HOME PURCHASE PROCESS
8 Steps to a Home Purchase
1. How Much Can You Afford
2. Get Pre-Approved
3. Hire a Real Estate Agent
4. Submit an Offer
5. Accepted Offer
6. Home Inspection & Appraisal
7. Home Loan Funds
8. Final Walk-Through
Step 1: How Much Can You Afford
This is a personal question. EVERY future home buyer should carefully examine their finances and consider the cost associated with purchase a home.
How much can you afford to pay monthly? A home purchase has a monthly mortgage payment plus property taxes and homeowner’s insurance. Be sure to also budget for property maintenance that comes with homeownership.
How much money can you can contribute toward the down payment on a home purchase plus closing fees? A down payment on a home purchase may be as low as 3.5% of purchase with an FHA home loan; however, there are also closing fees in a home purchase. A general estimate on the cash-to-close (down payment + closing fees) required from the buyer is between 5-7% of the purchase price. Down payment home loan assistant programs are available for those who qualify.
Step 2: Get Pre-approved
The next step is to seek and consult with a mortgage lender. Many prospective home buyers avoid this step initially and immediately jump into shopping for homes. This could potentially be a waste of time, and no seller or representing listing agent will take any buyer’s interest in a home seriously unless a pre-approval letter can be provided with an offer. A mortgage lender evaluates the borrower’s finances and creditworthiness and determines the loan amount and types of home loans the borrower is able to be qualified under. A pre-approval letter is issued after careful review of the borrowers financial documents and credit report. A pre-approval is different than a pre-qualification. For more info, read: Preapproval Vs Prequalification
The following (3) criteria will be evaluated before a pre-approval is obtained:
Mortgage banks use the FICO score to measure a borrower’s credit worthiness. To qualify for a home loan, most mortgage banks require a minimum 580 FICO score; however, some banks can and do qualify borrowers with a FICO score as low as 580. Anything lower than a 580, will require compensating factors, such as a much higher down payment. Generally, a higher FICO score will put the borrower in an advantageous position to obtain lower interest rate quotes, and conversely, a lower FICO score will put the borrower in a limited position where higher interest rate quotes are the only option.
Capacity refers to the ability to repay debt. Mortgage banks will evaluate the borrower’s ability to repay debt by (1) reviewing the borrower’s work history, and (2) reviewing their current income versus their current debt obligations. Most mortgage banks will use a ratio, called the debt-to-income ratio, to determine the borrower’s capacity – ability to repay debt.
Mortgage banks will look at the borrower’s assets: cash deposits (checking, savings), real estate owned, retirement accounts (401k accounts, IRAs), stock and bonds, etc. Most mortgage banks require borrowers to come in with a down payment on a home purchase. Some banks allow the down payment to come in the form of gift funds, where funds may be gifted by a borrower’s relative to be use toward the down payment on a home purchase. FHA home loans require 3.5% down payment and conventional home loan requires 5% down payment.
Step 3: Hire a Real Estate Agent
After you have obtained a pre-approval letter from a lender, you can now consult with a real estate agent. Hiring and working with a qualified and licensed real estate agent will make your home search more efficient, and will give you more confidence in the market, as the agent will provide his or her expertise guidance as you move along in the purchasing process. A buyer’s real estate agent submits written offers and negotiates term of the contract on your behalf.
Step 4: Submit an Offer
Searching for a home with a real estate agent may take weeks to several months. Normally, the real estate agent accompanies the buyer to open houses as the buyer searches for a home. Once a buyer decides on a property, upon the buyer’s request, the real estate agent submits a written offer on his or her behalf. Keep in mind that not all offers are accepted by the seller. The seller has the option to reject or counter-offer the buyer’s offer. Depending on the market, homes that are higher in demand may receive multiple offers above the home’s
Step 5: Accepted Offer
If a buyer’s written offer is accepted by a seller, or a written counter-offer by the seller is accepted by a buyer, it is now considered a legally binding contract. The offer and acceptance must be expressed in writing and MUST contain signatures from, both, buyer and seller. The seller’s agent will then open escrow. Escrow is an independent third party to a real estate transaction that ensures the purchase agreement is executed according to its terms. Escrow also collects, holds, and disburses funds. Customarily, the seller is the party that decides which escrow company will be handling the sales transaction.
Step 6: Home Inspection & Appraisal
The contingency period contractually gives the buyer a specified time to conduct a home inspection, home appraisal, and secure financing. The contingency period is customarily a 2-3 week period, however, this period may be negotiated between buyer and seller. The best practice on completion of the home inspection and appraisal is to be ordered and completed as soon as possible. If the home inspection identifies a defect in the property that was not disclosed, and/or if the property’s appraisal value comes lower than the purchase price, the buyer has a contractual right to rescind the offer that was accepted by the seller, or the buyer may renegotiate with the seller on new terms (i.e. lower purchase price, repairs, etc.).
A home inspection is performed by an independent third party chosen and paid by the buyer. The home inspector physically inspects the property to identify any defects or deficiencies within the property. Upon completion, a report with photos and notes of areas inspected is provided to the buyer.
A home appraisal is performed by an independent third party chosen by the lender but paid by the buyer. The appraiser gives an unbiased opinion on the value of the home. A lower appraisal value than the purchase price reflected on the purchase agreement will require the buyer to compensate for the difference by contributing more to the down payment or re-negotiate a lower purchase price with the seller. Upon completion, a report with photos and appraiser notes will be provided to the buyer.
A pest inspection is performed by a licensed professional who determines if a structure is damaged from insects, bugs, or termites. A pest inspection is not required by law; however, if the appraiser notes any pest damages to the structure of the home, the lender will require a pest inspection. Regardless, it is highly advised that a pest inspection be done on the home, and it is customary for the seller to pay for the inspeciton.
Step 7: Home Loan Funds
Upon entering into a purchase agreement – an accepted offer with buyer and seller signatures – a mortgage loan officer will work with the buyer-borrower to move the home loan forward so it funds in a timely manner. Before your home loan funds, a clear-to-close must be reached, which is the final stages of the home loan process. A clear-to-close means that the mortgage lender has cleared conditions that the buyerborrower is required to meet before releasing loan documents to the borrower for signing. Note that a condition required to be met before obtaining a clear-to-close is a satisfactory home appraisal. After the buyer-borrower signs the loan documents and funding conditions are met, the home loan is funded. When a home loan is funded by a mortgage lender, the funds are wired to title or escrow.
Step 8: Final Walk-Through
The next and final step is a final walk-through of the property with your real estate agent. This walk-through is to ensure that the property’s condition has not changed, and to ensure the completion of any agreed upon repairs. Escrow then confirms the county recording of deed and officially closes. After the closing of escrow, all funds held by escrow will be disbursed to due parties.