Buying a house can be an exciting dream or an overwhelming nightmare. At Springs Homes, we want to provide you a roadmap and a little insider insight which can go a long way to help ensure your experience is a good one.
You will undoubtedly have questions ranging from, "Is this the Right Time to Buy a House?" and "How Much Home Can I Afford?" to "Where Does the Home Buying Process Begin?" These questions may be your first thoughts, but there are certain to be many more questions that appear during the first steps of buying a house.
We’ve broken the home buying process down into a series of small, manageable steps. These steps address the preparation, the search and finally, the offer, purchase and closing of a new home.
These steps are designed to give you confidence about the home buying process. But as simple as they may seem, each provides additional information and links to help you prepare for any unforeseen challenge or obstacle.
How Much Home Can You Afford?
"How Much Home Can I Afford?" is the first question any home buyer should ask, the second is "How Much do I Want to Spend?" Unless you are paying cash for a home, you're going to need a mortgage loan. Since mortgage financing is usually the most complicated aspect of the home buying process, this is a logical place to start.
There's nothing more disheartening for a home buyer than looking at homes online or in person, getting excited and then finding out that they don't qualify for the homes they are in the process of falling in love with (ouch!). This is why it's so important to get your financial situation in order before starting to shop for a home.
The mortgage lending landscape is complicated and even real estate professionals often display a lack of understanding about the different types of loans and loan products, what they require and how they work. The number of different loan types and different requirements and options associated with each one make this understandable. To get this part of the home buying process right, you are going to need a guide and that guide should be a good and trusted lender.
In order to find a good lender you will want to ask your Realtor for a recommendation. If you aren’t working with a Realtor yet, friends and family will be more than happy to share the names of lenders who have provided good service.
Meeting with a lender and getting pre-qualified is the first step every buyer should take when beginning the home buying process. Pre-qualification will give you, the buyer, a clearer idea of what you need in terms of cash as well as how much house you can afford.
If you have no credit or bad credit, a good lender can help you get on track with cleaning up bad credit or establishing good credit. If you think this might be your situation, please read our guide to Buying a House with Bad Credit.
We have also put together a comprehensive Mortgage Pre-Qualification Guide. This guide walks you through the entire pre-qualification process and spells out what to do in simple terms that are easy to follow.
Think of the pre-qualification stage as simply collecting information, yes you will need to share a little information to get some information but that’s how this works. You should talk to a couple of different lenders, talking doesn’t mean you are committed to using them. You aren’t actually committed until you start paying for things like appraisal, inspections and rate lock.
You need to trust the lender you finally pick, so be diligent about this process. As you talk to different lenders, you should start to hear the same things about the type of loan that's right for you as well as how much money will need to put down and any improvements to your credit, debt reduction or income you need to make before buying a home.
As you get to know these lenders, you’ll want to narrow down your lender choice to a select few and start the pre-approval process. This means making full loan application in order to get pre-approved for a home loan.
3 Tips to Select a Mortgage Lender-Anita Clark
At this stage you are trying to decide on a lender but you are also trying to establish yourself as a strong buyer. When you do finally make an offer on a house, you're going to have to submit something called a lender letter. This is literally a letter that gets included with your offer, the intention is to assure the sellers and the listing agent that you will have no problems obtaining a loan. The stronger the lender letter, the better.
This means the further along the approval process you are, the stronger the lender letter you'll be able to obtain. This is a great time to go ahead and make full loan application so the lender can pre-approve you. This means all the lender is waiting for is a contract on a property. It’s important at this point to understand the difference between prequalification and pre approval.
We haven’t talked about online lenders because online lenders are a risky proposition for most first time home buyers. It is important to note that although there are some remarkable online lenders, you can't beat a trusted local resource for customer service. If you are a first-time home buyer or have a complicated loan, you really need to consider using someone you know and trust.
Your Needs and Wants
Once you have a feel for how much you can spend and more importantly how much you want to spend, you will need to establish your wants and needs, we call this a "needs assessment". In this stage you'll be evaluating things like what neighborhood you want to live in, how many bedrooms, bathrooms, proximity to schools, etc.
