Step by Step Home Buying
When you are researching real estate you are likely to notice the terms "house" and "home" used in the same context. However, there is a significant difference between the two.
A house is a physical things; it is where you eat, sleep and put your things. It is a material possession and investment. A home on the other hand, is where you feel comfortable and safe. A home is where you live.
You buy a house using logic, whereas you buy a home using emotion. When you are purchasing real estate you must balance you logical needs and emotional wants as the two will likely be in conflict.
For example, you may desire a home with a view; however the payments are higher than you can comfortably afford. This is a prime example in which you must balance the two to come to a good decision.
Should you purchase the home and have to budget more carefully in the future; purchase the home with no view at a cheaper price; or buy a smaller house with the view (among other options).
When viewing a home, most buyers are looking at the home emotionally; envisioning a safe and happy future in the home. However later, when it comes time to complete a mortgage application or make an offer on the home, the logical side will begin to kick in.
In order to make the best decision, you must view everything both logically and emotionally. If you must make a trade-off, you must first decide how major the decision is. Generally, if it is a big decision, you will make the decision based on logic. However, emotion should also be a factor and can win in the small decisions.
If you are able to successfully balance these two perspectives you will find yourself in a home that you love that will also provide an investment for the future at a price that works for you.
Although you have viewed the property and checked the workings, you have not lived in it. The seller, on the other hand, has a better knowledge of the home. They may know things about the home that were not initially apparent to you. Due to this, you will have the seller provide you with a disclosure as part of your offer.
This disclosure will provide you with any conditions that could have a substantial impact on your decision to buy the home. This will include any issues with the home; such as whether they are in a flood zone, noise zone, or any other type of hazardous area.
If you have an agent, this will be done automatically. However, there are many states that do not require the seller to provide this information to you. Also, when buying a foreclosure, you will definitely want to ask this to be done. You should always use this as a stipulation is your offer.
Condition of the Property
About the worst thing that could happen on moving day is to get to the home only to find it a complete mess. To ensure this does not happen, indicate in your offer certain minimum standards that must be met on the condition of the home. If you do not, you may find the home and yard in disarray and be powerless to do anything about it.
Some of these stipulations can be things like the roof and plumbing not leaking, the appliances working and all debris being cleared away.
In addition to the appraisal and termite inspection, you will also want to hire a professional to go through the home, seeking out any problems. Of course, you have already gone through the home checking on the condition, but you are not trained in the proper things that need to be looked into. Even if nothing is found that the seller will need to repair, you will at least have knowledge of any potential problems with the home.
The seller will want to have this inspection done quickly in order to approve the results and move on with the transaction. When the inspection has been completed, you should allow yourself a sufficient amount of time to review and approve the inspection report. If you do not wish to approve the report and want to have the seller pay for all or some of the repairs, you will need to negotiate this with them at this time. If you are unable to negotiate this in a way that satisfies you; you are able to cancel the purchase without penalty.
You should always allow a maximum of ten to fifteen days to receive the report and five days to review it.
Final Walk-Through Inspection
Before you officially close on the home; revisit the property to make sure it is in the same condition that you stipulated in your offer, and make sure required repairs have been made. This should be done no sooner than five days before closing. Be sure that you put this right into you offer.
How Financing Details Affect Your Offer
Most buyers use a mortgage to purchase a home as they do not have the large amount of cash needed to pay for the home upfront. Due to the fact that your purchase of the home will be contingent on obtaining financing, the seller has the right to be informed of your plans to finance so they can evaluate them. This is why financing details are included in the offer.
You will need to disclose the amount you will be putting down in the offer as well. Along with the financing information, this informs the seller of how likely you will be to actually obtain the loan. The larger the downpayment, the more likely you it is that you will be able to obtain the loan as underwriting guidelines are less strict.
Including financing information in the offer will also help to protect you. In the case that interest rates rise suddenly or become volatile, your mortgage payment my rise to a payment that you are no longer able to afford. Including a maximum interest rate that you will accept will protect you from any occurrence such as this.
Along with this, the seller will want you to see some flexibility in the fincancing terms that you will accept. If the current interest rate is seven percent and this is the highest rate you are willing to accept, you have the ability to cancel the contract if the rates rise past seven. This is detrimental to the seller since they have lost valuable marketing time by this point and may have their own plans based on closing on the home successfully.
Asking for Closing Costs and Financing Incentives
At times, closing costs or other financial incentives may be requested to be paid by the seller. One such fincancial incentive that is commonly used is asking the seller to provide funds to temporarily buy down the interest for up to the first two years. This kind of incentive would work well if the buyer is currently tight on cash or pushing their qualifying ratios to the limit.
