Outlined below is a simple five step program for buying a home. So, if you are a first time home buyer and have ever wondered what basic steps are to buying a home, there are five simple steps to take towards home ownership.
Step 1: Get your finances in order by pre-qualifying for a mortgage
At some point in the home buying process, usually early on, you will want to get “pre-qualified” for a mortgage. That means talking with a lender to determine if they’ll consider loaning you money for a mortgage. You can contact a bank, savings and loan, credit union or lending institution to get pre-qualified. Many lenders can qualify you quickly and over the phone so you’ll know right away if you can purchase a home.
You will most likely speak with a loan officer. He or she will want to know some basic information like how much you make, what recurring debts you have (car payments, student loans, credit cards). You may be asked for your social security number since they will want to “pull” your credit history (your track record for repayment of loans and obligations) in order to obtain your credit score from Experian, Transunion, and/or Equifax (these are the three credit reporting agencies). If you have been paying your bills on-time and have not gone bankrupt in the past, you are likely to have credit score that could qualify you for a loan program.
Later you will make written application for a mortgage. But, that often comes after you’ve found the house you want to buy and have negotiated the sales price and other terms. Then, later in the process, you will have “loan approval” once you have satisfied all the banks conditions. Then you will be ready to close.
Step 2: Find a Realtor and start looking for a home
Most sellers will be working with a real estate agent to market their home to prospective buyers. Sellers’ agents put listing information into a database call multiple listing service or “MLS” for short. The local MLS is the starting point from where listing information about homes for sale is propagated all over the Internet.
Real estate agents have access to the MLS and can help you in your search for a new home. Consumer websites, such as Realtor.com or Zillow.com to name just two, are great, but the information they contain may be less than what is available to a Realtor who has access the MLS. For example, consumer website provide basic search capabilities but Realtors can perform very sophisticated searches, for example, searches based on water depth for waterfront home or for pet-friendly rental listings.
You might want to interview several Realtors before you start working with them. Real estate professionals can be experienced or inexperienced, know the area you are looking in or not, have worked with other buyers purchasing the type of home you are considering or not. Skills and experience can vary greatly from real estate professional to real estate professional. You will probably want to work with an agent that has the your same style. So, if you use text messaging as your primary means of communication, make sure you’re working with a real estate professional that is up on all the current technology.
Some real estate professionals will work with you initially without an exclusive buyer agency agreement and some will not. Don’t be afraid of a buyer representation agreement. All it really means is that if you purchase a home where that agent represents you, they are guaranteed compensation. In Maryland, don’t assume that the agent can or does represent you when you go look at a home. Agency comes in several different flavors, including seller agency, buyer agency, presumed buyer agency, dual agency, inter-company agency, secret agency (OK, well not secret agency, you’ve got to have a sense of humor sometimes about this stuff!). Maryland law requires that licensees (salesperson, associate broker and broker) discuss with you the types of agency (or representation) available to you at the first scheduled meeting.
You will probably look at one or a dozen and one homes before deciding which one to purchase. If you are browsing the Internet you will have toured tens of homes, maybe even hundreds of homes before deciding which one to set foot in. If the listing has only one picture or has only pictures of the exterior you likely to ask “what are they hiding at that house”. So when you start searching for a home online, you will have toured, at least virtually, many homes before actually scheduling an appointment to see it in person. Once you are at the house, take your time, look around, open doors, just explore. You will know when it “just the right house”.
Step 3: Make an offer to purchase and negotiate the deal
Once you have found the home of your dreams, then you will need to decide on the price your want to pay for it and other terms you want to include in your offer to purchase. The list is short and includes:
- Sales Price
- Closing or Settlement Date
- Earnest Money Deposit
- Financing (Cash, Conventional, FHA, VA)
- Inspections (Home, Radon, Well Water Quality, Septic System, Environmental, Roof, Chimney, etc.)
You real estate professional won’t write the offer for you, you write the offer. All the agent can do is “fill in the blanks on pre-printed forms” unless they are also an attorney, to do anything else is practicing law without a license. The real estate agent will use pre-printed contract forms when assembled together will be your offer. In Maryland, that can mean 50 or more pages that will include the buyer agency agreement, the contract of sale, and all the special addendum and disclosures necessary for a complete offer. Be prepared to read and sign them all before the agent will submit your offer to the seller’s agent for presentation to the seller.
You will be relying on your Realtor to assist you in the negotiations. And, you will want an expert at negotiation. An agent’s negotiation skills can make or break the deal. While your agent will make suggestions about negotiations strategy and tactics, ultimately the decisions are yours. So, asking your agent “what you should do” at any point in the negotiation really translates “what options do you have” at this point in the negotiation.
Ask you Realtor to prepare an estimated settlement cost worksheet based on the sales price and terms you want to offer. Experienced real estate professional can give you a breakdown of down payment, fees and expenses so you will know how much “cash to close” is required. Your real estate agent can work up different scenarios from paying asking price to getting a real steal so you know where there might be room for negotiation and what is fixed no matter what.
