HousesBuyOwner knows that buying a home is exciting, but the process can also be very daunting. With a little information and guidance, buying that new home can be an easy and enjoyable experience. If you have chosen to hire a real estate agent, they will guide you through the process. If you have decided not to use an agent the following is a guideline for some of the steps used in buying a home which we hope will be useful to you. We encourage you to consult your attorney regarding your state laws and customs, as they can vary from state to state.

1. Knowing how much you can spend

Figuring out how much you can spend is a good place to start when searching for a home. Knowing your limit helps tailor your search, and you may even discover that you can afford homes you hadn’t previously considered. Once you have chosen a mortgage lender, there are three levels of loan approval that they offer.

• Pre-qualification: You can get pre-qualified by a mortgage loan officer fairly quickly. This is simply an estimate of the loan amount you might qualify for, based on unverified financial information that you provide. It gives you a ballpark for the amount of loan in which you may be able to receive.
• Pre-approval: To be pre-approved you must fill out a mortgage loan application. The lender takes a closer look at the tangible financial documents you’ve provided such as former Tax Returns and bank statements, obtained your Credit Report, and set aside the loan for you until you’ve found a new home. The loan application will also require certain information regarding your employment, income, assets, and liabilities. Keep in mind that this is not a loan commitment, but it will inform you of the maximum amount they will offer, which loan programs you qualify for, and will give you a better idea of your interest rate. Being pre-approved not only lets you know the amount of house you can buy, but it also lets the seller know that you are a serious and qualified buyer and could speed up the closing process.
• Loan Commitment: You can acquire a loan commitment once you have made an acceptable offer on a home. Your income and credit report will be examined again and the home itself must be approved, usually through an appraisal and title report ordered by your lender.

2. Finding a home

Prioritize your needs and wants when looking at houses. What amenities and features are most important to you? Would you like to live in a certain school district? What kind of home will accommodate you and your family in the future? Once you’ve chosen an area in town that appeals to you, familiarize yourself with the sale prices of homes in that area.

There are many sources for finding homes that are for sale. You’re using one now. Read the classified section of your local newspaper, drive around neighborhoods, question friends and family, pick up a home magazine such as our HousesBuyOwner.com Monthly Magazine, or enlist the aid of a real estate agent.

While searching for a home, we recommend hiring a real estate attorney to assist you with the upcoming transactions. They are educated on unique local laws, ordinances and regulations, not to mention the complexities of the paperwork involved in buying a home.

3. Making an Offer

Once you have found a home that fits your needs and is within your pre-qualified price range, you can make an offer on the home. There’s no set formula for determining the amount that you should offer. Consider the sales prices of comparable homes in the area before submitting a formal offer. This information can be found through various sources including:

• The real estate section of your local newspaper;
• Public records at your local county recorder’s office;
• A professional appraisal which give you an estimated value of the home based on its condition, proximity, neighborhood, and sales of homes that are comparable; or
• A Comparable Market Analysis provided by a real estate agent, which lists the recent sales of similar homes within the area and compares them to the house you are interested in buying.

Once you have an idea of the market value of the home, you should also take into account the condition of the home, the seller’s situation, how long the home has been on the market, and the maximum amount you’re willing to pay.

Put your offer on paper, being very specific. Have your real estate attorney either draft this offer for you or approve the offer you have written yourself. A written offer includes more than just the sales price. It may also include the earnest money deposit amount, the mortgage and down payment amounts, the closing date, the date the seller must vacate the property, an itemization of what is included in the sale, payment of closing costs and transfer taxes, and commissions to real estate agents. When submitting an offer, you might want to include contingencies for a home inspection, the sale of an existing home, a certain appraisal amount, or financial approval. Negotiate who should pay for repairs and include this in your offer along with a time frame. You may want to require certain disclosures of adverse conditions that might affect your decision to purchase the home.

It is customary for the buyer to offer earnest money with an offer, proving to the seller that they are serious about buying. The earnest money may be returned if the offer is rejected by the Seller or if written contingencies such as financing or inspections are not satisfied. Keep in mind that once entered into a binding contract, this money can be lost if the buyer fails to close on the deal or if the buyer does not act in good faith in attempting to satisfy the contingency, even if it is not met. This money should be held by an attorney or title company in an escrow account and used towards the down payment and closing costs.

4. Signing a Sales Contract

Once an offer is made, the seller will then respond by accepting the offer, rejecting the offer, or making a counter offer. If a preliminary agreement is made between both parties and your attorney has reviewed the contract, the offer is signed making it a legally binding sales contract. Addendums can be used for items not listed in the sales contract including:

• Contingencies such as the buyer getting financed within a certain time frame;
• Items that are included in the sale such as appliances and fixtures;
• Repairs that must be made before transfer;
• The buyer’s right to inspections and the time;
• Lead Based Paint Disclosure for homes built prior to 1978;
• Seller’s Disclosure which lists item by item each of the various parts of a house and their condition.

5. Getting a home inspection

Hopefully your offer to purchase was contingent upon an extensive, professional home inspection with a satisfactory report. Keep in mind there are generally time frames in which you must have the inspection complete and in writing before the contract is binding. It is a good idea to have selected an inspector prior to making an offer. Inspections are designed to disclose any flaw in the property which could affect its safety, livability, or resale value. The inspector will write a detailed inspection report about the home’s major systems and features including the foundation; electric, heating, and plumbing systems; the attic and basement; ceilings, floors, and walls; appliances; the roof, siding, and gutters; decks, patios, and porches; the garage; and the property’s drainage system. Necessary repairs should be completed or monetarily compensated for.

