by: Sean Engmann
Realtor® at Compass
CA DRE# 2117899
The Home Buying Process
For many first-time homebuyers the process of buying a home is a mystery. Some are so worried about the process that it keeps them on the sidelines. The fact is, the homebuying process is very complex, but that is primarily for the protection of all parties. With the right guidance, it certainly shouldn’t be scary.
1) The Decision to Buy
The first step in the process is the decision to buy, and for some, that’s the hardest part in the whole process. Many Realtors jokingly refer to purchasing the home as “the best accidental investment people ever make” and the fact is that most people who can afford to rent, can also afford to buy. If you are on the fence about your decision to buy, it’s a good idea to seek out more information to help make that decision.
2) Find a Buyer’s Agent
Many people skip the part about finding a buyer’s agent and immediately start attending open houses and looking for properties themselves on the web, waiting until later to hire an agent. There’s nothing wrong with doing that, particularly if you’re meeting with prospective agents at the open houses and learning more about your likes and dislikes.
The fact is, though, that even at the beginning of the process, agents can be incredibly helpful. Agents understand the market and can help you find the right home more quickly. Perhaps more importantly, agents can introduce you to the process and understand the financial side of the transaction. They can introduce you to the right lender for pre-approval and help gear your search toward properties that are appropriate for your budget.
More importantly, you want to be working with an agent when you’re ready to make an offer on a home. Sure, in California you can ask the listing agent or an agent at the open house to write the offer for you, but that doesn’t give you the opportunity to evaluate and be confident in that agent’s ability to shrewdly negotiate and to successfully navigate the transaction. The purchase of a home is an enormous transaction and your agent should be selected with due diligence.
3) Find a Lender and Get Pre-Approved
If you’re not a cash buyer, getting pre-approved is absolutely essential to having your offer considered. That involves finding a lender. During the transaction, the lender and your agent need to work closely together to ensure that your loan gets funded, so working with a lender recommended by your agent ensures that they have a strong working relationship.
Once the lender is selected, you can either get pre-qualified, pre-approved or pre-underwritten. A pre-qualification letter is typically given with minimal if any verification done by the lender, so it is not considered strong in an offer. Conversely, to get pre-approved a credit check will be run by the lender and you will be asked to provide a substantial amount of information to verify your ability to repay the loan, including W2s, pay stubs, bank statements and tax returns. Pre-approval letters are standard in California to establish if a buyer is to be seriously considered. Pre-underwriting takes it further, as it means that your finances have already been fully vetted and the lender has agreed to give you a mortgage up to a certain amount. Pre-underwritten letters can be found in strong seller’s markets.
4) Find a Home and Make an Offer
Once you have a pre-approval letter in hand and you find the home you like, it’s time to make an offer. To make an appropriate offer, you should as your agent to prepare a comparative market analysis to establish market value and work together on an offer strategy. It is critical to carefully craft an offer based on the strategy because there are many facets to it besides price that can determine whether you win or lose.
In addition to price, there are contingencies to consider, from property condition to loan to appraisal as well as the time frame under which escrow should close. While sellers typically love no contingencies and a fast close, you need to weigh that against your ability to perform under the contract. The number of contingencies requested, and the time period the contingencies will remain in effect prior to removal are all subject to negotiation. So is the time frame under which escrow should close, and all have a significant bearing on the likelihood of your offer being accepted.
Upon entering into contract, you should be ready to deposit 3 percent of the purchase price into escrow, typically within 48 hours as earnest money. Whether or not earnest money is deposited is subject to negotiation, but virtually all serious offers contain earnest money as it typically represents “skin in the game” and can serve as insurance for the seller if the buyer breaches the contract.
5) Contingency & Inspection Period
While many first-time home buyers rightfully celebrate getting into contract, the contingency period is really where the work begins and can be one of the most hectic times for buyers and buyer’s agents. A contingency means that there are certain conditions that must be met by either of the parties in order to proceed to the next step of the contract. Even if there are no contingencies related to property condition, thorough inspections should be conducted.
The first few days after getting into contract are usually a flurry of activity as it becomes a race against time to get everything done before the close of escrow. Property and pest inspections are typically scheduled as soon as possible. For buyers with loans, an appraisal is generally required and can be tricky to schedule – that must be coordinated with your agent and the lender. Meanwhile, if you were pre-approved for the loan, the underwriting process begins which can require substantially more documentation. The good news for you as a buyer is that if the inspections reveal more problems with the property than you thought, or if for some reason you cannot obtain a loan, you can cancel the contract and be refunded your earnest money, provided you had the appropriate contingency.
Once the contingencies have been removed, it’s time to close. Buyers should ensure that they remain diligent with their finances and refrain from any large expenditures or anything that may raise a red flag and jeopardize the close. At this point, the lender will send all of the loan documents to the title company and a time will be scheduled to sign the loan documents. Once the loan documents are signed, you and your agent will schedule a time for the final walk-through where you will be able to make note of any concerns that you find for later resolution. Typically on the day prior to closing, you will provide the balance of your funds to escrow, including the remaining down payment and any closing costs, and your lender will fund the loan. Upon receiving all of the funds, the title company will record the transaction with the county, putting you officially on record.
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