Buying a home can be a very stressful process. Having the right loan officer, real estate lawyer, and real estate agent can ease that stress and streamline the process. Without further ado, here are the steps to becoming a homeowner.

1. Obtain a Pre-Approval from a Mortgage Lender

The pre-approval indicates the type and amount of loan you qualify for. The value stated on your pre-approval is the maximum amount a mortgage lender will lend you towards a home, and will help inform both you and your agent about your practical price range for a home (….which is why many agents won’t take you home hunting without a pre-approval). A lender qualifies you for a loan by looking at four things: credit score, income, assets, and debts.

The pre-approval is also one of the main items a seller’s agent looks at when a buyer submits an offer on a home. This allows them to evaluate that buyer’s ability to pay the asking price for the property. The lender you choose ultimately doesn’t have to be the lender you get a loan from. It’s a free service, so if you’re unhappy with the terms one mortgage lender is offering it may be worth shopping around.

2. Find an Agent

Obviously, every client is going to have their own individual standards for what constitutes a good agent. In my opinion, a good buyer’s agent is communicative, honest, and pro-active.

Being communicative is making sure that the agent understands what the buyer is looking for, eliminating all gray area that could potentially cause them to miss out in their search for the right home. For example, a big garden in the agent’s eyes may be quite different from what the buyer is imagining. It’s also imperative that the agent is keeping their client in the loop about every part of the real estate transaction. This helps to prevent unwanted surprises and creates a strong foundation for the agent-buyer relationship.

Being honest is about being upfront about what a buyer is able to afford based on the level of competition, and the condition of the market. Just because a buyer may not be able to compete in the market today doesn’t mean they won’t be able to compete in a few months; an honest agent will have the integrity to tell a buyer to come back at a later date or move on to another property.

Being pro-active is about taking the initiative of filtering out properties that the agent knows the buyer won’t be interested in. The idea is to not prolong the search for a home more than necessary by overwhelming the buyer with too many options. Being pro-active also extends to booking tours by working around the client’s schedule in order to get ahead of other suitors of a potential home.

3. Home Search

The fun part! Based on your criteria, the agent is going to take you out to view multiple homes. Houses are ideally lined up across one day, with no more than five houses being selected in order to avoid buyer’s fatigue. The agent will be creeping around the buyer as they walk through each house, watching for disgruntled facial expressions and remarks, in order to help better understand what the buyer is looking for in a home.

4. Make An Offer

Once the buyer has found the right home, the agent will urge them to make an offer. The strength of the offer will depend on what the buyer’s agent can find out about the house and the owner’s motivation for moving. The length of time the house has been on the market will also play a factor. For example, houses that have been on the market longer than average may not require as strong of an offer due to the lack of buyers competing for the home.

Once the offer is submitted, the seller’s agent may come back with a counter offer, which may consist of either a request for a larger down-payment from the buyer, or tightening up certain deadlines for home inspections or mortgage approvals. If the offer is accepted, the buyer will submit what is called earnest money, generally $1000, by check or cash. It’s the first deposit in a real estate transaction and shows the seller that the buyer is serious and willing and able to purchase the property.

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5. Home Inspection

Once the offer is accepted, a full home inspection immediately follows over a 7 to 10 day period. The home inspection will include roof, termite and air quality, which is going to cost the buyer between 300-500 dollars. The day after the inspection, the buyer will receive an inspection report telling them everything that is wrong with the house. Ninety-nine percent of the report will cover little things like an outlet cover being cracked, or a light bulb not working.

However, the major ticket items that affect the material value of the home such as a leaky roof or flooding basement could cause a buyer to reconsider going forward with the transaction. If this is the case, the buyer can back out and get their earnest money deposit back. However, if they choose to go forward, the agent can enter into another round of negotiations with the seller’s agent to get money off of the final purchase price for needed repairs.

6. Sign Purchase and Sale Agreement

The Purchase and Sale Agreement is the meatier and more comprehensive version of the offer form. It is signed 10 to 14 days after the initial offer is accepted, and where a further deposit is required as the real estate transaction moves towards a close over the next few weeks. The amount of the deposit is usually 5% of the agreed upon sales price, however the earnest money deposit made during the offer phase will already count towards that 5%. (For example, a $100,000 home, will require a $4000 deposit during the Purchase and Sale Agreement, as $1000 in earnest money had already been submitted with the offer, equaling 5% or $5000).

It is important that a buyer has a good real estate attorney draw up the Purchase and Sale contract and work with the seller’s attorney, so that any contingencies can be put in place following faults found in the home inspection, as well as undetectable faults that may arise in the future. There will also be contingencies written into the contract regarding potential problems related to liens that are found after the seller leaves the property.

