Complete Real Estate Process for Buyers
This pandemic has changed the way we live, how we work, how we go on day-to-day. Did you once work at an office and now you are working from home all day? Did your kids go to public school but now they are schooling at home? Has the home that you are living in seemed to have gotten much smaller over the past 2 years? Are you looking for more space?
If you are, that’s normal. You see, people are buying and selling now more than ever before, and you may want to get into the market too, but don’t know where to start. Fortunately, it not some secret that only a few know. So, how do you buy a house?
(Step 1) Get pre-approved by a Lender/Loan officer
What is a lender? A lender is someone who “lends” or loans the money you don’t have now to buy something, like a house. They could be a mortgage lender, a bank, a credit union, or any other financial company. There are four main types of ways to buy a house: Cash, Conventional loan, FHA loan, and VA loan.
Conventional means Standard. This is the most common.
FHA (Federal Housing Authority) is used a lot by first time homebuyers.
VA, or Veteran’s Affairs, loans are for military personal and vets.
What is “pre-approved”? A lender will a look at your income, job history, credit rating, and anything else they might need before deciding on an amount to loan you. When all that is done, they give you a letter that tells you how much they will loan you. This is called the Pre-Approval Letter. This is an important first step. Without this, nothing else happens! You’ll find out why in a minute.
(Step 2) The Realtor and what Realtors do for you
Between the job, family, grocery shopping, and all that you do to live your life, you likely don’t have a lot of extra time to look for a house or to find the home that has everything you are looking for. That’s where a Realtor comes in. Their job is to look for your dream home. As members of the National Association of Realtors, they are bound by a Code of Ethics that requires them to work for your best interest. Realtors look for homes, tour you through them, write and submit offers for you, guide you through the dates and deadlines that are on the contract, and negotiate on your behalf.
Remember how I said that the pre-approval process is an important step? With all the homes that are available, the Realtor will ask what your budget is. With a pre-approval letter, the buyer can confidently say what is affordable to them. The Realtor can then look for homes in that price range and find that dream home for you.
In this market, you need to have that Pre-approval letter to even have a chance at getting your dream home. This marks you as a prime buyer to a seller. A seller wants to be sure that the person walking through their home is a serious buyer. With the funds readily available, you are in a better position to purchase the perfect home for you and your family. Remember, the home you see now, someone else saw earlier.
So, you’ve finally found the perfect dream home! What’s next? Your realtor will submit an offer and help you purchase it. Once your offer is signed by you and the seller, it is said you have gone “under contract.”
(Step 3) Earnest Money and Loan Application
Once under contract, you will have dates and deadlines that need to be completed to keep the contract moving forward.
One of the first is Earnest Money. This is money that the buyer will submit to the seller that shows that they are serious about completing the purchase of the home. This can vary but is typically around 1% of the purchase price. The amount the seller is requesting is often found on the listing sheet. Even though the seller requests a certain amount the buyer may offer more, or less.
Earnest Money is typically deposited with the seller's Title Company 3-5 days after going under contract.
The next is the Loan Application. Being pre-approved is not the same as being Approved.
Pre-approval is the lender telling you how much you have been initially approved to borrow. The Buyer still must apply for the loan through a loan application where all information is verified by an Underwriter and only then are you “clear to close” and funds are made available. This is usually the last step, occurring a few days before closing day.
(Step 4) Inspection (Optional)
Unlike the other steps on this list getting an inspection is optional (but highly recommended for your family’s safety and benefit) and paid for by the buyer.
Here is a real-life example why:
A buyer was under contract with a new home builder. The home was finished and ready to live in. The Realtor advised that an inspection be done on the house. The buyer wondered why an inspection was needed on a new home but paid for it anyway and had it done. When the inspector went to the house attic, he found that the insulating contractor used spray foam halfway through the attic before they ran out. Unfortunately, they did not come back, so the attic was not completely insulated. This would bring a whole host of issues to the homeowners.
Because the inspector and the homeowners found this while the home was under contract, the Realtor was able to negotiate that the builder pay for and finish the attic before the house was sold. If this had been found after the house was sold, it would have been the responsibility of the homeowners. “Buyer Beware!”
While the inspector is inspecting the house, it is also a good idea to have them inspect the sewer pipe for the house using a sewer scope. Here’s another example of why:
Two homeowners were buying an old house, built in the early 1900’s. Back then, builders commonly used clay pipes for their sewers. These were ok for the time, but they do deteriorate and are subject to tree roots and cracks. In this case, the sewer scope found a large hole in the pipe. If this wasn’t addressed prior to the sale, this would have become an expensive problem for the buyer. Because it was found before the house was sold (during the home inspection phase), the Realtor was able to negotiate to have the sellers fix the pipe before closing, and this kept the contract moving forward to closing.
As you can see, even though it is optional and the buyer pays for it, it is in the Buyers’ best interest to have an inspection and a sewer scope done for the house. In Colorado, the same could be said for an optional radon test as well.
Understandably, the inspection phase is the one of the most critical parts of any real estate transaction. If you ask a realtor how the transaction is going, they will say, more times than not, “We just have to past inspection.” This is the time when most deals fail if they are going to do so.
(Step 5) Improvement Location Certificate / ILC (Optional)
All land that is bought and sold has property lines and is recorded in the County Assessor’s Office. Unless you look in the public records, property lines aren’t visible. When buying a home, do you know where the property lines are? Has the previous owner, or the neighbor built a fence or other structure on the wrong side of the property line? An ILC will tell you.
