The Home Buying Process
Everything in today’s world seems more complicated than it was when your family bought their first home. Because it is complicated there are several things we advise homebuyers to be aware of when they begin the “home buying process.” Most people do not wait until they have saved enough cash to buy the home they want. If cash is available then the financing of the home may not be needed. There are reasons why an individual who has cash may not want to pay the entire purchase price in cash. There are certain income tax advantages and options available to homeowners who finance the purchase. These are given as an income tax incentive for people to buy homes. Also many owners want to keep cash available for emergencies and other investments.
When one thinks of financing a home there are many options. I will mention only a few of them. The type of financing that best fits you will depend on many factors. The seller may finance the purchase for you. That is called seller or owner financing. Today most sellers want their full equity out of the home so that they can purchase another property, use the funds for other investments or to settle or pay debts. Your banker may have a finance program. Banks are normally used for short-term money unless the bank has a long term mortgage program. Banks also have higher short-term interest rate requirements that may not be to your advantage. Credit Unions may be a source of funds also. Again they normally offer short-term programs that may not allow you to borrow the amount of money you may be able to borrow on long-term mortgage programs. Some credit unions have long term money available also. Also the yield requirements of a credit union may not allow you to borrow at a competitive rate when compared to long term mortgage lenders. In ALL financing programs the borrower needs to consider the cost of borrowing the funds over and above the interest rate on the note itself. In most cases, homebuyers will use one the following programs to purchase their home: long term conventional loans, FHA loans, and VA loans. Each has different down payment requirements, closing cost, and eligibility criteria. A conventional loan is a generic term for a long term, non FHA or VA mortgage.
After you have decided on the type of loan you wish to apply, then you will want to get pre-approved or pre-qualified by the lender for the maximum amount of money you will be qualified to borrow. Of course, you don’t have to borrow the maximum amount. The prequalification amount will give you a guide on the price range of home at which you will want to see and consider. The lender will also give you a good faith estimate of the cash you will need for down payment, closing cost, and prepaid items (taxes, insurance, etc.) under the program you may want to use for your home purchase. The total of the loan amount for which you will qualify, your funds available for down payment and funds available for closing cost and pre-paid items will determine the upper price range of your home.
Now that you have a price range we can start the home search process. The Texas Realtor will explain the “agency disclosure” to you and you will make a choice of which agency relationship you and your agent will have. The Realtor you choose to work with will research the market place for homes that fit your needs. These needs will include the size of the home, number of bedrooms and baths, location, schools, price, neighborhood, etc. You can assist your agent by searching homes through the internet and driving neighborhoods you like. Appointments will be made to view the homes to find the one that fits you the best. You will want to go back and view those homes a second or third time that interest you. It is very hard to see everything on one visit to a home. Also it is a good idea to create a system to keep track of the pro and cons of each of the homes. After viewing homes that you and your agent have selected, you then make a decision which home you want to attempt to purchase.
The Realtor will prepare an offer for you to sign and earnest money may be put up with the offer to show your interest in the property. An option fee for a specific time period may be paid by the buyer to allow him to withdraw from the contract without any liability for any reason. The option fee paid gives you this right if accepted by the seller in the offer. The earnest money will not be deposited if you are not able to reach an agreement with the seller or if one of the terms of the contract is met or not met that allow the return to you. The earnest money is optional on a contract but it is normally required by the seller. If you just decide not buy the home and nothing in the contract allows this decision then you could loose the earnest money. You will want to have a home inspection by a licensed inspector as one of your contract contingencies on the home you select to make an offer. The home inspection helps a buyer to determine the condition of the improvements and potential future maintenance cost. There are many legal stipulations in the contract that are binding on the buyers and sellers. Buyers and sellers may want to consult with an attorney. The earnest money you put up on the contract will be applied to your cost at the time of closing.
It is a good idea to get a blank sales contract when you start looking at homes to make sure you have ample time to review all details of a contract. All Texas licensed agents are required to use contract forms and addendums from the Texas Real Estate Commission. Agents are not allowed to draft their own forms unless the agent is an attorney. The Texas Association of Realtors also has recommended forms for its member’s use that include the TREC wording. Three things can happen when you make an offer on a property at some terms other than at the asking price and terms from the seller. The seller can reject your offer, the seller can accept your offer, or the seller can counter your offer. Any action by the seller other than acceptance is a rejection of your offer. If the seller counters your offer you then have the option of accepting the counter, rejecting the counter, or countering the counter. Either party may withdraw from negotiations without any liability at any time prior to all parties having signed a final agreement. All terms are to be in writing and signed by both buyer and seller.
