A 10 Step Approach to Understanding the Basics
Whether you are a first-time home buyer or just have been out of touch with the real estate process, this is an excellent guide to help you make the right decisions and buy that home!
One of the many issues facing today’s real estate world is that it can become a daunting, and often difficult process for many people because of two reasons; They don’t choose the right real estate agent and they don’t let themselves get educated!
As your real estate agents we are obligated to educate you and direct you as we go through the buying process, and we always encourage our clients to let us educate them as well as stay current on this site to ensure they have the best understanding and can easily bring any questions or concerns to my attention.
We have put this guide together as a resource to hopefully answer a few of the basics regarding the purchase of a home. This ten step approach should leave you feeling a little more confident as we head down the line of your purchase.
We have also broken down the approach to better understand the Pre-Purchase, Mid Purchase, and Closing/Post-Post Purchase aspects of the process:
Pre- Purchase: Asking the Question: Are we/am I ready to buy?
1.) Make the Decision That You WANT To Buy
This part of the process is what I am all about: Its about peering over that ledge with your new home in your thoughts and the potential joy, adrenaline, or even anxiety overtaking your system. Let me tell you that if you are at the point where you are thinking about buying a home, you probably have already answered the question above. It’s sort of like buying a car or a new TV, or deciding to go to college or start a business: You don’t know what the exact outcome will be but you’ve already made up your mind that you are going to do it and you are going to make it work. This is the first step to buying your home: deciding that you want to do it.
2.) Aligning Yourself With and Hiring the Right Professionals.
One of the most important aspects of getting through the home-buying process is the people you choose to represent you and help you through the process. I can’t stress enough the importance of finding a real estate agent you can trust, who has only your best interests in mind, and who has the expertise and knowledge to ensure that you open that front door with nothing short of complete satisfaction. This is where we come in. We build our business knowing the importance of your home purchase. It’s not about us. It’s about YOU. Secondly, there are other professionals you will be working with most likely in any real estate transaction that will need to come through for you to get you there: This primarily includes a mortgage broker/banker/lender, home inspector, a title company/escrow agent, and potentially others. I will explain this in more detail later.
3.) Getting Pre-Approved (NOT Pre-Qualified) to Know Your Price Range.
Many prospective buyers find that this is their biggest obstacle before purchasing their home. So many people are afraid to get pre-approved because they are worried about how much (or how little) they can afford. But before you take any other steps in the real estate process, this is a must! Long gone are the days where your buddy at the bank could just approve you for a loan without verifying income, without having regulated underwriting policies, and without worrying about home values not increasing significantly, thus mitigating the bank’s risk. With that being said, it is very important that at the outset of your decision to pursue buying a home you get pre-approved. Some of you might ask, well what is the difference between pre-approval and pre-qualification?
Pre-Qualification: The straightest answer to this question is that pre-qualification is simply you telling the lender roughly how much you make (without verification) and roughly how much your other monthly debt is (without verification), and that lender giving you a dollar-per-month allocation that you should be able to spend on a new house. This dollar-per-month amount can be easily calculated in a loan amount that you pre-qualify for.
Pre-Approval: The simplest answer to this is that a pre-approval takes the next step of the pre-qualification and is a much more solid indicator of where you stand in your purchase/loan range. In most cases, the lender will run your credit report and be able to accurately verify your monthly debts, as well as see you credit score. You credit score, depending on the loan type, can affect the interest rate of your mortgage. If you interest rate is higher because your credit is lower, you will have less per month to go towards a principal loan amount, and thus, a lower purchase price.
Additionally, for a pre-approval, lenders may very well want to verify your income and job status up front as well as other items pertinent to that particular lender. So before you start looking for a houses, it is highly recommended that you get yourself pre-approved so you are not wasting your time looking for something over (or under) your price range. It is possible to get under-qualified with a pre-qualification, too. If you weren’t aware that lenders use your GROSS monthly income and you give them your NET (after taxes, 401k, etc..), and they didn’t look at pay-stubs to verify your income, they may pre-qualify your for much less than you could’ve afforded!
Finally, in the negotiating process, the majority of purchase offers that you will put in when you want to buy a house will be required to have a pre-approval letter accompanying it. Sellers want to see that you have gone down the road of commitment and are not wasting their time with an offer either. Being prepared is the best way to get into that house of your dreams!
4.) Finding “Your” Home
The fourth and final step of the “pre-purchase” steps to buying a home is the most exciting and important part of the entire process. At this point, you have completed the first three steps: You decided you wanted to buy, you aligned yourself with the right professionals by hiring us as your real estate agents, and you have gotten yourself pre-approved for a price range. Now the fun begins.
