Buying a Home

It is a lot easier than you think!

So many times, I have sat at the closing table with my buyers assisting them in buying their dream home and experienced the relaxed atmosphere, the laughter and the wonderful warm feeling of people on both sides of the table happy with the process of buying and selling a home. But, just as often I experience the feeling of uncertainty and concern that I see in the eyes homebuyers as they begin the journey of buying a home.

I want to take a few minutes, whether you are a first time home buyer just starting out or the seasoned veteran or the senior couple looking at downsizing to a smaller home... and just walk you through the basics, explain the process a little and explain terms that will make it easier.

Now, I don’t lay claim that this one article will cover every situation, but it will make clearer a lot of the real estate terms and the process buying a home a little easier.

If I could give one bit of advice . . . Get your loan approval first!! You and I both know that you are going to thumb through the newspaper, Showcase, go on line and do the computer search and ride through neighborhoods and go to open houses ... that is good to do and hey, I'm not trying to stop you from looking; but it is really important to get your loan approval in hand first.

Why? As I work with buyer clients, very often the buyers have already gone out and found the home that becomes “the home of their dreams” only to learn that they do not qualify for the price range of their dream home..

The difficult scenario is the buyer that falls in love with “the home of their dreams” and they later find out it is a house they can’t afford. Then, when they resume looking after qualifying for a home in a lower price range, it is very hard to be happy. They will always compare or measure the homes in their price range to the “dream home” they first found... at a higher price!

So, you should get one of our Main Street Realtors to make an appointment for you with a good lender. For a lot of buyers, this is the scary part... yet it is really the easy part! There just a three documents that you will need to bring with you to your first appointment are:
Your last two year's W-2's or 1099’s, your last two (most recent) pay stubs and your last two bank statements (checking, savings, etc.).

Going to your lender first, with one of our Realtors of course, is very important. There are so many types of loans and special programs. Your lender is the expert and he or she will be able to best fit the right type of loan to your situation.

Some terms that you will hear when it comes to getting a home loan to buy a home are: pre-qualified, pre-approved or credit approved pending appraisal.

Let me help you a little. Getting pre-qualified is a good thing to do, but it does not mean much and it is not final approval. Anyone can call a lender, talk over the phone and give the lender verbally their income and what debts they have. Based only on what is given to the lender on the phone, the lender can pre-qualify you. But, to make sure you are ready to buy a home, we need to go to the lender with your documents that have already been mentioned.

With the documents, your lender will go on line and pull your credit, review your credit history and with the documents, really pre-approve or actually approve you for a maximum loan amount. This is the best. I call it Credit Approval pending Appraisal. The appraisal will come when we actually have a purchase agreement on the home you have decided to purchase. But, you will be wise to get credit approval . . . first!

O.K., lets say we have credit approval at a maximum loan amount. Now, we are ready to start the search for your home.

At this point, we will sit down with you and explain Alabama Real Estate law and the importance of having a buyer's agent representing you in the negotiation of your home.

Once we have established our relationship as a client, then the next important step, is: The Buyer's Dream Sheet... knowing your wants, dreams and needs ... and the office visit to do a search of the current home market!

When you go back to our homepage, you will see under buyers, the Buyer’s Dream Sheet. You can also take a moment, if you have not already done so… and fill out your own dream sheet and email it to the Realtor of your choice!

At our office, we will sit down with you and complete your buyer's dream sheet. This is where we listen to your needs, your wants and your dreams. We will establish your needs inside your home (number of bedrooms, baths, formals, basement or not, minimum square footage, etc.). Where do you want your dream home located? What is important? Convenience to work, the schools for your children, a subdivision verses acreage or what side of town do you prefer?

Then, we will sit down at our office computer, go to the MLS and search the market in your price range.

While we are at our office, we want to get you very involved in the search of your home. We will also encourage you to go on line at home using www.MainStreetTuscaloosa.com to give you the opportunity to search at home on your own, then give your agent the Multiple Listing System numbers and they will follow up to make sure these homes are still on the market and available.

While we are at our office, we will walk you through the process and explain a few more terms that will be important to understand in the process of buying your home.

* Purchase Agreement   * Offer to Purchase
* Earnest Money   * Type of loan
* Closing Costs   * Pre-paids
* Pro-rated property taxes    * Right of Inspection
* Caveat Emptor (Buyer beware)   * Termite Letter
* Title Insurance   * Closing
* Delivery of Possession    * Subject to Loan Approval
* Repairs   * First Right of Refusal
* Counter-Offer   * Withdrawal
* Loss of Earnest Money

When we find the home that you want to purchase, we will make an offer to purchase... not a purchase agreement yet! Now, let me use an offer to purchase and talk a little about each of these terms....

