There are myriad viewpoints on whether buying versus renting is better, and what is right today might not be right tomorrow. Deciding, though, is only the first step. Purchasing a home in a desired location—whether a primary residence or an investment property—is a lengthy, complex process. Read on for an overview of the home-buying process.
How much can you afford?
Once you have decided to purchase a home, including deciding where to buy, the next task is determining how much you are willing to spend. Figure out your budget before you start perusing properties online. This will help you to stay focused and make a practical decision, rather than an emotional one.
Beyond an upper limit you are willing to pay, consider whether you will pay cash or finance your purchase (i.e., obtain a mortgage). If you are going to borrow money to buy a home, understand that you will typically need to provide a down payment. Additionally, be aware that you will also be responsible for closing costs, which will vary by location. (More on that below.)
Also keep in mind that your mortgage payment will consist of more than just principal and interest. You will also be responsible for property taxes, home insurance, and perhaps mortgage insurance.
Lenders typically require mortgage insurance if your loan-to-value ratio exceeds 80 percent. In other words, a down payment of 20 percent is typically required to avoid mortgage insurance. Alternatively, once your loan balance drops below 80 percent (through principal payments and/or increase in home value), you can ask your lender to remove mortgage insurance from your loan.
Select a lender and get pre-approved.
Your next step is to select a lender. (Skip this section if you will be paying cash.) You can compare mortgage rates online for conventional, FHA, and VA loans. Other loan types (such as USDA) may also be available in your area. The non-conventional loans offer favorable rates and often lower down payment requirements if you qualify. Your lender can help you weigh your options.
A typical requirement for many loans is that you intend to occupy the property as your primary residence. Not all loans are available for investment properties. Failing to be truthful with your lender could be mortgage fraud, so be transparent about your goals.
Besides interest rates, consider the mortgage term. The most common options are 15-year or 30-year mortgages, but other terms may also be available. There is generally a tradeoff between mortgage length and interest rates: the longer the loan, the higher the rate, because the borrower represents a greater risk to the lender. You will have a larger monthly payment with a shorter term, but the total interest paid over time will be much lower.
Make sure that your lender will not impose a prepayment penalty. (Making extra payments each month can shave years off your mortgage, saving you considerable interest over time!) Also, be sure that your lender will allow you to hold the property in an LLC or trust, if that is your intention.
Once you have decided on a lender, obtain a pre-approval letter. This involves submitting basic income and asset information, and the lender obtaining a credit report. If it appears that you have sufficient income, assets, and credit, your lender will issue a letter indicating that you are tentatively approved for a mortgage up to a certain amount. This shows sellers that you are a qualified borrower and can feel confident accepting an offer that requires you to borrow money. Remember, though, that you do not have to spend this whole amount!
Lenders issue pre-approval letters subject to verification of the information provided in your pre-approval application. Pre-approval does not involve a detailed review or underwriting, and is not a commitment to lend; that comes later.
Hire a real estate agent or attorney.
Once you know how much house you can afford, it is time to select a real estate professional to assist you in your home-buying journey. (I recommend obtaining the pre-approval first because there is no sense in going further if your financial situation is prohibitive.) They have access to available homes through the multiple listings service (MLS), are familiar with the home-buying process, and will advocate on your behalf.
If you do not already have someone in mind, the best way to find a real estate agent is to ask folks you know for referrals. There may also be a local realtor association you can consult. You should aim to work with someone who is based in or near the area in which you seek to purchase. Real estate agents are generally licensed to practice throughout an entire state, but a Virginia agent in Roanoke is less likely to be familiar with the market in Arlington, so find an agent well-versed in the specific area where you will be buying.
Pay attention to the terms of your engagement contract with your real estate agent. You will often be required to compensate your original agent if you terminate their services in favor of another agent within a designated amount of time. This is designed to prevent buyers from using a real estate agent to shop around, and then terminating them once they decide on a home to avoid paying a commission. A short time frame, or an agreement confined to a particular property, is fine, but be wary of far-reaching parameters.
Earlier this year, the National Association of Realtors reached a settlement in litigation related to realtor commissions. It is too soon to tell what ultimate impact, if any, will be on realtor commission structures.
Another alternative to hiring a real estate agent is working with an attorney. Attorneys licensed in the state where you are buying are also allowed to function as real estate agents without a real estate license because they are already authorized to represent other people generally. However, a real estate agent is generally better positioned to help you find properties. Attorneys are often involved in other aspects of a purchase, such as reviewing contracts, examining chain of title, and managing disputes. However, if you do not need assistance finding a property initially because you already have your heart set on one or more particular properties, hiring an attorney instead of a real estate agent can be a good option.
You can also represent yourself, but this should generally be avoided unless you are a real estate agent or attorney. Even then, it is usually best to have an outside person assisting you or at least verifying your decisions.
One more piece of advice: Never accept a dual agency. A dual agency is one where the same agent or brokerage represents both the buyer and the seller. Most states allow this if there is full disclosure. You do not want someone representing you that also represents the adverse party because there is an inherent conflict of interest, particularly in real estate where agent commissions are based on the sale price.
Tour homes.