This list should start with the absolute essentials, in other words, if you can't have this feature, you’d rather stay in your current situation. This would be things like more bedrooms, more bathrooms or closer to work. As you build this list you'll move towards items that would be nice to have, this would be things like, a good view, large closets, etc...
Back in the pre-qualification process, the lenders you talked to should have established an upper limit dollar amount. This is the number the lender thinks they will be able to loan you, this number includes your down payment.
The other important number that should have come out of your pre-qualification homework was the number you wanted to spend based on the payment you'd like to have.
At this point, you should take your wants and needs list along with the information you learned during the pre-qualification process and share this information with your Realtor.
Establish your needs and wants in a home Jeff Nelson
Some people hesitate sharing the upper dollar limit they qualify for with a Realtor. They fear the Realtor will push them to spend more than they are comfortable with. This is certainly understandable but if you really feel like you're working with a Realtor that would actually do this, you might want to re-evaluate your choice of a Realtor.
Tour Homes & Neighborhoods
This stage is the appropriate time to start looking at neighborhoods and houses. Your Realtor should take your wants and needs list in combination with the upper and lower price limits you have established and put together a group of properties and areas to start your house hunting.
What to Look For When Searching For a Neighborhood Bill Gassett
You will no doubt be simultaneously searching for homes on real estate websites while your Realtor is searching the MLS. It’s important that you share those properties as well as your thoughts with your Realtor. Don’t forget you and your Realtor are a team, sharing ideas and opinions is essential for successfully finding your home.
If you are trying to adhere to a strict budget and most buyers are, your initial impressions might lead to some disappointment, this is normal. Keep in mind what you are seeing your first time out is what is available on the market right now, at this point in time. These are most likely homes that are or were overpriced to start with and have been sitting on the market for a while. As you keep looking at new homes as they come on the market, you'll start to get a sense of what constitutes a deal or at least a well-priced home.
If you have been looking for a while and you're not happy with the types of homes you're seeing, you'll most likely have to reevaluate your wants and needs list or your price range. You'll need to take a look at things like neighborhoods and school districts. These two factors generally drive prices higher. A good Realtor can help you find niche neighborhoods in your desired school district or an emerging neighborhood at the edge of where you want to be, but for less money. A good Realtor is your best resource for finding hidden gems.
Your lender can also suggest different loan products that might reduce your payment into a more acceptable range. Products like adjustable rate mortgages can help bring your payments into a range that fits your budget.
Short sales and foreclosure properties can also be a good alternative for a buyer that's not finding what they want in their price point. This kind of property was very prevalent during and just after the Great Recession. We see less now, but they do hit the market from time to time. It is important to understand that there is a difference between a short sale and a foreclosure.
If you have the resources available, as well as the construction skills and knowledge, another good option is to look at fixer uppers. You'll need to work on this type of property, sometimes before you can even move in, but the competition for these homes isn't as much from normal retail buyers as much as it is from wholesale investors. This gives you, the normal buyer, a slight advantage.
How To Purchase And Renovate A Fixer-Upper Kyle Hiscock
The advantage for the normal buyer, is that investors are looking for properties priced well under market value, but not necessarily as deeply discounted as the investor. When competing against investors, you as an owner-occupant, will have the advantage of time on your side. Investors are generally looking for short-term gains or in the case of rental investors, quick cash flow. You on the other hand, will most likely be looking at this purchase as a longer term investment. You certainly don’t want to overpay, but if you have done your homework and understand market values you will be able to structure a winning offer with the help of your Realtor.
Make an Offer on a Home
At this point you should have enough knowledge about the the areas and homes you are looking at to know a good deal when you see it. When this happens and you're ready to make an offer on a home, there are a number of things that need to take place.