7. Apply for Mortgage

Simple enough. You have to apply for the mortgage with the mortgage lender 1 to 2 days after signing the Purchase and Sale Agreement (IMPORTANT!!!). Failure to apply for the mortgage in a timely manner puts the buyer at significant risk of losing their 5% deposit, as these dates are agreed upon in the initial offer acceptance. If the mortgage can’t be approved by the lender for whatever reason, the seller will want to make sure the buyer did everything they could to get it over the line, including applying on time and notifying them in a timely manner of any hold ups. Failure to do so means the seller is entitled to keep the deposit to compensate them for the long period of time the house was taken off the market.

8. Home Appraisal

The mortgage lender is going to send an appraiser out to determine what the fair market value is of the home at some point during the mortgage approval process (Please note: Upon applying for a mortgage, the mortgage approval process usually takes 3 to 4 weeks). That appraiser will determine the value of the home by looking at at the condition of the property, the location, and comparable properties in the area. In a perfect world, the appraiser’s valuation of the home comes right at the sales price, meaning the mortgage approval process can proceed to the closing stages.

If the appraisal comes in over the sales price, then it is highly likely that the buyer will purchase the house with more equity in it than originally anticipated. However, if the appraiser’s valuation of the home comes in below the sales price, then there’s a chance the buyer is going to have to bring more money to closing. This will be to make up for the difference between the lower mortgage amount the lender is now willing to lend to the buyer versus the originally propositioned mortgage amount (example at the bottom of the page).  In this scenario, the buyer’s agent will negotiate with the seller’s agent and reach some sort of compromise on the seller lowering the sales price towards the appraised value, and minimize the amount of extra money the buyer would need to bring to closing.

9. Mortgage Approval, Final Walkthrough and Close

I’ve include all these as one block as they will happen within the space of a few days. First the mortgage approval will happen, approximately 3 to 4 weeks after the mortgage application (barring there are not hold ups with the appraisal or underwriting process). In the background of the mortgage approval process, the buyer’s lawyer will be performing a title check on the property to make sure there are no liens or taxes owed by the property to the local, state or federal government.

Second, the buyer will conduct a final walkthrough of the property with their agent to make sure all the appliances that were working in the initial home inspection are still working, ensuring that there are no late surprises. The final walk through will also ensure that anything the seller had contractually agreed to take (eg. microwave, chandelier) is gone, and anything the seller contractually agreed to leave behind (eg. refrigerator, oven) is still there.

Lastly, closing day will take place. The buyer will be asked to sign A LOT of documents (mostly non-negotiable bank papers relating to their mortgage). However, there will be three important documents that the buyer should pay particularly close attention to: the closing disclosure, the promissory note and the mortgage.

The closing disclosure contains all the fees associated with closing costs, which represent 2-3% of the sales price of the home. The closing costs cover payments for a variety of services including the appraisal, lawyer fees for title search and recordation, and a bank mandated advance on home insurance. A buyer will generally receive notice of their closing costs 3 days prior to the final closing day, in order to have the payment ready. The promissory note is the IOU to the bank, and includes the determinable amount, date, and interest rate of the loan by which a buyer will pay back the bank. Lastly, a mortgage is an agreement between the buyer and a lender on the loan used to help purchase the home; but more importantly gives the lender the right to take they buyer’s property if they fail to repay the money the buyer has borrowed.

BONUS: CLEARING UP GRAY AREAS IN THE TRANSACTION PROCESS

Can you give an example of an appraisal that comes in low?

A buyer agrees to purchase a house from a seller for a sales price of $100,000. In the Purchase and Sale contract, the buyer stated they would be requesting 80% financing of the home ($80,000) from their mortgage lender. During the mortgage approval stage, the appraiser, who works on behalf of the mortgage lender, does a valuation of the home and determines the house to be only worth $95,000. Since the buyer contractually agreed to 80 percent financing from their mortgage lender, the lender is now only willing to lend $76,000 (80% of $95,000 = $76,000) instead of $80,000. This means that the buyer may have to bring an extra $4000 to closing if the seller chooses not to lower the sales price ($100,000) to the lender’s valuation ($95,000) of the home. The buyer will also have the option of backing out of the deal at this stage and get their deposit back if the seller refuses to lower the price.

What is the difference between Deposit and Down-Payment?

The deposit binds the buyer to the property via monetary consideration and is usually smaller in amount than the down payment (although sometimes they can be equal). The down payment is the total amount of buyer funds that are put towards the property, and is found by subtracting the mortgage amount from the sales price.

Example 1

Home Sales Price = $100,000

5% Deposit during the Offer Acceptance and Purchase and Sale Agreement: $5,000

80% Mortgage taken out from the Bank: $80,000

15% Remaining Amount brought to Closing by Seller: $15,000

Total Down Payment is $20,000

Example 2

Home Sales Price = $100,000

5% Deposit during the Offer Acceptance and Purchase and Sale Agreement: $5,000

95% Mortgage taken out from the Bank: $95,000

Total Down Payment is $5000. (Deposit and Down-payment are the same!!)