Another real-life example:
Imagine that you find your dream home. You have a nice big yard, but you want everything you pay for. You get an ILC to just see where your property lines are. You notice that, after getting the ILC back, your neighbor has their nice big fence 8 feet across your property line. If after finding this, you may report it to the County and ask for them to help resolve it.
An Improvement Location Certificate will show the buyer where these improvements are located. There are times when the Title Company required it, in which case it is typically paid for by the seller. There are times when the lender might require it, then it is typically paid by the buyer. Either party has the option of ordering one at their own expense.
(Step 6) Appraisal
When a lender loans money, they want to get an opinion of what the house is worth. To find out, the lender will send out an Appraiser, who will use different, very detailed, ways to find out the home’s value.
The lender will base the loan amount on the value of the home as determined by the appraiser. If the sale price falls at or below that value, the appraisal is said to have come back “at value with no exceptions.” But what if it doesn’t come back “at value” or has exceptions? Then it can jeopardize the loan. Enter in something called “appraisal gap funds.”
If that is a little hard to understand, here is an example:
Imagine you find that dream home. You’re approved for $400,000; the home is listed at $400,000, and the appraiser values the home at $400,000. The home is in your price range, it’s worth what is being asked for it, therefore your lender will lend you the money needed to purchase the home.
Sometimes though, the home will not be valued by the appraiser at the asking, or agreed upon price, especially in a hot market where competing offers drive the price of the home up. Appraisal gap funds assure the seller the buyer will bring additional money, up to a certain amount, to cover the gap. As you might imagine, this can make a contract more attractive to the seller.
Here’s an example of how that might work:
Your dream home is listed at $400,000. The appraiser says the home’s value is $395,000. The problem? The lender will only give a loan to buy a $395,000 house. There is $5,000 “gap” or difference between the two numbers. Either the seller will have to drop the price $5,000, or the buyer will have to come up with an additional $5,000 to cover the gap.
This is where the Realtor comes in. In a competitive seller's market, The Realtor might advise you when writing the initial offer that you give $5,000 in appraisal gap funds (if you are able to do so). This means that, in the rare chance, that the home doesn’t appraise at value, you will pay $5,000 to the seller covering the difference. In a competitive market, this makes an offer more attractive to a seller who might be looking at multiple offers at once.
Remember the 3 different types of loans? Conventional, FHA, or VA. Each loan will have its own appraiser and will value the home differently and consider different things.
Who pays for the appraisal?
The appraisal can be negotiated to be paid by either party, the buyer or seller, but since the Lender works for the buyer, typically the buyer would pay for the appraisal. This is reflected in the closing costs. I’ll get to that in a minute.
(Step 7) Title company and Closing Costs
Congratulations! You are now at the “closing table”. The spotlight now turns to the Title Company. This entire time, the Title Company has been helping keep the contract moving forward. So, what exactly does a Title Company do?
Remember the Earnest Money? Typically, the Earnest Money is dropped off at the Title Company where they hold it in “escrow” on behalf of all parties. Escrow simply means a third party (the title company in this case) is holding the money prior to closing.
The Title Company also issues something called the Title Commitment. This is important because it lets the buyer know if this house is free of “liens,” which are legal claims against the property. The lender who lends the money to buy the property will hold a lien on the property.
A mortgage is a type of lien. The Lender loans money to the buyer to purchase with the condition that if the buyer doesn’t repay that money they borrowed to the Lender, the Lender takes the house. This is called a “mortgage”.
The Title Company might also find that there is a mechanic lien. What’s that?
Let me illustrate:
A Homeowner has a new sunroom built on the house. He hired a contractor, a window company, an electrician, and a plumber. Once everything was done, he realized he didn’t have enough money to pay for it, so he decides to sell the house.
Well, that’s a problem. Those companies that built the sunroom still need to be paid their money. So, they put a lien, a security interest, against the property. Because the Lien is against the property, it must be paid before the property may be sold. The title company will have to pay any outstanding liens before they will insure the property against hidden liens, that money will have to come from the seller or the seller's proceeds from the sale.
Therefore, the Title Commitment is important as it insures the cleanness of the title.
The Title Company also calculates closing costs. This is everything that needs to be paid for the sale to close: i.e, loan amount, appraisal, any other costs that were made and not paid during the transaction, etc. Since they are the ones who record whose name is on the Title, the Title Company is central to the transaction and closes the house.
And that’s it. That’s how you buy a house.
So, to recap, The Realtor is between you and the seller, negotiating for the Buyers, reminding their clients of dates and deadlines.
The Lender loans the Buyer money to purchase the home and works solely for the Buyer.
The Inspector works for the Buyer, inspecting the home and making known the condition of the property.
The Appraiser works for the lender and lets them know what the home is worth.
The Title Company collects the Earnest Money, ensures, and insures the title is clean at the time of sale, and works closely with the Lender. They complete work to transfer title of the property and closes the transaction.
Bonus:
A Realtor:
Sam Kelley is an Associate Broker with the Kelley Team at Neuhaus Real Estate, Inc. Neuhaus Real Estate has worked with buyers and sellers as their agent in multiple transactions over the last ten years to help people buy their dream home or sell their home for the best price possible.
A Lender:
Mike Stein is a lender with Academy Mortgage. He has been in business for over seven years and comes highly recommended by Neuhaus Real Estate.
https://academymortgage.com/about-us/team/mikestein