When you ask for incentives like these, however, the seller will generally be less likely to negotiate on the price of the home. What these incentives really mean are that you need some help initially getting into the home but are willing to pay more in the long run.
Another possible, but not as commonly used, option is to have the seller "carry back" a second mortgage to aid you in facilitating the home purchase. This is an option when the seller does not need all the proceeds from the sale of their current home to purchase their next home. The benefit of this practice is that by combining the down payment and the seller's second mortgage, you may be able to avoid paying mortgage insurance which will save you money.
If this option is part of your purchase offer, include the terms you will pay on the second mortgage.
If you are one of the rare few actually able to pay cash on a home, you will need to document this within yoru offer to show that you have the funds available. A bank statement will generally work for this purpose. If you plan on liquidating stock or some other asset, you should provide a timetable of when you will be able to prove that you have converted the asset to cash.
Other Financing Details in Your Offer
You should also provide the seller with information in whether you will be getting a fixed rate or adjustable rate mortgage. You will also need to state whether you are getting conventional financing or getting a VA or FHA loan.
How FHA and VA Loans Affect Your Offer
Government loans require additional financial and performance obligations on the seller. For this reason you must disclose if you are obtaining a VA or FHA loan in your offer.
These government loans do not allow buyers to pay certain fees that are usually charged by lenders, escrow companies, settlement agents and title companies. These fees are known as "non-allowable" fees. They still get charged but the buyer is "not allowed" to pay them. In the end the seller will pay the fees instead of you.
These "non-allowable" fees will generally come from your lender. Before you make your offer, you should be pre-qualified by a loan officer. Therefore, your real estate agent can inquire from your lender about how much the lender's non-allowable fees will be. If you have an experienced agent, you will also be able to count on them having an idea of how much the escrow or settlement agent and title insurance fees will be.
Because these "non-allowance" fees would not be the responsibility of the seller with a conventional loan, the type of loan you are using must be included in your offer. Buyers using these loans should also be aware that since the seller will be paying these additional fees they will be less likely to negotiate on the price of the home.
VA and FHA Appraisals
When a buyer is financing their home purchase through a VA or FHA loan they must have an additional home appraisal inspection which is a bit more detailed (and expensive) than with a coventional loan. These appraisers must perform certain minimum inspections along with an evaluation of the market value of the property. Although repairs will sometimes be required from these appraisals, it is not a thorough home inspections and a professional home inspection must still be performed.
Since this is another additional cost to the sellers that would not be there with a conventional loan, your offer should include a maximum figure for these repairs. If you do not do this, the seller is basically signing a blank check and it is understandable that they will not likely be willing to do so.
Bear in mind that whatever price you include to cover these costs will affect the seller's willingness to negotiate on price. For example, if you include $500 for repairs, the seller will generally be $500 less negotiable on the price. If they know they may have to pay this, they will likely want to keep $500 on the price to cover their cost. If your repairs do not cost this much, you may have not gotten the price down as much as you would have been able to otherwise. In order to avoid this, state in your offer your maximum amount and whatever is not spent of that amount will be credited to the buyers closing costs.
You and the Seller Must Agree
The process of purchasing a home does not occur between only the buyer and seller; there are many people working behind the scenes to make the purchase happen. Since some of these services affect both the buyer and the seller, it is important that both parties agree on which people or companies to use for them. When making the offer, request which companies you wish to have performing each service. Ask your agent for recommendations if you are unfamiliar with these service providers.
Escrow and Settlement
One of the service providers you must decide on is the escrow or settlement company which acts as an "independent third party" between the buyer and seller. If you did not have this third party you would not know when payment or the title and actual ownership of the home changes hands. These are services provided in escrow and settlement as they will hold your deposit and coordinate the activities that go on during the escrow period.
This service is very important to both parties and you will both pay the fees, so it is important that you agree on which service to use. Due to this, you should include your choice in part of the offer. Most people will be unfamiliar with companies that provide these services so ask your agent to make a recommendation for you.
Be aware that the seller may also have a preference in who to use for this and may use it as a point of negotiation. It is customary that one side will choose the escrow and settlement agent while the other chooses the insurance company. However, everything in real estate is negotiable.
Title Insurance Company
Title insurance is important to insure that you gain clear title to the property, providing you with an Owner's Policy. If anything should happen down the line, you will be able to go the insurance company to clear up any discrepancies. It is customary for the seller to pay for this policy so they will have an interest in which company is used.
However, you will need to pay a fee to the insurance company as well for the Lender's Policy. This policy is used to insure your mortgage lender that there are no existing claims against the property and that the mortgage will be in the first position. This means that if you sell or refinance the property, their mortgage gets paid first, before any other liens or judgments against the property.