10 Steps to Purchasing a Home

First and foremost, congratulations on making the decision to purchase a home! It’s a big step and implies you have made intelligent decisions when it comes to personal finances. Shopping for a home should be a fun process, full of optimism about the future and excitement about the benefits of homeownership. At the same time, it’s likely the single most significant investment you’ll make in your lifetime, so ask a lot of questions along the way and never sign your name on anything unless you’re 100% comfortable. The following steps should give you a good idea of what to expect, provide a couple handy tips and take some of the mystery out of the buying process. Although real estate rules and regulations vary by state (this article is specific to Colorado), there are many commonalities regardless of where you purchase.

Step One: Find a qualified real estate professional. This is not a required step, but why forego professional representation when it doesn’t cost you a dime? The vast majority of the time, agents are paid by the seller in a real estate transaction. If an agent implies otherwise, that agent is not the one for you. One of the best ways to find a compatible agent is to consult friends and family for a referral, chat with two or three of them and go with whom you’re most comfortable. This way, you’re not only assured that they’re good at what they do, but a significant portion of agents’ livelihoods come from referrals and they will typically go the extra mile in hopes you will refer additional business to them in the future as well. It isn’t recommended that you qualify your candidates solely on their previous/current sales figures. High sales volumes don’t necessarily equate to the best fit for you personally.

Step Two: Find a mortgage lender and work backwards from an acceptable monthly payment to arrive at a suitable range for a purchase price. Depending on who you ask, some people may feel this should be the first step in purchasing a home. On the other hand, having already selected a real estate agent could make this step much easier since successful real estate agents have long standing relationships with a variety of mortgage lenders who they trust. Again, request two or three names from your agent and take some time reviewing the various loan products they suggest for your purchase. If your agent isn’t able to furnish a list to you relatively quickly, you might revisit Step One. Being pre-approved will prevent you from wasting any time or getting emotionally attached to a home you aren’t able to afford.

Step Three: Prepare for expenses related to your home purchase. The “glory days” of “no money down” are long gone because they ended up forming the foundation of countless extreme-risk loans which inevitably defaulted, contributing to the real estate market slump that plagued the nation for a handful of years. Expect to need at least between 3-4% of your purchase price as a down payment (some loans may require as much as 20% for less-qualified buyers). The bulk of this will be due at the time you go under contract in the form of earnest money. Earnest money is an amount determined by the seller and held by a third party as recourse in the event that the buyer violates the terms of the purchase contract. As long as you are being well represented by your agent and cooperative during the real estate transaction, this is a rare occurrence and the money is credited back to you as a credit towards your purchase at closing. Another 3% needs to be set aside for closing costs, which are varying amounts the bank charges the buyer to create and facilitate the loan. There are ways to entice the seller to pay a portion or all of these on your behalf if you present a strong offer, so be sure to discuss your options with your agent. Finally, inspection costs will need to be paid at the time of completion, starting around $300, but may lead to more costs if there are any red flags. Some of these costs could include radon testing, sewer scopes and engineer reports. Again, there are ways to share additional costs with the seller, so continue to consult your agent. Don’t get overwhelmed though, these costs are spread out over the length of the transaction, hopefully providing some time in between to replenish the bank account.

Step Four: Begin your search. Now that you have a price range in mind, give your agent a little better idea of what you’re looking for in a home. Don’t get too specific right at the beginning because you may overlook some properties and your search criteria will evolve as your hunt progresses. If you happen to search in a seller’s market where the inventory of homes for sale is low, you may find yourself in a situation where there are multiple offers. There is a fine line between submitting a winning offer and overpaying for a house, so work with your agent on assembling a balanced offer. Also in a seller’s market, don’t wait for the weekends to search for a home as time is of the essence. If you find yourself in a buyer’s market, where there inventory is abundant, the process may take a little longer and you won’t always close on the first home you put under contract. Either way, it may be difficult at times, but be patient. You may think you found the ideal home, but end up being outbid or reveal deal-breaking red flags through your inspection. The perfect home is out there waiting for you, but rarely in the first place you look.

Step Five: Make an offer. Once you found the home that meets your needs, your agent will evaluate comparable properties and you’ll work together on submitting an offer that would satisfy both parties. Low ball offers are not common as the media may imply and you don’t want to get off on the wrong foot with an offensive offer.  Along with the purchase contract, you will include the pre-approval letter your lender provided and the earnest money, which is typically deposited within 48 hours. The purchase contract will lay out all the details of your offer, most notably price, closing date, whether or not you’re requesting closing cost assistance and any other additional provisions. The strength of your offer will primarily be dictated by two factors: the price of comparables in the area and the length of time the home has been on the market. The more straightforward and clean an offer is, the more likely a seller is inclined to accept it. However, if the home has been on the market for a long time, the seller will be more willing to work with lower offers which may include additional requests.

Step Six: Be diligent. The purchase contract provides very specific timelines for a variety of tasks paramount to the successful purchase of a home. To name a few, there are deadlines to object to seller-provided paperwork regarding the condition of the home, complete an appraisal, conduct an inspection and secure the terms of your loan. As long as you’re proactively cooperating with your agent, deal-breaking complications are rare. That said, if any deadline is neglected, you could end up waiving some of your rights as a buyer and ultimately lose your earnest money as a result. Consider every deadline an important one and collaborate efforts with your agent to ensure they are all sufficiently met. If there are extenuating circumstances, dates can be amended, but it requires advanced written notice and mutual agreement between the parties.