The first step is to establish an offer price. Even though you already sense the home is a value, you’ll want to establish the actual market value. Your Realtor should produce something called a CMA, this stands for comparative market analysis. This market analysis looks at similar homes in the area that have sold in the last 6 months. Ideally in a market analysis, your Realtor will be looking for exact matches; properties that are exactly like the one you are considering. This isn't always possible since each house and lot are different, but it's the goal. Since exact matches are so rare, the next step would be to look for properties as similar as possible to the subject property. The goal is to find as many similar houses as possible that have closed in the previous 3 to 6 months. You would then examine how much they sold for, any seller concessions like closing costs paid, etc. Next you and your Realtor will use this information to come up with the most well informed offer you can make. It’s important to remember that this is not an appraisal, simply an analysis to help you with the offer price.
Before your Realtor actually writes the offer, there are three more things you need to consider.
- Terms: Are they willing to take your type of loan? Sometimes a home will not qualify for FHA or VA loans. Other times the sellers aren’t willing to pay the associated costs of certain loan types.
- Closing Date: When do you want to close? A lot of this will depend on when you can get the inspections and appraisal completed.
- Seller Concessions: Are you asking the seller for things like closing costs?, considerations of inclusions, exclusions, etc.
At this point you should have a pretty good idea of whom you want to use as your lender. If you started the pre-approval process right after you finished working on pre-qualification, you should have a pretty strong lender letter in hand. Your Realtor will need a copy of this to submit with the offer. The idea here is we want to convince the seller that we can actually get a loan so they take the home off on the market and stop showing it to other potential buyers.
This is also a good time to touch base with the lender and give them a heads up that you are getting ready to make an offer on a property.
Once you've established how much you'd like to offer for the property, what terms, deadlines and closing date you want. Your Realtor will put together an official offer spelling out how you'd like to structure the deal. At this point you'll need to produce earnest money. The earnest money is your way of saying we are serious about this transaction. If you don't perform to the terms of the ultimate contract, the earnest money is potentially the seller's recourse for the buyer's inability to perform.
Having said this, when your Realtor writes the offer, there will be a number of real estate contingencies in place in order to protect you from losing your earnest money while you are doing your inspections and getting you loan finalized. Responsible Realtors and home buyers don't tend to lose earnest money. Generally, we see this happen when deadlines are missed or the buyer just gets the eleventh hour case of "buyer's remorse" and walks away.
Once your offer is accepted, the “Due Diligence” period begins. This means scheduling and performing inspections, reviewing covenants and title work, and a laundry list of other items. The most important item on this list is undoubtedly getting the loan processed and ultimately approved.
Processing the Loan
Your offer has been accepted and you are now officially under contract on a home. The first thing you're going to want to do, is to get a copy of your contract to any lender you're still considering working with.
If you aren't already pre-approved, you're also going to want to make full loan application with any of these remaining lenders in order to get an accurate loan estimate from them.
Earlier in the process, you were evaluating lender's costs based off of something called a fee sheet, or a list of their fees. This is not necessarily an accurate representation of where you’ll end up with the lender but it does get you close. Once you’ve made full loan application and submitted a contract, the lender has 3-days to get you a “loan estimate”.
The loan estimate is a document the lender is required give you after you have applied for a loan. This form breaks down the true cost of the mortgage loan. Since the loan estimate is a standardized form it makes it easier for the borrower to compare loans.
When you are shopping for a mortgage, the right combination of cost, dependability and service are what you should be looking for. Paying too much for a high service lend will cost you in the long run while going with the cheapest low service alternative can cost thousands of dollars as a result of missed deadlines.
10 Biggest Mortgage Mistakes First-Time Home Buyers Make -Xavier De Buck
The next phase of the loan process is underwriting. Lenders generally try to sell loans back into what's known as the secondary mortgage market. These entities have strict guidelines as to what they require in order to purchase these loans. This is why your lender needs to underwrite the loan to a specific standard. What does this mean for you? The lender will most likely be coming back and asking for certain types of documentation.
Borrowers find this entire process very frustrating, but it's important to understand that there are entire underwriting departments behind the scenes asking for this documentation. There's not really anything your loan officer can do about this. The entities that buy loans publish guidelines and your lender must adhere to those guidelines in order to sell your mortgage back into that market.
Some underwriting departments actually use a technique called overlaying. This is a practice we started to see after the mortgage meltdown in 2008. This is a practice where the underwriting department of the mortgage company goes above and beyond what's actually required in the underwriting guidelines.
