7 Steps to Home Ownership
by Tricia
Ebert, Realtor®, CSA®, ABR®, BPOR®, CDPE®
So you’ve
made the decision to buy a home. Congratulations! You are about to embark on
one of the most exciting and terrifying experiences of your life.
As a
Realtor® who specializes in helping first-time homebuyers, I know how
nerve-wracking it can be to look for the “perfect” house and to take the huge financial
leap in faith that you can afford a mortgage. So let me help you with your
experience by giving you 7 simple steps to get from “renter” to “home owner”!
(1)
Real Estate Terms to Understand: Before I list the necessary steps
to buy a house, you need to understand some important terms.
Purchase Offer or Purchase
Agreement: When you find your ideal home,
your Realtor will help you make an offer to the seller. This is commonly called
the “Purchase Offer” or “Purchase Agreement.” These forms have been created by
attorneys who work for your state’s Realtor association (such as “CAR,” the
California Association of Realtors). These forms include protective clauses for
buyers and sellers called “contingencies.” See the next explanation for more
information about these clauses.
Contingencies: When your
Realtor helps you make an offer on a house, there are “contingencies” built
into the contract to protect you. The most important ones are the physical
inspection, appraisal and loan contingencies. This means that when a seller
accepts your offer, there is a “discovery process” you go through to decide
whether or not to actually buy the house.
It’s vital you hire a home
inspector who will go
through the house and give you a report on its condition. You may find out the
air conditioning unit is about to quit, the water heater is 20 years old, and
there are leaks in the plumbing under the house. These are important issues
that need to be addressed with the seller. If you want to have the seller make
these repairs or give you money for the repairs, you need to put that in
writing and see if you’re happy with the response. If you are, then you can
remove the “physical inspection contingency.” If you’re not, you may want to
cancel escrow. (FYI – Your Realtor can recommend two or three inspectors they
have worked with if you don’t know who to hire. Please trust their opinion on
inspectors who know what they’re doing.)
Your loan contingency
includes an appraisal contingency. This means the bank where you’re getting
your loan hires an appraiser who will look at houses similar to the one you’re
buying in that area and see if the price is in line with current market value.
If you are offering $100,000 more than all the other houses that have sold in
the area, the appraiser will point that out to you and the bank. It’s most
likely the bank will not approve your loan based on this information. In this
case, you may need to renegotiate the price with the seller. Or you may need to
pay the difference between the appraised value and the price you’ve offered
(not recommended).
Also, the bank will require a long list of items they need from
you to give final approval of your loan. This may include your last two years
of tax returns, your last three months of bank statements for all accounts,
information for the source of any cash deposits you’ve made, etc. The bank will
check your credit report and FICO scores to make sure you haven’t made any
large purchases and taken on any additional debt since you first applied for
your loan.
If the appraisal shows your offer for the house is in alignment
with true market value, and you meet all of their demands for paperwork and
credit scores, then you will get approval of your loan. At that point, you can
remove the appraisal and loan contingencies and go forward with escrow. If not,
you may need to cancel escrow (more about escrow is coming up).
Title and Title Companies: When you
buy a house, you need to know that the person who claims to be the owner is
really the owner! Title companies do the legal research necessary to make sure
an owner of a house has the legal right to sell it. These companies also verify
that there are no lawsuits pending against the owner of the house you’re
buying. If there are, the lawsuits have to be settled before the house is sold.
This is very important information to have BEFORE you buy a house. Title
companies also insure your purchase against “defective title.” So if the
owner’s relatives contest the sale of the house, maybe claiming they had a
partial ownership or interest in it, the Title company has to defend you in
court and deal with the situation. (This can sometimes happen when the relatives
of a deceased property owner sell the house.)
Disclosures: When you
make an offer to buy a house and the seller accepts your offer, the seller is
required by law to disclose to you everything and anything they know about the
condition of the house and any details about the neighborhood that may affect
the quality of life there. They have a limited amount of time to give you a
list of disclosures and if they don’t, you can cancel escrow. Also, if you
don’t like the information in the disclosures, such as airplane noise you
didn’t know about or a toxic waste dump being under the house, you can cancel
escrow. What is escrow? See the next term…
Escrow: Depending
on which state you live in, you will either use an escrow company or a title
company to hold your deposit when your offer is accepted by a seller. Escrow companies are neutral third party
corporations. They work for BOTH the seller AND the buyer in a neutral
capacity. They will hold your deposit until you have done all of your
inspections of the house, obtained approval of your loan and are ready to move
forward to purchase the house. When your bank is ready to fund your loan so
that you can buy the house, the money will be wired to the escrow or title
company. This company will then record the deed that gives you title to the
house, and they will disperse the funds to everyone who needs to be paid, such
as the seller and the seller’s lender (to pay off their mortgage), the title
company, the escrow company, the real estate brokers representing the seller
and the buyer, etc.
NEXT WEEK: Now that you understand the most important terms involved in buying
a house, we'll discuss THE most important detail of buying a house… FINANCING!
See you next week!