Step Seven: Get an inspection. Your agent should be able to provide you with a couple references if you don’t already have someone in mind, but it is your responsibility to hire and pay for an inspection. Before you schedule it, confirm with your agent that the appraisal has already been completed by the bank. If for some reason the appraisal comes back less than the agreed upon purchase price, you have the option to terminate the contract since most banks won’t approve an over-priced loan. There is no need to spend money on an inspection of a house you’re not going to buy. In some situations, such as buying a government or bank owned property, you are purchasing the home “as is.” This means, even if there are problems, the selling party is not going to fix anything, but that doesn’t mean you shouldn’t have the property professionally inspected. Structural issues, mold growth, roof problems and environmental threats (like radon gas) are just a few red flags that aren’t always noticed by the untrained eye. It also gives you the opportunity to legitimately terminate the contract (having your earnest money refunded) if the red flags are beyond reasonable repair, so it is extremely important the house is carefully scrutinized inside and out before you commit to making the purchase. If your inspection isn’t completed or the Inspection Objection Deadline passes and you didn’t submit a written notice of objection, you have effectively waived your right to inspect the property and you have no recourse if red flags are discovered at a later time. Any issues discovered after the deadline leave you in a difficult predicament having to decide between buying the house “as-is” or being in default, voiding the contract outside of its terms and conditions, thereby forfeiting your earnest money. Submitting your inspection issues to the selling party prior to the Inspection Objection Deadline enables you to terminate the contract if the issues are beyond reasonable repair (earnest money refunded), negotiate down the price to compensate for their cost or leave them in the hands of the selling party to be completed to your satisfaction by an agreed upon date.

Step Eight: Get ready to move! The closing date should be clearly defined in the purchase contract, so if you’re renting, make sure you get sufficient written notice to your landlord. Typically, they ask for a minimum of 30 days, but review your lease agreement to be sure. As long as you’ve been a good tenant, you should be able to look forward to having your deposit refunded, hopefully offsetting some of the costs of purchasing your home. Additionally, since mortgage interest is paid in arrears, your first mortgage payment won’t be due until a full month’s worth of interest can accumulate, further providing a little extra financial breathing room. For example, if you close on your home in the middle of March, the remaining days of March will be prorated according to the interest rate on your mortgage and charged to you as a closing cost. April will pass and your first payment won’t be due until May 1, paying April’s accumulated interest in arrears. So, time your move accordingly and you’ll have the luxury of going one month without paying a mortgage or rent. Some of the last few items to address include calling the appropriate utility companies and putting utilties in your name (starting on your move-in date), change your address online or by physically going into the post office and start packing up what isn’t used daily to get a head start.

Step Nine: Head to the closing and get the keys to your new home! The day is finally here. You looked high and low, found the perfect home, labored through the under contract period and are hopefully (almost) done packing. The closing itself is paperwork-intensive, but between your agent and the closer at the title company, it should be a smooth, straightforward process. There are two sets of documents you’ll be signing; those that pertain to the real estate transaction and those that pertain to the loan. Each document will be explained to you, but don’t hesitate to ask questions. Your agent will have reviewed a Good Faith Estimate with you well before the closing, which details where every cent goes, so there shouldn’t be any surprises. Depending on how the purchase contract was negotiated, there’s a good chance you will have to bring certified funds to closing. Typically, this covers remaining closing costs, the balance of the down payment your loan requires or a combination of the two. Just go to your bank and ask them for a certified check in the appropriate amount; it will be deducted from your account immediately. Normally, the selling and buying parties sit at the same closing table, but if schedules conflict or you’re working with a bank/government owned property, it isn’t out of the ordinary to close separately. Once everything is mutually executed, the closer will send the documents over to the lender for one last review. As long as everything is received as expected, the purchase is funded and you’re the new proud owner of the property. If you find yourself in a situation where you don’t take possession immediately after closing, be sure your agent has a fully executed Post Closing Occupancy Agreement if the previous owners will spend any amount of time in the property after the transaction is complete. It’s essentially a rental agreement that legally binds the previous owner’s accountability while on the premises and your legal recourse if the agreement is violated.

Step Ten: Be a proud homeowner and enjoy the benefits. Once you’ve settled in and have all your plans for painting, decorating and perhaps an improvement or two completed, knowing that you own everything from the landscaping outside to the plumbing in the walls to that new fantastic 42” flat screen TV your agent bought you as a closing gift is more than just peace of mind (Your agent didn’t buy you a closing gift? Call me next time!). As long as you continue making sound decisions financially, the equity you have the opportunity to build up over the next handful of years could be the beginning of the nest egg that will fund your retirement. Not only can you benefit from appreciation, there are annual tax benefits as well. Keep in mind, you can’t always rely on the real estate market for appreciation. So, in addition to thoughtfully maintaining your home, try and pay down the principle more than the minimum amount each month. If you make one extra payment each year, you could pay off the home almost seven years earlier than if you simply made the minimum payment each month. The easiest way to make one extra payment a year is divide one payment by 12 and include that to your payment each month. For example, if your payment was $1,200 per month, if you added $100 ($1,200 divided by 12 months = $100) and paid $1,300 each month instead, you would significantly reduce the term of the loan and increase your equity over the years.

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