The bottom line for you, the borrower, is that there's really nothing you can do about what the underwriting department of your mortgage lender asks for. Non-compliance usually leads to rejection of the file. The best advice is to ask your lender during the pre-qualification process if their underwriting department overlays the basic guidelines for your loan type.
Everything You Need to Know About Mortgages-Springs Homes
One of the final requirements of obtaining full loan commitment is the inspection and appraisal.
Home Inspection and Appraisal
Up to this point you have been getting your financials in order and searching for a home. Now that you have found one, you need to do what's called due diligence work. This means exercising the contingencies that were written into your real estate contract that involves performing inspections, reading title work and covenants and finalizing the loan process.
During the home inspection phase of the home buying process you'll be determining the physical condition of the property and its systems as well as assessing any potential health or safety issues. Your Realtor will most likely recommend an inspector, but if this doesn't happen you can ask friends for referrals.
It's important to find an inspector you trust, so you might spend a little time on the phone doing a short conversation about the process and what they will be looking for. You should also share your priorities and or concerns before you choose someone.
Home inspectors are certified, not licensed. This means they voluntarily join an association and adhere to that organization's standards. We can’t stress the importance enough of using an inspector that is certified.
Prior to the inspection date you will want to familiarize yourself with the guidelines from the particular organization that certifies the inspector you ultimately choose. You can usually download a set of the organization's standards from their website. In this article about home inspections, we include links to the appropriate inspection organization's websites.
In addition to the primary Home Inspection there are some additional inspections that are really valuable. For example, Colorado has high radon levels, so a radon test is very important. If you're looking in an older neighborhood you're going to want to do a sewer line scope. Also, for older homes you might want to do a lead based paint assessment. Here's a list along with descriptions and prices of additional inspections you might want to do.
9 Things You Should Investigate During the Inspection Period - Harmony Realty Triangle
Once you have the results back from the property inspection you're going to want to study those carefully. When you have a good idea of the property's condition as well as any health and safety issues and or problems with the major systems like electrical or HVAC. You're going to want to meet with your Realtor and decide how and if you want to proceed. Sometimes the results of an inspection are so discouraging that a buyer chooses to simply walk away rather than close on the house and deal with the issues.
If the buyer chooses to proceed they have two choices; first they can take the house as is and proceed to closing. This tends to happen more in a seller's market; when the buyers are just happy to get a house. In a normal market, the buyer in conjunction with their Realtor will put together a list of what is called unsatisfactory conditions. The seller then has the right to fix these things, offer a dollar amount settlement or flat-out reject the proposal.
Negotiating after the home inspection can be very stressful, this is why it’s important to understand the condition of the current market. This helps the buyer know how much if anything to ask for. It also helps to know the seller's level of motivation but if they have a good agent that can be difficult to obtain. The best advice we can give is to pick a good Realtor, during the selection process you should discuss how they handle inspection negotiation. The answers should be clear, simple and easy to understand.
How To Negotiate After The Home Inspection- Paul Sian
In addition to the inspection, your lender is going to require an appraisal. The lender wants to know if the house is worth what they're lending you to purchase it. In the unlikely event you don't make your payments and they have to foreclose, the lender wants to know that they can resell this house and minimize any losses.
You, the home buyer, will pay for the appraisal but the lender will order it. The appraiser unlike the inspector is licensed and adheres to a strict set of guidelines. Appraisers undergo continuing education in order to maintain their licensure as well.
The appraisal happens without the buyer being involved. The lender orders it, the Realtor will schedule it and the appraiser goes in alone makes their assessment based on measurements, construction quality, number of rooms, floor plan and condition. All of this data gets put into a spreadsheet, the appraiser applies debits and credits based on condition and quality as they relate to the comparable sales in the area.
Once complete, the results of the appraisal are sent to the lender and the buyer and their agent are notified as to the status, the property either appraised or didn't appraise.
Here is a thorough outline of how the appraisal process works.