Offer to Purchase and Purchase Agreement...After we sit down and evaluate the home you want to buy as to it's overall condition and market value as compared to other homes in the same neighborhood as well as other homes in the same elementary school district, you may be ready to make an offer to purchase. At this point you are making a serious offer to purchase the home. This vehicle places on the table for the seller's consideration a number of terms and conditions. It only becomes a purchase agreement after both the sellers and you as the buyers have agreed to all terms and conditions.

Now understand, even after both parties have agreed to the terms of the purchase agreement, it is still subject to certain conditions that we will talk about a little later.

Earnest Money ...There is no requirement in real estate to offer any earnest money as part of the offer to purchase. However, this amount of money demonstrates to the seller your level of seriousness or earnestness to purchase their home. It is based on the circumstances, but I advise that a sizable amount of earnest money is a clear signal that you want the home. In some cases you may want a very low amount of earnest money to possibly send another signal. Anyway, you should set up your offer with earnest money.

How can you loose your earnest money? We will talk about that when we talk about loan approval and home inspections.

Type of Loan ...You may be in a position to make a cash offer, but most folks are not. So, you will on your offer to purchase indicate to the seller the type of loan you are going to obtain. Conventional, VA or FHA. Most conventional loans require a down payment of not less than 5%; FHA loans require a down payment of not over 3%; while VA loans require the veteran to put no money down. Your lender will work with you on the various type of loans, what you qualify for and what is best for you. There are many programs Realtors should not be lenders!

Closing costs ...When a home is bought and sold, there are standard closing costs that someone pays. It does not matter who... the seller or the buyer ... but they will be paid unless the lender, buyer or seller waives them. And only a few can be waived. I am going to briefly talk about each of the following major items:

Loan Origination Fee, Mortgage Insurance, Appraisal, Credit Check, Survey, Termite Letter or Wood Infestation Report, Transfer Fee, Underwriting Fee, Tax Service Fee, Flood Certification, Attorney Fees, Document Preparation Fees and Recording Fees.
Note: Home inspection costs are not a closing cost.

Closing costs are totally negotiable. Many Realtors will advise that the seller only pays for those closing costs that demonstrate that their home is ready to sell: Like survey, title insurance, wood infestation and deed preparation. But, remember everything is negotiable and is driven by the buyers and sellers circumstances.

Prepaids ...Now these costs are normally paid for by the buyer, however again it is negotiable. What are prepaids? When you close on a home, there are really four things due at closing as prepaids. The prepaid interest from the day you close in the month until the end of the month. Ideally, you should close on the last working day of the month, so that only one or at most two days of loan interest have to be paid to get the loan to the end of the month in which you close. Second, you will have to pay the first twelve months of home owner's insurance at closing ... in advance. Then, you will set up two escrow accounts that will be stocked so to speak during the next twelve months. These two escrow accounts are your property taxes and home owners insurance escrow accounts. See, your mortgage payment includes principal, interest, property taxes, home owner's insurance and mortgage insurance. We will talk about mortgage insurance a little later. Now, when your home insurance and taxes come due, your lender will take the funds from your escrow accounts and pay the taxes and home owners insurance. And you think they are just nice guys! Well they are, but they are going to make sure that their investment is properly insured and that the taxes are paid. OK, your prepaids are: prepaid interest, one year of home owners insurance, property taxes escrow and home owners insurance escrow... got it?

Mortgage Insurance ...If you pay 20% of the purchase price as a down payment, you will avoid paying Private Mortgage Insurance. Mortgage Insurance is included in your loan payment and it basically pays a insurance policy for the lender. This policy protects the lender in the event you do not make your mortgage payments and the lender has to foreclose on the property.

Right of Inspection, Caveat Emptor or Buyer Beware ...In Alabama, the seller does not have to provide a home warranty or guarantee the condition of their home beyond closing. Some states do require the seller to warrant the home for a period of time and that varies from state to state. Unless you elect to buy a property “as is”, you have the right in Alabama to conduct a home inspection. Home inspections are at your option and normally at your own expense. It is my recommendation that every offer to purchase include in paragraph 21 of the offer to purchase that, “this offer is subject to satisfactory home inspection at the buyer's option and own expense”. I also recommend that the offer include the statement, “that any repairs deemed necessary will either be: paid for by the seller, or the repairs will be negotiated to both parties satisfaction as to the sharing of the costs of repairs; or either party may withdraw”. It is just honest business to include that statement in every offer. It keeps things in the open.

Home Warranty ...You can purchase a one year home warranty or you can negotiate for the sellers to provide a one year home warranty at the time of closing. This is normally between $300 and $500. This will depend on the size and age of the home as well as amenities in the home. All negotiable!

Termite Letter or Wood Infestation Letter ... If you buy a home for cash, you do not have to have a termite letter, but if you are creating a loan, the lender will order and require the inspection of the property to make sure it is free of active termites, that it is free of wood decaying fungus or if it has had previous termites that there are no structural issues with the home. This is simply for your protection as a buyer. As we write the offer, I will advise you more on this point.

