government (FHA, VA, USDA, SONYMA, etc.) are followed closely. The home is officially appraised for value to make sure it is worth the money the bank is loaning on it. There is a title search to make sure it is clear of liens and encumbrances.
Once everything is submitted and satisfactory, the bank issues a mortgage commitment letter agreeing, possibly with some conditions, to issue the mortgage loan to you.
Any contingencies in the mortgage commitment letter must be met before closing. Some common ones are: getting homeowner's insurance, employment verification, verification the property is not (or is) in a flood plain, passing septic and well tests if not on public water and sewer, etc.
Sellers' attorneys and buyers' attorneys (and bank attorneys) are essential players in real estate closings in New York State. It is all about protecting the interests of the involved parties - you the buyer, the seller, and also the mortgage bank. Closings are most often held in the offices of the attorneys for the mortgage bank.
Some of the papers are 1) the title abstract (history) and search to show that there are no liens and encumbrances, 2) title insurance policy - which is an insurance policy protecting the interests of the mortgage bank if something adverse was missed in the title search (a separate title policy - called a fee title policy - protects the buyer if something was missed, and this is the time to get it if you want it), 3) Closing Disclosure from the mortgage bank showing all closing numbers. Compare this to the Loan Estimate you got when you applied for the mortgage. Have any numbers changed? Do you understand why? Are they valid or mistakes?
Before the closing, the mortgage bank will issue the "clear to close". With this and completed paperwork, the closing can be scheduled.
As included in most contracts, there is a provision for a final walk through. This should happen within a day or two of the scheduled closing. With this, the buyer visits the house with their agent to make sure the house is in the same condition as when the purchase offer was accepted, with any repairs agreed upon done, all the sellers' personal property out, and the property "broom" clean.
Bring a camera (or use your Smartphone) just in case you need to record something (hopefully not) that was not done or has broken in the interim. If there are problems, have your agent contact (or you contact) your attorney so the situation can be fixed or an agreement for you for a holdback of funds to fix the problem can be made. Most of the time things are fine, but if they are not, you want the attorneys to be aware of it before the closing.
Likely sitting at a table in an attorney's office, you are now ready to take legal possession of the property. Plan on having a tired writing hand - there are alot of papers to sign. Closings can last an hour or two. Once complete, though, the home is yours! The deed will be sent to the County to be recorded. You are holding the keys to the future in your new home.
Here is a helpful list of details to take care of when moving into your home. Things like telling everyone your new address, changing addresses on credit cards, etc.
You can check out our website blog articles for advice and ideas for homeowners. And feel free to call your CB Faith agent for market updates, help with comps if you are going to an assessment hearing, etc. We are here to assist after, as well as before the sale.
Most important - enjoy your new home!