The first thing you need to do is analyze your ‘Wants’ and ‘Needs’ with regards to your future home. Identify what items will be deal breakers and which ones you might be willing to compromise on.
Choose a Lender and get Pre-Approved. Knowing how much money you have to work with is key. There is nothing worse than falling in love with a home and then finding out that you can’t afford it. Pre-Approval will also make your offer more likely to be accepted as the financing is already guaranteed.
Find as many properties currently on the market within your budget that match your “must haves” and set up appointments to view them. Take notes of your impressions of the neighborhood, the street and the house itself.
Once you have found the home you wish to purchase, you will need to determine what offer you are willing to make for the home. It is important to remember that the more competition there is for the home, the higher the offer should be – sometimes even exceeding the asking price. Remember, be realistic. Make offers you want the other party to sign! You will want to include any repairs that you will be requesting the Seller to make, if any. When you write an offer, you should be prepared to pay an earnest money deposit. This is to guarantee that your intention is to purchase the property.
After you present your offer it will either be accepted, rejected, or the seller will make a counter-offer. This is when you will need to negotiate – hopefully leading to an accepted offer.
Your attorney will work with the Seller’s attorney to draw up the contract, which will state the purchase price, how long you have to obtain financing, a timeframe for the closing date and any other contingencies you and the Seller have agreed upon.
The signed contract is sent to an attorney or title company to begin preparation of all work related to transferring and changing the title to the new owners and preparing the title commitment.
You may elect to perform inspections on the property if desired. The types of inspections vary by property type and situation, but a home inspector generally inspects the home first, and other inspections and tests can be ordered if revealed to be necessary by the initial inspection. A wood-destroying insect or termite inspection is also common.
If the inspection shows anything that needs to be repaired that has not already been addressed, you can negotiate with the seller for closing cost credits or repair work. Sellers can either a) agree to all of the buyers' requests, b) offer a modified solution back to the buyer, or c) decline to make any amends. In response, the buyer can continue to negotiate, accept the seller's position, or walk away.
You will submit a loan application to your lender, either directly or through a mortgage broker. Within 3 days, the lender will send you a "Closing Cost Estimate." It is a breakdown of estimated closing costs. The final costs are likely to deviate from this estimate.
Your lender will request a series of personal financial disclosures. These vary by situation, but the most commonly requested documents are:
- Several months of statements for each bank account a borrower holds (including any investment accounts)
- Several months of statements for any outstanding loans, lines of credit, or other liabilities. This can also include documentation of rent payments.
- Up to two years of tax returns for the borrowers.
- Recent pay stubs and contact information for each borrower's employer. The number of pay stubs varies by situation.
- Any other disclosures that are material to a borrower's financial situation. This includes but is not limited to marriage licenses, divorce settlements, child support, liens, bankruptcies, or judgments. If there's something that affects how much money you have on hand that isn't shown by simply looking at your salary, be prepared to document it.
- Explanation of any credit inquiries.
- Substantiation of any large deposits or cash gifts that aren't regular income. In some cases, a large cash gift may look similar to a personal loan by a friend or family member, and lenders will require gift letters from those that gave you the cash gift, stating that the gift was not a loan. They may also ask for itemized deposit slips. The exact amount that triggers this requirement varies by situation (for instance, a $1,000 cash gift may be material to a single borrower that makes $35,000/yr but may not be material to a borrower that makes $350,000/yr), so it's good practice to ask your lender if you suspect you might have a material cash gift or large deposit - so you aren't surprised by this at the last minute.
- Repeated and updated documentation of any of the above. Keep in mind: to a lender, anything can happen to a borrower's personal financial situation and credit during the escrow process. Thus, you may be asked more than once for the same type of document so that your lender has the most recent pay stubs, rent receipts, bank statements, or other disclosures that may change over time. Any material changes in these documents - or any element of your personal financial situation - may require the lender to reassess your eligibility for the loan for which you've applied.
The lender renders an approval decision, and if approved, issues a loan commitment letter, stating its willingness to fund the mortgage provided certain conditions are met. These conditions usually include appraisal (so the lender can confirm that the property you're buying isn't worth far less than you're paying) but will also generally include any material change in your situation - or the property - as initially disclosed to your lender.
An appraisal is ordered by the lender or mortgage broker. If the appraisal comes in lower than the purchase price, then you can ask the seller to reduce the purchase price. As long as the results of the appraisal were made contingent to the purchase of the home, you can simply walk away if appraisal becomes an issue.
5. Homeowners Insurance
Homeowners' insurance is purchased (or substantiated, if the property being purchased includes homeowners' insurance as part of association fees or similar arrangements), and proof of homeowners' insurance is submitted to the lender.
Part 4: The Closing (or Settlement)
1. Title Commitment
As part of the preparation for closing, the attorney or title company performs a title search (if they haven't already) to determine if there are any liens or assessments on the title. Provided the title is deemed 'clear,' the closing proceeds as planned and the attorney or title company issues a title commitment. All paperwork for changing the title / deed and title insurance is prepared, and a final closing date is confirmed with all parties.
2. Closing Cost Statement
A final cash figure for what you will need to bring to the closing in the form of a cashier's check or bank wire is calculated.
3. Final Walkthrough
A final walkthrough will often be performed the day of or before closing to verify the property is in the same condition it was when the process began and that all discussed repairs have been made.
4. The Closing
At the closing, or settlement table, you and the seller will sign all closing documents, including the HUD-1 and the final loan documents. You will pay the remaining funds in your down-payment to the attorney or a representative of the title company who is acting as the settlement agent via certified funds. The representative from the title company or attorney will then record the transaction and deed with the appropriate municipality.
5. Move In
You are now the proud owner of a home!