One of the biggest changes in the real estate industry over the past 15-20 years has been the process in which homes for sale are found and information is received about the market. It all boils down to one word: Internet. Statistics show that in today’s world, some 95% of all prospective home buyers search online for homes before they even get to Step 2 of this process. And you might do this for up to SIX MONTHS, before moving forward. Obviously technology has changed the way REALTORS do business, because in some ways it has eliminated a big part of what we do. That being said, as your agent, our job is about a LOT MORE than just finding you a house. Below is a list of just a few reasons why:
We negotiate on your behalf to get you the best price and terms possible.
We can do things that the internet cannot do when it comes to searching for homes.
We personally know areas, neighborhoods, school systems, demographics, and more.
We work for you 24/7 so when you are at work, we are out there looking for that home.
We are problem solvers. We find solutions that come up during the process and take care of them.
We understand the real estate rules, title laws, lending laws, contract laws, state laws, etc..
We can spot a mile away when someone is trying to take advantage of your situation and we protect you from it.
We look to help you develop long-term growth and stability in your life by providing expertise and advice in the purchase of your home.
We love to help you. One of the greatest joys in life and part of the American dream is homeownership. We help you get there.
We get you to the closing table and we get the keys to your new home in your hand. Period.
So, back to finding a home and making an offer. The process obviously begins with the general idea of getting together and discussing what YOU want your new home to be. Do you want a ranch style home? Do you want 4 bedrooms, 3 bathrooms? Do you need an office? Do you need a garage? How about a yard? Fireplace? Hardwoods or Carpet? Blue or Green? And so on and so on…
This initial consultation is often times the most important facet of representing you as an agent. Because we LISTEN to what your needs and wants are, and can then concentrate on finding that for you in your price range.
And to elaborate on item number two of the aforementioned list, we CAN do things the internet cannot do for you. Because we pay to realtors, we have the ability to be the very first to know about properties coming on the market, price reductions to existing listings, etc.. A lot of the websites out there that provide listings are several days behind on new listings, and in many cases, much farther behind on updating listings that have already sold. The last thing you want to do is find the house you think you will love online, only to find out it actually already sold a month earlier.
So as we utilize our professional tools to find the actively listed homes and put you in a position to jump on them first, we also do the more important thing; Get you INSIDE.
The one thing you won’t be able to do without an agent is get inside the house to look at it firsthand. And there is no way to truly know if it is your next home without going inside of it. There is so much to be said about being inside and envisioning this house as your home, and the emotion and the joy of just feeling like you are in your home.
5.) Making An Offer
Now that we have found the homes meeting your criteria, we have looked at them once, twice, maybe even three times, you decide you are in love and are ready to make an offer.
How much should you offer? What about the dates and deadlines of the contract? How do we negotiate a price and terms? This is where you need us.
We are experts in all of these areas. We ensure you don’t set unrealistic deadlines that put you in a legal bind. We research and understand the values of comparable homes and make sure we go in at the right price to make a deal happen. We understand what makes sellers want to sell and what makes buyers want to buy, and we bring them together.
Of the many things a purchase contract consists of, including the basics of the price and the closing date, there are many other important aspects of a contract we take care of. These items include: dates and deadlines for your inspection, your loan approval (known as loan conditions), appraisal, title documents, homeowner’s association documents, and other pertinent items of concern that need to be attended to before you close on a house.
One of the big things that help you along the process is as your agent, I am removed of all emotion regarding the house. Sometimes it is easy to forget or forego thinking about many things that could make the home purchase a bad decision for yourself because of the emotion surrounding how nice the kitchen looks. Although the term is way over used, this is an example of looking at the purchase from a “big picture” perspective to make sure it is a good decision, not just financially, but physically and emotionally.
Think of the movie “The Money Pit” with Tom Hanks. Don’t fret all the little things but don’t underestimate the power they can have over you once you get moved in.
Once you make the offer, there are one of three things that will happen:
1.) They Accept the Offer – We are under contract and immediately begin moving forward with all the things that need to be done prior to closing (i.e. scheduling an inspection, continue the mortgage process, etc..)
2.) They Counter-Offer the Offer – They want to make a deal happen, but have countered your offer with changed terms. This could be mean a higher price, a different set of dates, or some sort of change in terms.
3.) They Reject the Offer – They don’t want to make a deal happen. This is more rare in today’s market, but if they absolutely think your offer was absurd and don’t want to try and come to a compromise, or they aren’t truly motivated to sell.
Many deals come together after several rounds of “counter-offers” and compromising between the two sides. Once you get a contract accepted, it is legal and binding, and we move forward with all intentions of you buying the home. At this point, we are at the “Mid- Purchase” part of the home-buying process. This part of the process is where you as a buyer take just a small step-back from the driver’s seat and the professionals you aligned yourself with perform the majority of their duties.T his part of the process contains three steps, which are in most deals the three predominant areas you will be a part of as you moving closer to your closing.