Title Insurance ... There are numerous ways to approach the decision to obtain title insurance. Lets touch on some terms ... Title Opinion ... Owner's Title Insurance ... Mortgagee Title Insurance. First, if you pay cash for a property, you do not have to do anything about investigating the title of the property you are purchasing. I would never advise that you do that. Title search is a search of the property's current status and the trail of owners, liens on the property, and any judgments associated with the property from present back to it's origin. At minimum, if paying cash you should order a title opinion. But, in all cases, I recommend Title Insurance. That is simply an insurance policy issued by a title company after a title search that protects you and holds the title insurance company liable, if there is ever any problem in the future with the title being clear. When, you get a loan to purchase a home, the lender will require Mortgagee Title Insurance. However, that policy will only protect the lender. Go ahead and require Owners as well as Mortgagee Title Insurance. It is very reasonable for what you get in protection and it is good as long as you own the property.

Closing ...This is when you actually sit down at the table with the sellers, the title company agent or an attorney and actually close the loan. You are buying the property. All the work comes to the table. Home inspection reports, wood infestation reports, appraisals, insurance binders; This is the end of the search and you become a home owner. Of course you will see the home inspections and be made aware of any problems with the termite letter, but this is when it comes to close.

Delivery of Possession ...In 99% of the cases, possession of the property will be taken at closing and that is the only way I recommend. However, there will be circumstances that will simply require both the buyers and sellers to cooperate in making things work for both parties. In some rare cases, the sellers may be in a situation that requires they remain in the property for a period of time after closing. If so, we will talk about the procedures to take to make sure there are no problems.

Subject to Loan Approval ...When you make an offer, if we do our homework properly you will have credit approval from your lender. However, I always advise my buyer clients to include in the offer to purchase the statements, “This offer is subject to the purchasers obtaining final loan approval.” If it is conventional, FHA or VA, then I simply specify the type of loan. I also include the statement, “If the purchasers do not obtain final loan approval, then the contract is null and void and all earnest money will be refunded to the purchasers”. Even though you have full confidence that you have credit approval, the appraisal or home inspection may force the lender to not be able to loan you the funds you require on that property.

First Right of Refusal ... Lets say that you have a home and you are going to sell your present home, before you purchase the home that you have decided on. Then, you will want to have first right of refusal on the sale of the home you have made an offer on. The language that is fairly common in this case is, “This purchase agreement is contingent upon the sell and closing of the purchaser's home located at 1234 Bay Drive, Hometown, Alabama". If you have a purchase agreement in place on the home you are selling and know the buyer of your present home has loan approval and a closing date has been set, then you should insert the statement, “This purchase agreement is contingent upon the closing only of the purchaser's home ... The first right of refusal is very important and should go one step further. Your purchase agreement on the home you are going to buy should have one more statement, “If the sellers get another acceptable offer, with out contingency to sell, then the purchasers will be given xx number of days to remove their contingency or withdraw from the purchase agreement.” We will discuss this aspect of buying even further when we get to that point.

Counter Offers and Withdrawals ... Of course when you make an offer to purchase, it may not be accepted by the sellers as written. If anything on the offer is changed, marked through and initialed... then it is a counter offer. We will of course consider all counter offers, weigh the impact of the counter and either accept the seller's counter or we of course can make changes to the seller's counter and counter back from you to the sellers.. of course this can go on and on! As a buyer, you can withdraw from negotiations, counter offers at any point that you choose. Important, an offer to purchase is not a purchase agreement or contract until it is signed, initialed by both parties and delivered to the Real Estate agent. This is not a simple aspect of negotiations and I will explain in detail when the time comes.

Loss of Earnest Money ... When we write an offer to purchase, we will always include in our offer that, “ this offer is subject to the purchasers obtaining final loan approval, If the purchasers do not get loan approval, then this offer is null and void and all earnest money will be refunded to the purchasers”. This protects you in phase one. Then during the inspection phase (after the negotiations have been completed on the purchase price, closing costs, prepaids and closing date); you will be protected. Your offer will also include the statement, “Subject to satisfactory home inspection.” We have already discussed inspections and negotiation of repairs. You will be protected if repairs are not successfully negotiated, then you will be protected to have your earnest money refunded. However, if you successfully get through the loan process and inspection phase, and you decide to not close on the property, the sellers can ask for your earnest money. It is not automatic, you have to agree and sign a earnest money release form. If you choose to not agree to release your earnest money to the sellers, then it must be entered into court for interplead.

Well, my short article is not really short. But, I think it will help you to better understand the process of buying a home. Yes, it's involved! That is why you will make the decision to hire me as your buyer's agent. That is my job. To make it easy and put the worry on me!

Thanks, hope to hear from you soon.

Keep the faith!


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