Getting Prepared to Buy a Home
As it is with any major purchase, it’s a good idea to determine your needs and wants prior to beginning the hunt for your new home. That process will allow you to get a clear vision of a home that would be a perfect match for you, or you and your family. Note the distinction between “needs” and “wants,” and what you might consider compromising in order to get one or the other. For example, do you really need that large kitchen you’ve been wanting, or would you be willing to settle on a smaller one in an otherwise attractive home that provides a larger family room? Once you’re immersed in looking at homes, it’s sometimes too easy to fall in love with one with a luxurious master bathroom with a spa tub, while overlooking the fact that the property doesn’t have enough bedrooms or bathrooms for your family.
Begin, however, by writing down why you’re looking for a new home in the first place. Ready to start a family? Then you might want to think twice about looking at a cozy condominium. Downsizing, but never considered a condo or townhome? Maybe it’s time you thought about one. Those types of factors will all have an impact on how you approach your home search.
After you have your motivation firmly on paper, you should make at least two lists. The first one should contain your ideal amenities and accoutrements. Your “wants.” Then, tackle the “absolute needs”list. Many of these will likely be on the first list. Before you know it, there will be a third list that is a blend of lists one and two. This process will continue organically as you progress through the course of home buying.
Getting Pre-Approved for a Home Loan
Unless you have the wherewithal to purchase a home with all cash, the amount you can spend on a home is determined by the entity that is going to loan you the money. Hence, the need for getting pre-approved for a home loan. The funding entity will consider several factors and will issue a statement on the size of loan for which you can qualify.
As a general rule, a lender will base in part your total monthly housing cost on no more than 30% of your gross monthly income. The second requirement is that no more than 36% of your income can be tied up in the combination of monthly house payment plus other long-term debt.
Each lender will use its own formula to determine “total monthly house payment,” but it usually includes mortgage principal and interest payment, property taxes and hazard insurance. Together, those items are referred to as PITI (principal, interest, taxes and insurance). Additional costs might be included in the calculation if the down payment is less than 20 percent, or if an expense such as homeowner’s association dues are involved.
The Pre-Approval Letter
Although your friends and family know you to be reliable and someone who pays bills promptly, the people and entities involved in your real estate transaction will require you to prove it. Therefore, a pre-approval letter is more reliable than a pre-qualification letter.
While the pre-approval process is somewhat involved, having that statement or letter will make your position and offer much more powerful.
Pre-Approval provides a good indication of:
- Down payment needed
- Closing costs
- Monthly house payment (including PITI: principal, interest, taxes and insurance)
- Best loan type for you, and the one that best suits your needs
- Special programs you might qualify for, such as those for veterans, first-time buyers, teachers, etc.
Pre-Approval materials for your lender:
- Employment and income history (including recent pay stubs)
- Monthly debts
- Amount and source of cash available for down payment and closing costs
Lenders are not bound by pre-approval letters because your financial situation or interest rates could change, a pre-determined date might pass or there could be other extenuating circumstances. If you choose a home, the lender will appraise it, consider any variation in other factors, and make a decision regarding your qualification at that time. You can research lenders yourself, or ask Lorene Warren for recommendations.
Basics of Making an Offer on a Home
First and foremost among the basics of making an offer on a home is the written proposal or contract. It contains your purchase offer and all of the proposed terms and conditions. After you and Lorene write and sign the offer, Lorene will present it to the seller’s agent, or to the agent and seller
What the offer contains
If the purchase offer Lorene has written on your behalf is accepted, it will becomes a binding contract known as a purchase agreement. It is essentially a blueprint for the sale and will include items such as:
- Address and legal description of the property
- Sale price
- Terms – such as all cash or subject to you obtaining a mortgage
- Seller’s promise to provide clear title (ownership)
- Target date for closing
- Amount of earnest money accompanying the offer as a deposit, and whether it will come in the form of a check or cash. Specification also might be included regarding disposition of the deposit if you back out of the deal at a later date.
- Method by which expenses such as real estate taxes, rents, fuel, water bills and utilities are to be prorated between you and the seller
- Provisions about who will pay for details such as title insurance, a survey, termite inspections, etc.
- Type of deed to be given
- Any additional requirements such as disclosure of environmental and/or seismic hazards and other locally-specific clauses
- A provision that you may make a final walk-through inspection of the property just prior to closing
- Any contingencies
The Home Purchase Agreement
Lorene Warren uses a standard form of the home purchase agreement designed by the Association of Realtors ®, a local Association of Realtors ®, or a private publishing company, depending on the custom in the area. You’ll be able to make changes, but they must be approved by the seller.
Oral real estate contracts are not enforceable in the United States. Therefore, Lorene cannot present your offer without a written purchase agreement signed by you. That contract must make everything clear to everyone involved, and should include things such as all personal property you expect to be included in the purchase, and the exact time and date you want to take possession. We will also specify in the contract that the seller is responsible for repairing any damage and rectifying the conditions causing the damage, as noted in the pest control report and the reports of other inspections.