Step 4: Inspect the home for defects and repairs
Once you have a deal on the table, now is the time to inspect the property for defects and necessary repairs. Many buyers will throw in ALL the possible inspections they can think of, including: home, radon, well water quality, septic system, environment, roof, chimney, mold, swimming pool, termite, and more. Once you see how much it is going to costs to conduct all those inspections, you will probably select fewer. You see, inspection are paid by you at the time services are rendered whether or not you end up buying the home. So, going wild with inspections can a) cost a lot of money up front and out of pocket, and b) turn off sellers resulting in them passing up your contract for some other buyer’s contract with fewer or no inspections. While it is your decision which inspections you want before purchasing a home, at least do a home inspection and termite, if nothing else.
What inspections you do get to preform will depend on what you negotiated as part of the contract of sale. So, if you forgot to include a chimney inspection or roof inspection in the contract, all is not lost. You may be able to inspect, but, you may not be able to ask for repairs if you find a defect. In any event, your lender will want a termite inspection and a water quality inspection if the property is on well water. You will want at least a home inspection and maybe other inspections depending on the age and condition of the home. The whole point of inspections is that should you find something wrong, you may be able to get the seller to repair it before they sell you the home. There can be exceptions where the seller either cannot afford to make repairs, as is often the case of a short sale, or unwilling to make repairs, as is almost always the case of foreclosures. Usually you’ll retain the unilateral right to terminate the contact in the case of an adverse result inspecting a short sale or foreclosure.
If it is a regular sale and you find something wrong, all is not lost. You may be able to negotiate with the seller so that they make the repair before settlement, obtain a monetary concession in the form of a credit at the time of settlement in lieu of the seller making the repair, or skillfully negotiate a lower sales price and fix the defects and make the repairs to your satisfaction after you have purchased the home.
Step 5: Settle the sale by exchanging money and keys
Once you have completed all inspections and you are satisfied with the condition of the property, it is time to get the title company and your lender working on settling the sale.
The lender will order an appraisal. When you make written loan application the lender will ask you for about $500 which goes to paying for the appraisal. The appraisal is for the lender’s benefit even though you are paying for it. They want to make sure that you are not over paying for the home. Furthermore, they want to be able to sell your loan on the secondary mortgage market, so the home you are buying will need to meet certain standards, this will be especially important if you are using FHA or VA financing. The lender will also submit your loan to underwriting. It the underwriter’s job to review everything to make sure that it meets all loan program guidelines. Be prepared to provide additional documentation should the underwriter request it. Without the underwriters blessing you will not get a mortgage, no ifs, ands or buts.
The title company will order an abstract of title and check on outstanding liens and encumbrances. The seller probably has a mortgage, so the title company will order a mortgage payoff from the seller’s bank (or banks if there is more than one loan). You will want to buy your first home “free and clear”, meaning all the loans are paid off, taxes that are due have been paid, water bills are paid, HOA/condo fees are paid up, front foot assessments are paid, and ground rent (if applicable) is current. On the day of settlement there will be a proration of fees and taxes and anything else that has been prepaid by the seller and must be reimbursed.
While you are waiting for all this to get worked out, you will need to obtain homeowner’s insurance, you will need to request utility service be established at the property in your name, and you might want to order cable or satellite and Internet service installation. Don’t forget to pack and call the movers (or reserve a truck and the assurances of your friends and family that they will help with you move). And don’t forget to give proper notice to your landlord that you intend to move out and therefore terminate your lease.
Assuming there are no other issues, the parties involved, you and the sellers and the real estate agents, will gather together for settlement at the appointed time and place. The lender will send the title company all the documents you’ll need to sign for your loan and wire in the money. You will need to bring a bank check for your down payment and any other amounts you owe. The check should be payable to you so that you can sign it over to the title company as part of settlement (if settlement were not to occur for some reason, you would simple endorse it and deposit it back into your own account). The first thing the settlement office will do is review the HUD-1. This is the accounting of all the money. Then you’ll sign your loan papers, the seller will sign over the deed, and finally the settlement officer will disburse the funds and you’ll get the keys!
It really is a rather simple process. How long will it take? Well, that will depend on the price range you are shopping in and the availability of homes that meet your requirements.
About the Author:
If you are interested in buying a home in Annapolis, Maryland or the surrounding area and want to tour any property currently on the market, or if you have a home to sell in Annapolis, Maryland and want a professional consultation on current market conditions, please contact me at 443-994-8043 or e-mail me at firstname.lastname@example.org or visit my website at www.liveinannapolis.com.
Stephen Howell came to Annapolis to sail the Bay in 1994. What he discovered was a whole new lifestyle. Ever since Stephen Howell has been successfully helping others make the most of Annapolis. You'll find that with the right professional by your side, you can Live the Lifestyle and Live in Annapolis.
Stephen Howell (and Jackson, his hound-mix from the HSSC in Sarasota Florida) lives on the Chesapeake Bay near Annapolis, Maryland. He works in the Annapolis real estate market. His website lets people search the Washington and Baltimore metropolitan area MLS. Buyers can also search for waterfront homes along the Chesapeake Bay. His website has current real estate data on Annapolis, Anne Arundel County, and Maryland.