Now that you have an agreement with the seller, what is next? In most contracts there are property inspections that need to be performed and time frames met on this and other issues. The formal application with your lender will need to begin immediately after the contract is signed. Things that will be needed at the time of application are credit information, verification of employment, copies of income tax returns, verification of deposits, etc. The lender will most likely collect a credit report fee at the time of application. If all the information is acceptable to the lender then a formal loan approval is given to you. The lender will then send closings instructions per the terms of the contract to an attorney or title company with specific document requirements and forms they will need executed, completed and filed of record before they will fund the loan in your name and funds transferred to the escrow agent or agents that are closing the sale and transfer for the buyer and seller. These instructions will include such things as fees to be charged, survey requirements, termite certifications, etc. The contract should provide which party will pay the cost and fees associated with the purchase and closing of the sale.
Title examination and other title work will start at the title company when a contract is received and or receipted by them. The title policy is an insurance guarantee for the new owner that the property is clear and can be transferred to them without any claims against the property other than the exceptions that will be put on the new owner’s title policy and lender’s policy if loan is used. The title policy will also contain exceptions to the clear title such as easements, right a ways, and other recorded restrictions. Once the examination of the title is disclosed to the buyer and accepted by the buyer and all lender requirements and documentations are met, the sale will be closed, recorded and funded. Closing is a term meaning the signing of all documents by all parties, filing of the documents and funding to the seller. Once the papers are signed and the proper papers are recorded at the county clerk’s office then the property officially belongs to the new owner. Again, possession is determined by the contract. Possession can be immediate at the time of funding or at some specific time set out in the contract If the seller wants to maintain possession of the property past closing and funding then an agreement may be needed to provide for this and the seller will probably be required to maintain the property and pay rent.
Now let us assume a conventional long term mortgage loan will be applied for in order to purchase the home. Many of the things we talk about here will apply to the other types of mortgage financing. Qualifying ratios of the buyer’s income to house payment and income to debt ratios, down payment requirement, applicant’s eligibility for the various programs, rates and terms available under each program, and how the borrower wants to approach the financing all play a role in the financing of the home.. A buyer might want to pay off a home as quickly as possible. If this is the case they will want to make sure their loan allows a prepayment without penalty. People who know they will be in a home only a short period of time may approach the choice of a loan differently than an individual looking for a long term or permanent situation.
The amount of money you pay as down payment will determine if you will be required to have mortgage insurance. This insurance will protect only the lender in the event of default by the buyer. Down payment, credit score, income, size of the loan and term of the loan can effect what the interest rate will be on the loan. The appraised value of the property, condition, age, location, or any combination of these can be a reason for the property to be rejected as security for the loan by the lender. When this happens the loan may be denied. There are two main factors that lenders look at when determining whether they will lend mortgage money to you. The first is the borrower and the second is the property itself. The borrower’s application may be denied for any of the above items not meeting the lender’s guidelines and requirements.
There is a variety of cost associated with borrowing money for a home purchase. There are costs associated with the loan, attorney’s fees, title fees, etc. The lender may require you to put money in an account (escrow account) monthly to pay taxes when due and insurance premiums when due. The lender is restricted on how much they can collect and hold in your name for these payments. An annual accounting is furnished by the lender showing the amount of interest paid, the amount of principal paid, escrow funds collected, funds paid out and to whom and how much, balances on the note and the balance in “your” escrow account. This information can be used when preparing your income tax returns.
This is not meant as a complete and detailed process in buying a home. It is to be used as a guide by a prospective home buyer for what to expect in the home buying process. Using the service of professionals in all areas and taking care of details will make the entire process an enjoyable experience. There will be times in the process that you will become discouraged and upset. The end result of home ownership is well worth the time and effort you are required to put into the home buying process.
Please call any of our agents at CENTURY 21 Johnston Company and they will welcome the opportunity to help you in your purchase of any kind of real estate.