Steps to Home Ownership
This article covers the 5 basic steps involved in purchasing a home, in order of execution. Following these steps will help make your home buying experience enjoyable:
The 5 Strategic Steps
1) Financing the dream - finding a lender
2) Locating the perfect house
3) Making the offer
4) Navigating escrow
5) Closing the deal
1. Financing the dream - finding a lender
The first and most important step involves calculating your personal financial situation, and the easiest way to evaluate what you can afford is to speak with a lender.
You can start at your local bank or credit union and speak to one of their loan officers. There are also mortgage brokers and lenders that are not affiliated with a specific bank, and they typically have different types of loan programs available than what you would find at a bank. There are also online websites that you can use to find a lender and calculate a mortgage.
Using a lender - it is crucial to take the time to meet with and talk to a lender who can walk you through exactly what's needed to qualify for a loan, and provide you with personal service to answer your questions. It is also a good idea to talk with more than one lender, as this will give you a good idea of the different types of loans available and any fees associated with the loans that can impact your closing costs or overall cost of home ownership.
The lender will start by running your credit report, which will give them your 'credit scores', sometimes referred to as FICO scores. There are three major credit reporting companies that calculate your scores based on criteria such as the number of your open credit accounts, terms of credit, amounts of outstanding payments and loans, type of credit (revolving or installment), on time payments, number of 30, 60 or 90 day late payments, bankruptcies, liens, and judgments.
The lender will also ask you about your current income, your savings, and any other payment liabilities you have, such as child support. You will probably be required to provide your last two payroll stubs, and/or your last 2 years tax returns. The lender will then determine your debt to income ratio, which is basically a calculation of how much money you bring in each month vs. how much you pay out each month. This will allow them to determine how much house (or house payment) you can afford.
Once the lender has calculated what price range you are qualified to purchase, they will provide you with a pre-qualification or a conditional approval letter.This letter is very important when making an offer to purchase a home, as many sellers require one at the time the offer is submitted.
2. Locating the perfect house
The important thing is to find an agent you're comfortable working with, someone who knows the area you're looking in, and someone who listens to you and is interested in providing you with good customer service.
You can ask friends or relatives if they have an agent they've enjoyed working with in past, or you can stop in at open houses and talk with the agent who is hosting it. Watch the signs in the neighborhood you would like to live in, as there is usually one or two agents that get the majority of the listings in the area. You can also call any real estate office, speak to the manager or broker, and ask who they would recommend to assist you in your particular situation.
Once you have found an agent, tell them what you want, and what you don't want, and be as specific as you can. Tell them the neighborhoods you like, or the style of house you like, number of bedrooms and baths you must have, condition and age of the house your'e willing to work with, and anything else that is relevant to your wish list.
Don't get discouraged. It may take a few weeks or months to find the right house, and things change every day, so keep looking.
3. Making the offer
If you're working with an agent, you'll most likely be writing the offer in the agent's office. Most states or the local Association of Realtors have standardized forms that simplify the process of writing an offer by having much of the typical legal jargon shown under numbered sections, which involves checking a box or initialing an area.
The typical contract starts with the basics: date and location of offer, buyer's names, address of the property, amount of the offer, amount of the 'earnest money' deposit, finance terms and requested close of escrow date.
Your agent should go through the entire contract for you and explain what all the terms and your selections mean. Your agent can tell you what's typically done in your area, in regards to who 'usually' pays for what, but the decision is ultimately yours.
Remember, everything is negotiable, and that includes the sales price. The agent is required to submit any offer to the seller, regardless of how low or ridiculous it may seem. Before you make the offer, you must decide how bad you want the house. Be aware that if you 'low-ball' the price, your offer may be rejected by the seller, which means you may not get a counter offer back, and you would have to start over with a new offer. The seller will usually accept a full price offer, if the other conditions of the contract are agreeable.
Once you complete the offer, sign and initial where shown, it's time to break out your checkbook. You will give the agent a check for a small percentage of the purchase price. The check is a 'good faith' gesture for the seller to see that you are serious. Typically the deposit check is 3% or less of purchase price, and your agent can advise you on what amount would be appropriate.
The agent then contacts the seller's agent (or in some cases the seller directly) and lets them know that there's an offer on the property. Back in the day (OK, the late '80's) it was typical to set up a meeting with both agents and the seller to present the offer to them, and plead the case of the buyers.
Today, however, the most practical way seems to be by fax, and your agent will probably fax the offer to the listing agent, along with a copy of your earnest money check and your 'pre-qual' letter from your lender. The listing agent will meet with the seller and present your offer as you wait anxiously by the phone.
More than likely, though, you'll probably get a counter offer back, with the terms modified by the seller. Usually it's the purchase price, if a below full price offer was made. Otherwise, it will be some other detail in the contract that the seller just can't seem to live with. If you agree to the terms of the counter offer, you sign your acceptance and you're on your way.
Once agreement is reached, the agent will open escrow, and the clock starts ticking.
Once you have an accepted contract, one of the agents will open an escrow with a title company as specified in the contract.
An escrow company is basically a neutral third party that helps facilitate a transaction. It's like a holding company, in that the buyer and seller each put in what they want to exchange: the seller wants to exchange their house for money, and the buyer wants to exchange money for a house. The escrow company is there to ensure that both parties follow what the signed contract states, and make sure that the necessary title insurance and deeds are in place and correct.
Unfortunately, the final days prior to the close of escrow can be very stressful, as last minute paperwork and lending conditions have everyone jumping through small flaming hoops to get things closed on time. Hopefully you're working with a great agent and lender who help keep these little setbacks to a minimum.
5. Closing the deal
You've signed your closing paperwork, you are now a homeowner.
A few days prior to close, you need to contact the local utility companies and have them transferred into your name, so service is not interrupted. This includes the electricity, gas, water, sewer, phone, trash, and most importantly (to guys), the cable or satellite TV.
The good news is you won't have your first house payment due for more than a month. Depending on what day of the month you close, you skip to that date in the next month, and your payment's due on the first of the following month. For example, if your escrow closed on September 12, you skip ahead to October 12, and your first payment is due on November 1. Why does it work this way? You've prepaid some of interest due on the loan as part of your closing costs.
You'll also be receiving a copy of the final closing statement, also known as the HUD-1 statement. Keep this with your other tax paperwork, as some of your closing costs may be tax deductible, along with any interest you've paid on your mortgage for the year. You may even receive a small check from the title company after close of escrow for any overpayment of final fees at settlement.
If you have a Home Warranty on your new home, keep the information in an envelope in an easily to locate place, so you won't have to search all over if something happens.
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