One of the requirements of the real estate contract is going to be that the seller provide a clear and merchantable title to you, the buyer. Buyers often ask “Why do I need Title Insurance?” this is usually because they don’t understand the number of different scenarios that can occur that can potentially make a title problematic. Clear and merchantable title means the property is free of any liens, judgments, encumbrances or other potential clouds on the title.
Do I Need to Get Title Insurance?-Karen Highland
The seller will provide the buyer with a title insurance policy at closing. This policy acts as the guarantee that the title is clear and merchantable. The policy will be purchased from a title company and since the title company is insuring the title, the job of researching and vetting falls to them.
The choice of the title company is very important. Title insurance isn't important until you need it and when you do, you want to know that your insurer is still in business. Here's an important article about how to choose a good title company.
During this process you'll receive a lot of paperwork to read through, and so will your Realtor. Part of a Buyer’s Agents job is to read the title work looking for potential problems and or exceptions the title company might be taking to the condition of the title.
One aspect of the title work you are going to want to read carefully will be any restrictive covenants or homeowner's association documents associated with the property. These will be included with the title work. This one is it's really important because so many conflicts and disagreements could be prevented if buyers would simply read the covenants and homeowner's association rules and documents before closing on a property. How many times have you seen a story on the local news about a disgruntled homeowner fighting their HOA about something that was clearly documented in the covenants?
Title insurance is not the most fascinating aspect of the real estate transaction until there's a problem, then it gets really interesting.
Closing on Your Home
You're almost at the finish line. You've taking care of your financing, found the house, handled inspection issues, got through the appraisal, read through the title work and you're ready to close.
The final walk-through is the next essential part of a successful closing. Through the contract negotiations there were a number of things that were agreed upon. Things like what stays, what goes, what gets fixed and what's left behind for the buyer to take care of. Not that you don't trust the seller, but it's in your best interest as the homebuyer to make sure that all of the i’s are dotted and the t's are crossed. Details often get missed by sellers in the rush to get out of the house. If only for this reason, we do a final walk-through.
The final walk through generally happens after the sellers have moved out, usually the morning of the actual closing. You should go to the walk through with your inspection resolution list, a copy of your contract and original MLS sheet. As the home buyer, you’ll want to keep your eyes open during the walk-through. You'll want to check for things like window coverings, appliances and anything else that was agreed upon in either the contract or the inspection resolution.
Is a Final Walk Through Necessary? Debbie Drummond
If things aren't as you expect them, the parties will have time prior to the actual closing to work out their differences. Sometimes this involves items being returned or arrangements being made for repairs or cleaning. Either way it's important to get these things worked out prior to closing.
Once you've work through any issues that arose on the walkthrough, you're going to head towards the closing table. Once there, you'll be presented with a large stack of paperwork. Lots of numbers lots of signatures all requiring lots of patience.
Prior to arriving at the closing, your Realtor and or lender should have gone over your final figures, including closing costs and the settlement statement. Closing costs are additional fees associated with the loan as well as the closing of the property. There are associated fees on both sides of the table affecting both the buyer and the seller. There's nothing worse than getting to the closing table and having a buyer ask what are all these closing costs? Make sure you understand all the fees, premiums and charges you are responsible for paying before signing.
As far as the closing itself is concerned, there should be a closer from the title company at the closing table. This person is responsible for making sure all documents are signed and dated correctly. Another aspect of their job is to explain any document you will need to sign. Ideally your Realtor and lender will have done enough preparation so that you really don't experience any surprises. If you do, it's important that you ask questions of the closer, your Realtor or your lender to explain what you are signing. Yes, legal documents have important ramifications don't just sign because you feel pressure.
The largest portion of documents to sign for the buyer will undoubtedly be the loan documents. Your lender should have paraphrased most of what you will be signing already. It also helps to have the lender present at closing in order to answer any questions or resolve any last minute issues.
After all the documents are signed, the closer should give you copies of everything you signed, any funds you are entitled to and of course most importantly, the keys to your new home.
We've all heard nightmare stories from people who've had bad experiences buying a home. No one can guarantee that your home buying experience will be stress-free, easy or even fun. Having said that, by following all the guidelines we set forward in this article you will significantly increase your chances of reducing your stress and actually enjoying the home buying process.