Before lenders approve home loans, many require termite clearances from pest control companies. The termite report is generally paid for by the seller, but is negotiable.

6. Obtaining Financing

Once you’ve discovered that you can afford to buy a home and have been pre-approved, determine how large a monthly mortgage payment you can afford. Another credit report will be obtained by the lender who will likely hire an appraiser to ensure that the home you are about to buy is worth the amount of the loan or greater.

There are many different types of loans available, for all types of financial situations.

• Conventional Mortgages: The most common loan is a conventional mortgage in which the rate is fixed, usually for 10, 15, or 30 years. A fixed-rate loan is one in which the principle and interest are spread out evenly for the duration of the loan allowing for a constant monthly payment. Many lenders require private mortgage insurance (PMI) to be carried when a borrower makes less than a 20% down payment. This insurance protects the lender in the event of default on the loan. PMI is paid monthly in addition to the principle and interest payments and can be removed once the property’s appraised value increases such that the loan to value ratio is below 80% (the loan amount divided by the property value is lower than 80%).
• Adjustable Rate Mortgages (or ARMs): ARMs are flexible loans that rise and fall with the market. The interest rate and monthly payment can change every six months, once a year, every 3 years, or every 5 years depending on how the loan was established. Caps can be set which limit the amount the rate can increase at each adjustment. One of the benefits of having an ARM loan is that the interest rates are generally 2 to 3 points lower than that of a fixed-rate mortgage. A lower interest rate might allow a borrower to qualify for a larger loan. These types of mortgages are good for those who are not planning on staying in their homes for very long.
• FHA Mortgages: Loans issued through the U.S. Department of Housing and Urban Development are designed to assist first-time buyers and low to moderate income buyers in purchasing a home. Eligible buyers can make as low as a 3% down payment. There are both fixed and adjustable rate FHA loans available.
• VA Mortgages: VA loans are government-insured loans managed by the U.S. Department of Veterans Affairs. VA loans are available for veterans, reservists, those on active duty, and surviving spouses of veterans with certain qualifications.
• Balloon Mortgages: Some fixed-rate loans have short terms and a large, final payment called a “balloon”. These loans are good for those who know they will either sell the property, refinance, or pay the full loan amount before the balloon payment is due.
• Hybrid Loans: Hybrid loans combine the security of a fixed-rate mortgage with the low monthly payment of an adjustable-rate mortgage. The terms of the fixed rate are generally 3, 5, 7, and 10 years at which time they roll-over into an ARM loan for the remainder of the 30 years.

7. Getting Insurance

There are two types of policies issued for title insurance: lender’s coverage, which protects the lender from any title problems, and owner’s coverage, which insures you for as long as you own your home. Purchased by either the buyer or the seller, Owner’s Title Insurance insures the buyer’s ownership of the house and guarantees that there are no liens against the property from previous owners. Most lenders require buyers to purchase Lenders Title Insurance which is a one-time premium paid at the closing.

Mortgage lenders also require the borrower to purchase homeowner’s insurance for the new home. Such policies protect the home against: casualties, such as fire or other related weather-related hazards; flood, which is drawn up in a separate policy; liability, which protects you against lawsuits resulting from injuries to guests in your home; and personal property, which protects the items inside a home. The premium can be paid along with property taxes through an escrow account set up by the lender and added onto the monthly mortgage payment. Proof of insurance should be brought with you to the closing.

8. Closing

After the sales contract is signed and all contingencies met, it is time to close the deal. As should be stated in your sales contract, the buyer is allowed a final “walk through” of the home up to 3 days prior to closing to ensure that all required repairs have been made and the home is in good condition.

You can find a closing agent through your title company, real estate attorney, or lender. The buyer and seller agree on the location for the closing to occur, and in some instances the closing can actually occur by their respective closing agents in separate locations on separate days. Either way, it is a good idea to have your attorney or real estate agent with you.

There are numerous documents which you will be asked to review and sign during the closing process. The following is a list of some of the typical documents used when a buyer is borrowing a conventional mortgage:

• Truth-in-Lending statement: Contains a full disclosure of the interest rate, annual percentage rate, amount financed and the total cost of the loan over its life.
• Settlement statement (also known as the HUD statement): It contains all the details of the charges and credits between the buyer and seller, as well as the amount of money owed by and credited to both buyer and seller.
• Monthly payment letter: Shows the total monthly payment, broken down into principle, interest, taxes, insurances, and other monthly escrows.
• Note: The actual agreement between the borrower and the lender, explicitly stating the terms of borrowing.
• Deed: The actual document used to transfer ownership from the seller to the buyer. Warranty Deeds convey ownership of the property and include certain guarantees such as having no liens against the property. A Quit-Claim Deed transfers the ownership of the property but makes no guarantees.
• Bill of Sale: This itemizes and transfers ownership of those items that are included in the sale, but are not attached to the property, such as appliances or patio furniture.

You should bring a cashier’s check with you to the closing to pay for all of your closing costs. Closing costs usually run between 3 to 8% of the purchase price. Some of the costs you will be responsible for include:

• Points/Origination fee: A point is equal to 1% of the loan amount. An origination fee is paid to the mortgage lender for the service provided while obtaining a loan for you.
• Credit Report
• Appraisal
• Pre-Paid Interest: Interest due for the remainder of the month.
• Private Mortgage Insurance: This will be paid monthly as part of your mortgage payment and depends on the amount of the down payment.
• Escrow Account: Generally 2 months of the homeowners, flood, and PMI insurance are paid in advance to the lender.
• Recording fees
• Title Insurance
• Closing/title search fees: Paid to title companies.
• Additional fees: Such as courier fees, survey charges, inspections and additional lender charges that may apply.