A Buyer's Guide to Purchasing a Home
Are you ready to buy a house and fulfill the American dream? If so there are several things you need to know to make sure you get through the process without legal problems.
Deciding Where to Live
Paying for Your New Home
Learn About Financing
The Down Payment and Mortgage Insurance
Using a Real Estate Agent
Using a Real Estate Lawyer
Making An Offers
How Much Should You Offer?
The Seller's Response
Having the House Inspected
What Should You Do About Repairs?
Your first step is to decide where you want to live. There are many factors to consider, depending on whether you're moving for a job transfer, retirement, or to change your lifestyle. You might want to consider commute times, school quality, recreation facilities, public transportation, and similar things.
After deciding where you want to live, the next step is determining what you can afford. The best way to do that is to apply for pre-approved financing. This will give you an idea what financing is available and how much you'll be able to borrow given your credit rating, assets, and income.
There are many things about mortgage financing you should be aware of. There are different kinds of mortgages, such as fixed and adjustable rates; 15-year and 30-year mortgages; and conventional, FHA, VA, and no document mortgages. As an example, a 30-year mortgage will give you a lower monthly rate, which might be attractive, but will cost you much more than a 15-year mortgage over time. Companies have different offers, so look around and compare.
There are mortgage brokers who claim to find the best mortgages for you. Some are reliable and some are not. You might consider using a broker to research all of the possible options for you, to help you find a mortgage despite your credit problems, or if you just simply don't want to negotiate with lenders yourself. If you decide to use a broker, make sure your broker is experienced and licensed (if your state requires a license). Finally, make sure you know how the broker will be paid and how much the broker's services will cost you. You can pay the broker up front, or he or she can be paid out of the loan (increasing your principal amount), or by commission from the lender (which may increase your loan costs). Make sure all the payment details are in writing and that the broker is getting you the exact deal you want and can handle. Always go over in detail the major terms of the final contract, such as the interest rate(s) and terms of payment, before signing.
The amount of a down payment varies widely depending on factors like the kind of mortgage and the borrower's credit standing. In a few circumstances, no down payment is needed, but it's more typical to pay 5% to 25 % or an even higher percentage of the purchase price as a down payment.
If you borrow more than 80% of the purchase price from a private lender, the lender will probably require you to pay for mortgage insurance (known as private mortgage insurance or PMI). You need to consider this cost when you decide how much you can afford to pay per month for your new home. The federal Homeowner's Protection Act (HPA) requires a lender to cancel this insurance when the principal balance of the loan reaches 78% of the purchase price. You can ask to have the insurance cancelled when the principal balance reaches 80% of the price.
You don't need to use a real estate agent to buy a house, but you might decide you want to use one anyway. Unless you are buying a FSBO (for sale by owner) house, where no commission is available to pay your agent, it won't cost you more to use an agent. If the seller is using an agent (and most do), there is a commission set aside to pay agents (usually 5-7%). If you don't have an agent, the selling agent gets the whole amount. If you have an agent, the two agents split the amount, so you don't pay any more. Since agents can be helpful and may do a great deal of work, using one is usually a good idea. Ask for referrals from people you trust and look for agents with knowledge of sales in your area and with an excellent reputation.
The use of a real estate attorney to buy a house is not required in any states, but in a few states it is customary to use an attorney in real property transactions. You should consult with a qualified real estate attorney if significant problems come up in the buying process. For example, you may need advice if the house has an illegal unit or addition, tenants in residence, or if there are problems with the title to the property. To avoid conflicts of interest, never rely on legal advice from the seller or one of the agents (even if that person is also an attorney).
You should make an offer that you intend to carry through, not something you think you can get out of later. If the seller accepts your offer in a written document, your offer becomes a binding contract, so be careful. In an offer, you say how much you're offering as a purchase price, what contingencies you reserve, and how much time you need to do things like finding financing and getting inspections. Many states have forms for offers. You can get these forms from your agent or from your state's department of real estate.
Contingencies are things that must happen before the deal will go through. Common contingencies include the buyer's ability to get financing, the buyer's satisfaction with the inspection, the buyer's ability to sell his, her or their current home, and/or the buyer's ability to obtain insurance on the new house.
Deciding how much to offer can be a challenge. You need to consider the "temperature" of the market. A hot market is one where the seller can usually get the asking price or above. A cold market is one where the buyer can bid below the asking price. You also consider comps or the prices that comparable houses (houses of similar size, amenities, repair, and so on) have recently sold for (keeping in mind that the temperature of the market can change quickly and a 6-month old comp might not be relevant). There are additional factors that relate to you personally, such as how much you want the house, how urgently you have to move, and how much you can afford. A seller's need to sell might also lower the price.
Your agent can help you set a price for your offer, but remember that your agent has a conflict of interest with you on this point. All agents get paid a percentage of the purchase price, so both your agent and the other agent benefit equally from a high price. Consider doing your own research on the right price to offer.
The seller has several options. He or she can accept your offer, reject it, or make a counteroffer with a different price, different contingencies, or different times. For example, a seller might not want to have the sale contingent on you selling your current home or might want you to complete inspections in 2 weeks instead of in a month. Counteroffers can go back and forth till the parties have reached an agreement. If either party accepts a counteroffer in writing, then both parties are legally bound by the terms of that counteroffer.
You will always want to have a house inspected before you actually buy it. You can't rely on an inspection report done by the seller, unless you are personally aware of the credibility and skill of the seller's inspector. Even then, there may be other special inspections you will want to have such as pest or mold inspections. To find out more about home inspections see Buying a House: Why a Home Inspection Can Save You Money. If the house needs repairs you didn't consider when you calculated the purchase price, you can renegotiate the agreement or call off the sale, as long as you made satisfaction with inspections a contingency in your offer and counteroffers.
There are several factors to consider when you're negotiating how repairs will be handled:
- If you're going to do the repairs, make certain that you get written estimates for repairs before the closing date. You need to know what you've agreed to.
- If the seller is going to make the repairs, make sure the repairs are finished before closing. If they aren't, reserve the power to cancel the deal or extend the closing date so that the repairs can be done. It will be a lot harder for you to enforce an agreement for repairs after the deal closes.
- Make sure that the contractor doing repairs isn't paid directly from the purchase price. You need to make sure the repairs have been done properly before payment is made to the contractor. You can do this by having the funds paid into escrow or paid jointly to you and the contractor. You can then release the funds when the repairs have been satisfactorily completed.
- Be careful with home repair loans. There is a potential for abuse if the loan broker or lender and the contractor are working together. One way to avoid problems is to select your own contractor and not rely on recommendations from the broker or lender.
This is the day you and the seller sign the final papers. Make sure that you've resolved all questions about how repairs will be made, when you get occupancy of the house, and all title questions before the deal closes. You may have title insurance, but your insurance is only as reliable for protection as the exceptions contained within. Your insurance may leave you in hot water if it excludes risks, such as rights of prior owners and/or mechanics liens, which show up after the deal is done.
If the seller or the seller's tenant won't be out of the house by the closing date, make sure you've settled when the occupant(s) will be out and that you've made a rental agreement for the time they will remain in the house after closing. If you have any questions, consult with a qualified real estate lawyer before the deal closes.