Now that you have a budget, a pre-approval letter, and a real estate agent, you can begin looking at homes! This is the most fun part of the process. Tell your agent what you are looking for in a home, including your must-haves and deal-breakers. They will search the homes available in the area and send you listings that meet your requirements. They may also have an inside scoop on a not-yet-listed home through their connections with other agents.
You can then trim down the listings to a handful of homes to visit in person. (I suggest no more than a half-dozen.) Work with your real estate agent to schedule a time for the tours. Private tourings are better than open houses because you will be the only one there versus several potential buyers simultaneously. A property tour is your chance to get a feel for each home and imagine yourself in the place. Be sure to drive around the neighborhood as well so you can decide whether you would actually want to live there. It is fine to visit multiple times, too! If making multiple visits, consider going at different times of the day to get a more comprehensive picture. Also, be sure to take a close look at the available amenities (such as the pool or gym if you are touring a condo) and other essentials like parking spaces.
Submit an offer.
Your goal in touring homes is to figure out which one you want to buy, if any. Pay attention to that “if any” caveat: It is perfectly okay to decide not to buy any of the homes. You can always rent for a while or invest later or elsewhere.
Work with your real estate agent to structure your offer. The key components are the purchase price, method of payment (cash or financing), and timing. If you are financing, the down payment portion is almost important. You will also need to put down an earnest money deposit—amounts vary by local custom—when submitting an offer to show that you are serious. The earnest money deposit also serves to compensate the seller for missed time on the market if you fail to uphold your end of the bargain.
The more you have to borrow, the greater the chance of the financing falling through, which represents a risk to the seller. After all, a seller will not accept an offer that will not be completed. (That is why pre-approval is so important!)
Cash is king, but timing is also extremely important to sellers when considering competing offers.
Check to see whether assuming an existing mortgage is an option. Assuming a mortgage means literally taking over the payments on an already existing loan. You may be available to obtain a much more favorable interest rate by assuming a loan!
You will likely want to include various contingencies in your offer. Contingencies allow you to terminate the purchase contract by specified deadline without losing your earnest money deposit. The most common contingencies are:
Inspection: Examine the physical condition of the home, including electrical, heating, plumbing, and more. An inspection contingency allows you to terminate the contract without losing your earnest money deposit if the physical condition of the home is not up to your standards.
Financing: If you cannot obtain financing, you can terminate the contract, assuming you are diligent in applying for a loan.
Appraisal: Be sure you can back out if the home does not appraise for at least its purchase price.
Covenants: Restrictive covenants impact your property rights. For example, you could be subject to an easement allowing your neighbor to use your driveway or might not be allowed to plant trees on your lawn. If the home is part of a homeowners association (such as a condominium or planned development), you have the opportunity to inspect HOA documents. Be sure that the HOA is well-managed, there is not a history of special assessments, and that the bylaws are acceptable. Actually read them! You might be surprised at some of the provisions. A covenants contingency gives you an opportunity to make sure these terms are acceptable.
Some folks will waive some or all contingencies to make their offers more attractive, but I do not recommend that approach because there are other ways to make your offer stand out (like a larger earnest money deposit, good supporting documentation, and shorter timelines). Contingencies are important, and can include literally whatever you want, but be reasonable. Your realtor will know what is generally acceptable and can advise you of the pros and cons of each one.
The last component of your offer will be seller concessions, if any, such as having the seller pay a portion of your closing costs or leaving the safe in the garage. Again, work with your realtor here, and be reasonable.
When submitting your offer, make it stand out—not just in its substance, but in its presentation. The purpose in assembling an offer packet is to make it easy for the seller and their team to understand your offer. You also want them to be confident that you will actually qualify for financing when you go through the full underwriting process so they do not immediately reject your offer in favor of an all-cash buyer. (Your realtor is responsible for compiling and presenting the offer.) My suggested approach:
Cover page with executive summary and table of contents. Executive summary contains price, down payment, financing method, and earnest money deposit amount, key contingency deadlines, closing (settlement) date, and title company or attorney handling the closing.
Documents in the order listed in table of contents, organized in a logical sequence with page numbers:
Lender pre-approval letter
Copy of earnest money deposit check
Verification of funds for down payment
Sales contract (typically a standard, state-based form) and addendums (if any)
Required disclosure forms (if applicable)
Negotiate the offer.
Your sales contract should include an offer expiration date and time. (Otherwise, the seller could theoretically accept your offer months down the road.) By that deadline, the seller is treated as having rejected your offer if they do not accept or counter.
Most likely, the seller will counter your offer, meaning they propose different terms from yours. The counter could be a different purchase price, shorter time period, or other changes. It will be presented by their representative to your real estate agent. Be sure to respond—by accepting, rejecting, or countering again—in a timely fashion.
There may be several rounds of back-and-forth as you negotiate the sale. Eventually, either you or the seller will decide not to pursue the transaction, or the parties will reach an agreement. At that point you will typically sign a “conformed contract,” meaning one that incorporates all the changes made during the negotiation process. (A conformed contract is more efficient than reading through a dozen counteroffers whenever you review the contract, but not every locality utilizes them.) The date you reach an agreement is the date of contracting, which starts the clock on the contingency deadlines.
