Home Buying 101
Is it your first time?
A real estate transaction ain't easy.
Whether you've done it once or many times, real estate transactions are complex. They continue to get more and more complex as our society becomes more litigious. This prompts governing bodies, like the Pennsylvania Real Estate Commission, to consistently review processes, procedures and related documentation. And with more and more legal language.
It's important that you feel confident about the Realtor who is representing you. But it is still your responsibility as a Buyer to ask questions and self-educate.
Read on for FAQs asked by many first time home buyers.
"Inspections, appraisals and ALTAs, oh, my!"
A transaction happens over many weeks and much paperwork. Know what you're getting into so you can rest assured when it comes time to sign on the dotted line.
The first thing you’ll want to do is talk to a lender about your finances. As a Realtor, all I need from you is a price point you want to search. No Realtor is a financial advisor. It’s not our expertise, and it’s not our business. The lender will also be more aware of the loans that might serve you as first-time Buyers. There are many breaks.
A pre-qualification is a quick conversation where the lender learns about your finances through Q&A. It helps you understand your ideal price range. Most will produce a worksheet for you that shows you an example of what it will actually cost you to buy a house for $xxx,xxx. If that isn’t offered, ask for one so you can see line items, like closing costs, and get a firm grasp on the right price range. (There’s nothing worse than thinking you know the costs, finding a house in that range and then learning you can’t afford it.)
Pre-approval is the second part of the financing process. It's more thorough than a pre-qualification. It usually results in a more formal letter, provided by the lender, that you can submit with your offer on a house. Where the pre-qualification is for you to understand your financial position, the pre-approval is for your Seller when you make an offer. It proves that you are a Buyer capable of affording the home.
Finally, the formal mortgage approval is the last part of the financing process. This will happen after an offer is signed by and the Sellers. It's where the lender will need to comb through your financial records to confirm you have the finances to afford the home. This includes everything from paystubs to bank records.
Down Payment & Closing Costs
If you’re even thinking about Buying, now is the time to start saving. Buyers are often shocked by what it costs to place a down payment on a home, and then to close on it. Most closings are about 60 days from the date that the Buyer and Seller sign the contracts. That means there is limited time to save up after a contract is signed.
Again, your lender will help you better understand some of those line items, like Principal Mortgage Insurance, Taxes, etc. The line items add up quickly, and the final figures don’t come until closer to closing (see reference to “ALTA” below).
In Western Pennsylvania, most licensed Realtors have access to a tool called the “MLS” (Multi-List Service). This allows us to find info on properties that's not available to the general public.
When you think you're ready, your Realtor will need to understand what you want. Think location. How many bedrooms? How many bathrooms? Garage space? Pool? Etc. The fun stuff. Keep in mind that the MLS isn't smart enough to look for things that are too specific. For example, a client may only want to visit houses on a cul-de-sac. The MLS tool isn't able to identify characteristics like that.
Deciding on an Offer
Your Realtor can conduct a comparative market analysis (or "CMA") to determine the value of the house you may want to make an offer on.
This involves comparing it to similar near-by properties that have recently sold. The biggest factors weighed in a CMA are location (house being compared should be within a mile or so of one another), school district and bedroom/bathroom count. Additional factors, like home condition and style are also considerations.
Try not to ask your Realtor to tell you exactly what your offer should be. Lean on them to make a recommendation (usually a range), but feel empowered as the person signing on the dotted lines, to choose the final number. An offer is more than a number. You will also need to consider things like seller's assist, and whether you want to ask that the Seller offers cash to help you close, etc.
Making an Offer
There is paperwork you’ll need to get through before you get to an offer. Some of those first documents that must be signed are the Consumer Notice (which should be signed during the first substantive conversation about real estate).
When you’re ready to make an offer, your Realtor will draw up an Agreement of Sale (a.k.a. “Sales Agreement”, “Sales Contract”). This is a templated document where Realtors “fill in the blanks”. Many years ago, the Agreement of Sale was a single page. Now, it’s 14 pages. The Real Estate Commission continues to refine policies, processes, procedures all all the related documents that go with them. Another reminder of why you need to be sure your Realtor knows what (s)he's doing.
Some of the other documents that may be appended to the Agreement of Sale include the Oil, Mineral and Gas Rights Addendum, Notice of Lead-Based Paint (if they home is older), etc. Some Realtors also file additional Addendums to ensure his/her Buyers have extra protection. An example of this is a Mortgage Contingency doc., which indicates that you are only responsible for purchasing the property if it appraises for the value if the sales price. It ensures you aren't stuck paying more for a home than it's worth.
Keep in mind that hand money (a.k.a. “earnest money”) is also necessary when you make an offer. You will write a check to show that you are a serious buyer. That amount will be wired into escrow. You will decide on the amount, and the money remains in escrow until closing, at which point the funds are provided to the Seller as part of the purchase.
Home Inspection & Appraisal
Inspections are often the most emotional part of a real estate transaction. You will have a certain timeframe to conduct an inspection on the home you want to buy. This timeframe, and the types of inspections you do/don’t want to conduct, will be indicated in the Agreement of Sale. All inspections are an up-front cost to the Buyer.
After you receive the inspection report, you will also have a certain period of time to respond to the inspection. Again, this timeframe will be indicated in the Agreement of Sale. This is where you will review the inspection results and respond to the Seller with feedback.
If you identify the need for repairs, you may request a credit to do them after you own the home. A best practice is that, if you request a credit, you will first need to secure estimates from licensed contractors, plumbers, electricians, etc. so the Seller knows you are asking for the correct amount.
No house is perfect. Period. A good listing agent (the Realtor who is selling the property for the owner) also takes this into account and prices the property accordingly. Good advice is to limit excessive back-and-forth negotiations to latent issues revealed by the inspection report, not the ones you already know about. Those ones you knew about should have been considered when you made your original offer.
The appraisal is handled by the lender and takes place at the time the mortgage approval is happening. It ensures the lender isn’t loaning you more than the home is worth.
A few days before your closing date, which is another thing indicated on the Agreement of Sale, you will receive an “ALTA statement”. The ALTA settlement statement is essentially an itemized list of all of the fees the Buyer and Seller will pay during the settlement. The form also clearly spells out important transaction dates such as tax pay-off, recording (deed) and disbursement dates.
Like the lending process, there are experts on the closing process in the form of settlement companies. Their work goes on up until the closing date. They take on things like the title research and title insurance. This ensures that you, as the Buyer, receive a “clean title” to the property you are buying. They also manage the transfer of the funds from Buyer to Seller to Realtor to Lender, etc. The Buyer has the right to choose the settlement company leveraged.
Coldwell Banker Real Estate Services
6305 University Boulevard
Moon Township, PA 15108