Every few weeks someone asks me how to buy a house.
Here is a primer to help the new homebuyer become familiar with the process.
Real Estate Agents
You don’t have to use a real estate agent. However, agents can save you from costly mistakes—they can help you navigate the mortgage loan and prequalification process, determine value of that perfect home, and help you bring you purchase the closing table.
A Realtor friend recently posted this: “Basically a Realtor is a project manager and an economic engine to ancillary services and businesses in the community…”
Once you find the right property, your agent will help you negotiate price and any contingencies.
After you reach agreement, your agent will walk you through the due diligence process: ordering surveys, inspections, making loan applications, or re-negotiations if necessary.
How Agents Get Paid.
If you are the buyer, you don’t pay your buyer's agent anything. Your buyer’s agent is paid a part of the commission earned by the seller’s agent.
The agent that represents the seller—the listing agent—usually receives about 6% of the sales price. This is sometimes negotiable.
Choosing Your Agent.
Your home is probably your most important purchase. Selecting an agent is as personal and important as selecting your doctor or lawyer or accountant. Talk to your friends and colleagues, get referrals.
Paying For Your New House
Most people get a loan for their home purchase even if they can afford to pay cash. A real estate loan is created with two main documents: a mortgage, and a promissory note.
(There will many more papers to sign at the closing table, but these two documents are primary).
The Lender is actually giving you the money to pay the full purchase price of the property. You will take title, and the Lender with put a lien - called a mortgage - on the property. The mortgage secures the loan, making your home collateral for the money you borrowed.
The note is your promise to pay back the loan. If you don’t pay the loan back, the mortgage allows the Lender to foreclose on the home and take back title / ownership.
Lenders usually require a down payment. They want the borrower to have skin in the game, so to speak. Traditional mortgages require the buyer to pay 20% of the purchase price in cash. The Lender pays the other 80%. The borrower then pays back the Lender in monthly mortgage payments at an agreed to interest rates over a period of years.
Mortgage interest rates change all the time. So a buyer should shop for a mortgage plan to get the best rate and "lock in" that rate.
Some Lenders require a smaller down payment but ask for an additional insurance, some offer fixed interest rates or adjustable interest rates. Some loans are set up to require a balloon payment. There is a lot to consider, but this gives the basics.
Equity is the value of what you own outright. On the home makeover shows, they often brag about renovations that increase equity. In other words, if you spend $3000 to add a new bathroom, it may add $5000 of overall value to your home.
You can calculate your equity with the following formula:
Property Value – Outstanding Loan = Your Equity.
Striking The Deal
Every contract (whether for a house or anything else) must include three basic things:
· Consideration (exchange of something of value)
The contract must also include the material terms, like price and timing.
The first step to buying a home is to make a written offer. Most agents use an approved form, but sometimes a lawyer will draft their own.
The offer will include the amount the buyer is willing to pay, when the deal will close, and any contingencies. Contingencies are terms that must be met before the deal can close. Maybe the buyer wants to secure a mortgage loan at a specific interest rate, or must sell his or her other home first, or wants to have the property clear an inspection.
The seller can counter-offer. Maybe the seller will accept the contingencies but wants more money than initially offered.
Once the terms are agreed to, the buyer usually deposits earnest money with a title company. This is a good faith gesture to compensate the seller for removing the property from the open sales market while the buyer fulfills the contingencies.
Earnest money is usually applied to the purchase price at closing.
The contract will determine what happens with earnest money if the deal falls through. This is another point to be negotiated.
The Title Company
Once a final agreement is reached, the written contract and a check for earnest money is sent to the title company.
The title agent gets to work, ordering a history of the title to the property which the title company will examine. The goal is to make sure that title is clear of any title defects. If defects show up in the search (maybe there’s an outstanding homeowner association lien), the title company works toward clearing that up.
As a condition of your loan, Lenders will require you to obtain title insurance. Title insurance will pay for any loss if there is a third-party claim against your title to the property. The Lender wants to protect its collateral! And the buyer wouldn't want to buy a property if it doesn't come with clear title.
Standard closing costs including things like:
· Title Search
· Inspection fees
· Title Insurance Premiums
· Title Closing Costs
· Recording Fees
· Transfer taxes
Depending on your region, common practice will determine whether the buyer or seller pays for which item. Sometimes sellers offer to pay for everything as an incentive to the buyer.
This post is an overview of the home buying process. Your team – Realtor, Attorney, Lender, Inspector, Surveyor, and Closing Agent – can answer questions more specific to your situation.