Elements in the Purchase Agreement
The most important element.
This is a deposit demonstrating your serious intent to buy the home. It will accompany yourpurchase agreement. The amount is usually one to five percent of the purchase price. It will become part of your down payment or closing costs if your offer is accepted, but is returned to you if your offer is rejected. If you drop out of the transaction against the terms of the contract, you might have to forfeit your deposit.
The seller should provide “Title,” or legal ownership unencumbered by any claims made by third parties. Title insurance will be assurance that the home is free of “unacceptable liens” or “encumbrances.” Who will pay for the title insurance policy? That is negotiable.
The mortgage clause specifies that obtaining a loan on the property is a condition of the sale. It should provide for a refund of your deposit if you cannot get the mortgage loan.
The pest inspection and report by a licensed pest control representative is a method for verifying to both buyer and seller any infestation by termites, other pests, and dry rot. Your lender may require a certificate stating that the property is free from these unwanted and damaging infestations. The pest inspection clause in you purchase contract should state whether the buyer, seller, or both will pay for any repairs necessary repairs related to those possible infestations
Lorene Warren strongly recommends a home inspection and written report by a licensed general contractor. The inspection will determine the general structural soundness of the residence as well as that of its roof, windows, doors, and plumbing, heating, cooling and electrical systems. Buyers usually pay for inspections (which cost between $300 and $500) themselves so they are sure the inspector is working for them rather than the seller. Lorene also urges her clients to request any additional inspections that might be recommended by the home inspector. Those might include inspections of the roof, foundation and soil, and swimming pool if applicable.
Conditions specified by you and placed in the purchase agreement must be met before the sale goes through. These contingencies are very important, so make sure to tell Lorene what they are so she can include them in the offer. Contingencies may include:
- A stipulation that if you cannot find financing, you will not be bound by the contract.
- The home inspector provides a satisfactory report within, say, 10 days after your offer is accepted or the contract becomes void.
- The sale of your existing home.
Of course, home sellers are more likely to accept contingencies in a slower market than in a more active one. Make sure your contingencies are absolutely necessary and important because too many, especially in a strong market, may prevent your offer from being accepted by the seller.
The buyer will usually choose the escrow company. It is also the firm acting as the tile company and providing the title insurance policy after escrow closes. There are some counties in which it is customary for the seller to pay for the title insurance policy, as well as to select the escrow and title company.
The payment of closing cost expenses and fees is negotiable between the buyer and seller. Local custom usually stands strong when it comes to allocating these expenses, however. For example, if the seller paid a certain cost when he or she purchased the property, then you will likely be expected to pay that particular expense.
Withdrawing an offer
An offer may be withdrawn at any time, in most cases, until the offer is accepted. Consult Lorene Warren for the best, safest and most expedient way to withdraw your offer.
Seller’s response to the offer
If the seller accepts your written offer unconditionally, you will have a binding contract. It becomes binding the moment it is delivered to you, or to Lorene Warren as your agent. On the other hand, the seller may present a written counteroffer if there are things he or she doesn’t agree to – including the sale price, closing date or other terms. It’s up to you to accept or reject the counteroffer, or to present your own counteroffer.
Just remember that the document only becomes a binding contract when one of the parties involved signs an unconditional acceptance of the other party’s proposal and the unchanged document is handed to the other party or their agent.
How the seller may counteroffer
A few negotiable terms and conditions are:
Termite inspection fee and repairing of damage
Points to the buyer’s lender
Cost of any repairs required by the lender
Cost of any repairs of defects disclosed by the seller, uncovered by inspectors, or required by governmental agencies
Escrow closing date
Date and time of possession by buyer
Rent back by seller after close of escrow
This part of your home purchase is where Lorene Warren truly excels as she negotiates on your behalf, calling to the table her many years of real estate experience and local market expertise. There are some principles that create a universally strong bargaining position, such as you are:
- an all-cash buyer
- already pre-approved for a mortgage
- free of a home that needs to be sold before you can buy
Even if you are in a strong position, however, in a strong real estate market you can make your offer more desirable by offering a purchase price above what the seller is asking for.
Here are some basic suggestions:
- Have the maximum amount you are willing to pay firmly in mind before negotiations begin.
- Place some terms and contingencies you can live without in your initial offer. That will allow you to negotiate some concessions without compromising the important items.
- Have a few alternative homes in mind. That knowledge of options will help you stay objective during negotiations and just might encourage the seller to be more flexible.
- Ascertain the seller’s wants and needs. For example, perhaps his or her new home will not ready by the proposed closing date, so consider allowing a rent back of their home for a period of time, as long as your schedule permits it.
- Keeping in mind that terms as well as price can be negotiated might result in substantial financial savings for you.