Buying a home is an integral part of the American dream, but buying your first home can be an overwhelming process. Take a look at Attorney Charles Tempio's 8 Simple Steps of Home Buying to get a better understanding of how to buy the home of your dreams.
Step 1: Get Pre-Approved by a Lender
The most effective way to find a house that you can afford is to know what your budget is. House hunting is fun, but can be stressful and a waste of time if you're not realistic about your budget. Before starting your house hunt, it is wise to make an appointment at your bank or at a mortgage broker's office to discover your mortgage pre-approval amount. This amount will be determined by looking at your monthly income, debts, and credit history.
Step 2: Find a Realtor
Finding the right Realtor is a very personal decision. You'll want to find a Realtor who you are comfortable with and who understands your budget and what you're looking for in a home. It is extremely helpful if they are familiar with the area that you want to live in so they can answer questions that are most important to you. Things you may want to find out include:
- Safety of the neighborhood
- If the home is located in a flood area
- School ratings if you have children or are planning for children
- Local town resources, such as parks, town pools and transportation hubs
Step 3: Make an Offer
Once you find a home that fits your budget and is located in a neighborhood you love, an offer is prepared by your Realtor and presented to the Seller. An offer is a boilerplate contract for the purchase of real estate, which is subject to being accepted, canceled, or having its terms modified by either the Buyer or Seller. If the material terms of the contract are acceptable to Seller, then the Seller will accept the Buyer's offer by executing the contract. Once the contract is signed by both Buyer and Seller, you have an accepted offer and a deposit of $1,000.00, known as earnest money, is presented with the contract to show the Buyer is making the offer in good faith. The contract will then be forwarded to your attorney, and attorney review will begin.*
*You will be beginning a new journey on one of the biggest purchases in your life. You want to be comfortable with the attorney you choose to represent you. Your attorney should be someone who you can communicate with, has the time to explain to you the process, answer your questions and concerns clearly and in an understandable fashion. It can be very stressful to be against a deadline and be passed from one secretary or paralegal to the next to get answers. Most Realtors will likely refer you to an attorney they are familiar with. However, before making the offer to purchase a home, it's a smart idea to contact a few attorney offices in the area and ask to speak to the attorney who would most likely be handling your transaction. Get a feel for who the attorney is and if you would like to do business with him or her.
Step 4: Wait for the Attorney Review Period
Attorney review is usually a three-day period in which either Buyer or Seller, through their respective attorneys, can cancel the contract for any reason or no reason at all. If either the Buyer or the Seller, after reviewing the contract with their attorney, desire to modify the terms of the initial contract, either party can cancel the contract and communicate in writing the proposed changes which would make the contract acceptable. This written communication is known as a rider. The submission of a rider by either Buyer or Seller's attorney will extend the attorney review period while the contract modifications are being negotiated. The property can still be shown by the Seller's realtor while in attorney review.
If neither Buyer or Seller asks for any changes to the contract within three business days (not including weekends or holidays) of the contract initially being signed, then the review period is automatically concluded and the contract is considered binding.
After attorney review is completed, the Buyer will then have a specified amount of time to satisfy the contingencies incorporated into the contract, as stated in steps 5-7 below. These contingencies are built into every contract in order to ensure that the Buyer knows what they are buying with respect to the condition of the home, to certify that no one else has a claim to the property and to ensure that the Buyer will be able to obtain a mortgage to close on the home.
Step 5: Schedule an Inspection
Most contracts typically indicate that the property is being sold "AS IS". This does not mean that the Buyer is not entitled to inspect the home, however, it does mean that the Seller reserves the right not to make any repairs at Buyer's request. Even though Seller has a responsibility to disclose any known defects, there is also an obligation on the Buyer to do their own due diligence so they know the condition of the property they are buying. This is why it is essential to have inspections completed before purchasing the home, which include:
- Home inspection. This will detect any structural or mechanical problems within the home.
- Radon/environmental hazard inspection. This will discover any elevated levels of radon, mold or asbestos or other known hazards harmful to the occupant's health
- Wood-destroying insect inspection. This will uncover if the home has any termites or other insects that can do damage to the structural integrity of the home, or even cause health concerns to the occupants.
In addition to the above inspections, Buyer may also want to have the property tested for any underground storage tank whether or not the home is currently heated by oil. The Buyer runs the risk that even if the home is not heated by oil now, that it may have been at one time and there may be soil contamination and require remediation or the tank may be abandoned and required to be removed. Both processes are extremely costly. Furthermore, if the home is or was serviced by a septic tank and/or a well, it is important to have those inspected as well.
All of these contingencies provide the Buyer with an opportunity to inspect the condition of the property prior to closing. These inspections are completed at Buyer's sole expense by a licensed contractor. Buyers will review the report with their attorney and discuss any issues or concerns revealed by the inspection reports. If needed, Buyers can request that Seller make certain repairs to dangerous conditions or be issued credit at closing to make certain repairs. In some cases, if a dangerous condition is revealed and Seller refuses to make a repair, remediate the issue, or provide a credit at closing so Buyer can remediate the condition post-closing, Buyer may cancel the contract and demand their deposit monies returned so long as Buyer's attorney reserved the right to cancel the contract for these reasons during the attorney review period.
Step 6: Get Mortgage Approval
Most homes today are purchased with the assistance of a securitized loan from a bank or a mortgage broker called a mortgage. The Buyer has the responsibility to apply for and comply with the lender conditions in order to obtain a mortgage to fund the purchase price at closing. Failure to obtain a mortgage will most likely cause the Buyer to be held in breach of the contract and subject to damages.* During attorney review, it is important for the Buyer's attorney to add language into the contract providing for the ability to request an extension of time to obtain the commitment or to allow the Buyer the right to cancel the contract and receive their deposit money back in the event that they are not able to obtain the mortgage commitment needed.
*It is important to note that obtaining a pre-approval amount and obtaining a mortgage commitment are two separate steps. Buyer may be given a pre-approval amount higher than what their actual mortgage commitment may be, which may cause Buyer to have to put a larger deposit amount than what was anticipated or to cancel the contract.
Step 7: Obtain a Title and Survey
Seller has a duty to convey marketable title at the time of closing which means the title is free from all encumbrances, liens, or defects. Buyer, at Buyer's sole expense, will investigate the quality of Seller's title by ordering a title search and a title insurance policy. It is the Seller's duty to resolve any claim against the title prior to closing. The title search will investigate the public records to detect any judgment against the Seller, liens, or undischarged mortgages. All encumbrances must be paid off at the time of closing, and in some cases, liens can delay the closing.
With respect to the survey, Buyer will want to purchase a survey to investigate the boundaries of the property for any issues with respect to an encroachment, which is usually caused by a neighbors shed, fence, or driveway on the property. Any encroachment should be dealt with prior to closing as boundary line disputes on a survey may affect title.
Step 8: Close on the Property
Prior to scheduling a closing date, Buyer’s attorney will let the Buyer know the exact amount of certified funds they are required to bring to closing and ensure that the mortgage is able to be funded (known as "clear to close"). Seller's attorney will draft the closing documents, which must be approved by the title company, obtain the certificate of occupancy for the home, ensure that all contingencies are satisfied and have the Seller schedule a final water and sewer reading. Once all of the above have been completed, the parties will schedule a walkthrough of the property and a date and time for closing.
On the day of closing, Buyer, Buyer's attorney, Seller, and Seller's attorney will most likely meet at Buyer's attorney office to complete the paperwork. Once all of the documents are signed, Buyer will then be given the keys to the home and will officially be a new homeowner.