Congratulations! You are now officially “under contract” to purchase the home!
Finalize mortgage application.
Your real estate agent will present a signed copy of the finalized contract to your lender. Your lender will then start the formal mortgage application process. You will be asked for lots of documentation. The faster you respond, the sooner you can complete the process. This is important because you are up against a financing deadline prior to the closing date. You can back out of the purchase if the financing falls through, but you have to do your best in trying; otherwise, you will lose your earnest money deposit if you have to withdraw from the sale due to a mortgage denial.
When you apply, your lender should provide a good-faith estimate of the eventual closing costs that will be required to finalize your purchase. (Closing costs include fees for inspections and appraisals, application fees, title insurance, and more. Your real estate agent can give you an idea of typical closing costs in your area.)
Ask your lender whether you can pay additional points (1 point is 1 percent of the loan amount) to reduce the interest rate on your loan. The extra one-time, up-front cost could save you thousands over time.
A good tip here is to organize your documents ahead of time and have them readily available. Lenders will typically ask for two years of bank statements, W-2s, tax returns, and brokerage statements. Have three years available just to be sure. They may also ask for information about student loans or other debts. For instance, if you recently paid off a credit card, you can show them proof that you no longer have that debt, which improves your chances of qualifying for the mortgage. Business owners will have additional requirements, like K-1s, financial statements, and verification letters from an accountant or tax professional. Streamline the process by authorizing your tax pro and lender to communicate directly. (I have assisted many individuals and business owners throughout the mortgage process and can usually anticipate what will be requested.)
When we purchased our condo in 2021, our sales contract had a thirty-day financing deadline measured from the date of contracting. The lender asked me if we could extend it to sixty days or at least forty-five. I rejected that request. I told him that if he asked for additional documentation he would have it within fifteen minutes, not a few days, so there should be no issue with completing the process on time. We were formally approved for financing, and received the commitment to lend, several days ahead of schedule.
Your lender will also require you to secure a homeowners insurance policy. You will secure the policy in advance to be effective on the date of closing, the initial premium will be paid as part of your closing costs. The insurance company you use is completely up to you. You may be able to qualify for a multi-line discount by using the same provider as your vehicle insurance, so that is a good place to start. Keep in mind that you are not locked into the same insurer for any length of time. Once you secure a policy, you probably do not want to switch insurance providers before you close on the home (because that will just slow down the process), but anytime after closing is completely fine.
Be sure to tell your insurance agent whether you will be purchasing the home as a primary residence or investment property, since different coverages apply.
Depending on your area, you may also need specialized insurance coverage for perils such as earthquakes, floods, hurricanes, or wildfires that are not covered by typical homeowner policies.
Complete your due diligence.
While you are busy completing your mortgage application, work with your real estate agent to complete your due diligence requirements. This means promptly ordering all inspections and appraisals, and addressing any other contingencies.
Hire a local home inspector. (Depending on your location, you may need multiple inspection specialists.) Your real estate agent should be able to provide referrals. After performing the inspection, the inspector will provide a detailed report regarding the physical condition of the home. At this point, you can invoke the inspection clause to terminate the contract (such as one of my clients who recently opted out after discovering that the foundation was cracked), ask the seller to repair or provide a concession, or simply accept the condition as-is.
Every home inspection will uncover some faults. You will need to decide how important they are. If you haggle over every tiny detail, the seller may back out, but do not accept major deficiencies. Sellers will be reasonable if you are reasonable.
In selling homes belonging to deceased family members in the last few years, the inspections revealed a malfunctioning water heater in one and a broken stove in another. In both cases, the buyer asked for a reasonable credit against the purchase price at closing to cover the cost of rectifying the problems, which was granted in both cases.
If the seller agrees to fix the deficiencies rather than providing a credit, be sure to verify that the repairs actually took place before closing. In any event, do a final walk-through the day before closing to verify that the home is still in proper condition. If any issues arise, have your real estate agent address them immediately.
Besides inspections, follow up on all contingencies such as reviewing restrictive covenants, homeowners association documents, and more. Also, start preparing for your move ahead of time so you can hit the ground running when the time comes.
Close the sale.
Once your lender approves your loan application, and you complete all the inspections and other contingencies, you will finally be ready to close on the property.
The closing (settlement) date may be adjusted several times as you move through the process.
The closing typically takes place at the office of the title company or attorney (depending on the state) handling the transaction. This is where you go in to sign a bunch of paperwork and pay the down payment and any additional closing costs that may be due. Make sure the actual closing costs are in line with the good-faith estimate you received earlier. Have your real estate agent address any concerns.
The office handling the closing should be able to provide a final closing statement a day or two ahead of time. You will typically need to bring a certified bank check or other guaranteed funds for the down payment and closing costs, or wire them the day prior.
You and the buyer will go at different times to sign the paperwork. You might find it strange, as I did the first time I went through a home purchase, that the buyer and seller typically never meet.
After all the paperwork is signed by both parties, the deed is recorded, and you officially own the property. Pick up the keys from your real estate agent and be ready to move. The long home-buying journey is finally over. Be sure to celebrate your success in your new home!
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