6.) Home Inspection
Typically, within a week or two of contract acceptance, you will hire a home inspector of your choosing to go to the house and conduct a full-on physical inspection of the house.
The inspector’s job is not to primarily find the little things like peeling paint or dirty carpet, but rather to inspect and give recommendations on the structural and mechanical integrity of the home. Many of the areas an inspector look at will include electrical, plumbing, foundation, heating/air conditioning/HVAC, insulation, windows, doors, outsides features, and much more.
Additionally, many inspectors offer you the ability to use advanced equipment to check for things like carbon monoxide leaks, moisture, radon, mold, or other “invisible” issues. While in many cases these are not always required or recommended, they can be beneficial depending on the house and/or the location where you are buying.
There are also areas within Colorado that you need to be aware of because of the levels of Betonite Clay, Subsidence (Undermining), as well as the traditional geographical concerns such as flood plains, rockslides, or hire fire danger.
Once your home inspection is complete, we work with you to discuss what issues and concerns arrived with your inspection report. We then will submit what is called an “Inspection Resolution” to the sellers. The inspection resolution is an opportunity for you to ask for certain items to be fixed, replaced, removed, or you can altogether terminate the contract because you not comfortable with the level of mechanical soundness of the property.
Also, you can move forward on the property without requesting any sort of compromise.
One thing to note is that even if you are buying a BRAND NEW house, your inspector will most likely find something worth reporting, so in other words, no house is perfect. Most inspections do not end up terminating contracts unless there is something really severe and unfixable that was unforeseen prior to inspection.
7 .) Title Work
During the same timeframe you are working on the home inspection, the title company hired to do the closing services and title insurance will be obtaining the “title work” for your property. Title Work essentially is the history of ownership, deed recordings, and other pertinent documents relating to the land and its improvements (the house) as far back as possible. The title company is in charge of finding any and all issues relating to the title so that when ownership of the house is transferred to you, someone 2 years later cannot knock on your door claiming that have ownership rights to the house.
The aforementioned is what you purchase Title Insurance for. The title company insures your ownership interest in the property by guaranteeing, based on their research, that you will have clean and clear title to the property. Now, the title process can be fairly complex, and depending on how we negotiate your contract and the type of property you are buying, there are different types of ownership deeds and different levels of insurability on a property.
As your agent, we review your “title work” to help you make sure that as you decide to move forward on buying the house, there is nothing unexpected we should worry about.
Finally, the appraisal is generally the second to last hurdle before closing. Appraisals are comprehensive valuation inspections done by a licensed appraiser to determine an accurate and true value of the home. Appraisals are typically ordered by the lender, and this is what they use as the last step before moving forward on approving your mortgage. The appraiser will go through the house and making value estimates on it, as well as pulling recently sold homes and currently listed houses in order to determine its value.
An appraiser generally combines two methods to determine the final value: Cost Approach and Market Approach. The Cost Approach is where the appraiser looks at what the costs would be to rebuild the house from scratch. Items and areas of the house are given a monetary value to replace and these are added up (i.e. $5000 for an A/C unit, $10,000 for a 2 car standard garage, etc..)
The Market Approach is where the appraiser looks are the comparable houses sold and in some cases currently listed properties and determines an appropriate value based on these and with relation to the condition of your property versus the others as well as market trends.
Once the appraisal is completed, an appraisal report is sent to the lender, and assuming it came back at least as high as the purchase price, you will move on to step 9, loan approval.
9.) Loan Conditions (Loan Approval)
In most purchase transactions, the loan conditions deadline is anywhere from a week to a few days prior to closing. During the mid-purchase timeframe, in addition to the inspection, appraisal, title review, and other contract items, you will be working with your lender to complete the mortgage process.
The mortgage process can be complex and may encounter speed bumps along the way, such as clearing up credit-related issues, verifying income and debts, which is all part of the underwriting process. This is another reason to get pre-approved, so that halfway through the buying process you are not alerted to anything totally unexpected.Once you get conditional approval from your lender and the appraisal comes in where the lender requires it to be, then we are ready to move onto the best part of the process: the closing table.
10.) Closing and Post-Closing
Ah… The relief, the anxiety, the joy…your future…Getting to closing might have seemed like a long process, but it is well worth it. Once you get to the closing table, you will sign all of your title documents, loan documents, and anything else needed to complete the transaction. You will also bring your down payment money and closing costs needed.
Closings typically take around an hour to an hour-and-a-half, and once you are done, you can feel the exhilarating experience of home ownership. Congratulations!
As for your post-closing experience, we are still here to serve you as your REALTORS and FRIENDS. If you have any questions or concerns, we will be here. We look forward to seeing you prosper and grow in your home and develop a relationship for life with you.