For most people, buying a home is the single biggest financial transaction they'll make in a lifetime. Before diving in, it's helpful to understand the basic steps that take people from browsing on Zillow to the closing table. Below is a description of the different stages in the buying process from start to finish:
- Determining your criteria.
Do you envision yourself in an urban condo or a suburban single-family home? Is close proximity to a train station vitally important? Maybe you have a dog and so a fenced-in yard is a must-have. Schools, commute times, and close shopping / dining options can be important considerations as well. Whatever your situation, sketching out a rough framework for your "dream" scenario is a great first step in the home buying process. Your list does not need to be perfect - in fact it will almost certainly evolve as you explore financing options and see properties in-person - but purposely thinking about and discussing these variables sets the stage for a smooth journey.
- Connecting with a buyer's agent.
Every journey needs a guide, and in this process the guide is your buyer's agent. A buyer's agent is your advocate during the home buying process, negotiating on your behalf and ensuring that you are protected as much as possible every step of the way. In the beginning, a good buyer's agent can help clarify the details of your target home, and discuss why certain features, towns or neighborhoods may or may not work well for your specific situation. As the process moves along you'll learn that certain risks can arise (either with the home itself or with the particular offer that you are making), so a good buyer's agent will clearly explain any risks and the implications of each decision made. He or she should also be a walking rolodex of trusted contacts for any situation that arises: recommending great lenders, home inspectors, real estate attorneys, insurance agents, movers, contractors, etc., whenever needed. But we really feel that the most important thing a buyer's agent provides is confidence. Buying a home is an important and expensive decision. The comfort of knowing that you are making the right decision is invaluable, which is what a good agent provides. (Check out Why Use a Buyer's Agent for more info.)
So, this is the time to meet with a potential agent and decide if he or she is a good match. You'll want someone who is knowledgeable, competent, responsive, and honest. (And being honest, by the way, might mean telling you what you need to hear instead of what you want to hear! It's better to know that a certain goal is unrealistic from the outset, instead of learning the hard way five months later.)
- Pre-approval process.
What is a pre-approval letter? A pre-approval letter is a document provided by a lender stating that the lender is tentatively willing to lend you a certain amount of money. You provide a lender the basic details of your financial situation (your income, your debts, how much money you have in savings, etc) and the lender gives you a letter which essentially states "based on the information that you provided, we are confident you would qualify for a loan up to X amount of dollars." Obtaining a pre-approval letter is relatively quick and easy, and it is a wise step at this juncture for two reasons. First, by confirming the loan amount that you would likely qualify for, you'll know which home prices are realistic for you. (As a side note, just because a lender will lend you a certain amount of money definitely doesn't mean that you should automatically max this out. You'll want to be aware of the mortgage payments for different loan amounts - based on your down payment amount, the interest rate, etc - to make sure the monthly payments are comfortable.) Once you have your pre-approval letter, you can have a more informed discussion with your buyer's agent about which towns and areas are feasible for your situation based on average home prices. Secondly, when it comes time to make an offer on a particular home, you'll need a pre-approval as part of the offer package anyways. You may have to submit an offer quickly, so it's much better to have this document ready to go instead of scrambling last-minute.
As you probably know, there are a variety of loan options with different down payment requirements, interest rates, and terms. Your lender will discuss different financing options to help determine which loan suits you best.
- Viewing homes.
After the parameters of your target home are sketched out, your agent can plug you into the "Multiple Listing Service" (MLS) which functions as the central database for properties for sale in Massachusetts. Your agent will assign you a specific search criteria, allowing you to browse all available homes within your exact parameters. You'll also receive a daily email with details of any new listings which is a great way to stay on top of the inventory. You may have already started browsing available homes on websites such as Zillow.com and Realtor.com. The information these websites provide is pulled directly from the MLS database. In other words, your agent is able to connect you directly to the source of property information in Massachusetts. You'll view the changing availability of homes in real time and will always have the most up-to-date information available.
In addition to providing MLS access, your agent will often have the inside-scoop on potential off-market opportunities (i.e., homes that are available for purchase but not advertised publicly). Your buyer's agent talks to property owners and other real estate agents every day, so at any given time he or she may have inside knowledge about a homeowner that plans on listing their house in the future (but would consider an offer now), or wants to sell but doesn't want to list their home publicly for privacy reasons. Whether the home is "officially" on the market, a "For-Sale-By-Owner", or an off-market opportunity, your agent can always help as your guide and advocate.
When a home is first listed for sale, there are often weekend open houses for easy public viewings. Buyers don't typically need their agent to accompany them for these showings, although there is usually a sign-in sheet to indicate which agent you're working with. For homes that aren't hosting upcoming open houses, your buyer's agent will communicate with the seller's agent to coordinate a showing based on your schedule (and scheduling with other agents can be a tricky undertaking in itself!). Your buyer's agent will likely accompany you during these non-open-house viewings.
- Making an offer.
When a suitable house is identified, your buyer's agent will explain current market conditions and advise what a competitive offer might look like. In addition to the price, there are several other parts of the offer which can be modified and negotiated (the closing date, deposit amounts, financing contingencies, inspection contingencies, etc). After submitting the offer, if there are negotiations with the seller your agent will advise the implications of every potential change to the offer - why certain changes or concessions might be worth making, and why you should stay firm on others.
If a seller accepts your offer - based on the price, terms, and timeline that you set forth - then the property is marked as "contingent" (i.e., it is now "held" for you and the seller is not actively procuring offers from other buyers). At this time you'll put down a relatively small deposit: usually $1000 - $5000.
- Connecting with a real estate attorney / due diligence.
Now that your offer is accepted, there is a small window of time to gather information on the property and conduct some due diligence before you are more formally committed to the purchase. A few things happen simultaneously. First, your offer may have an "inspection contingency" which allows a licensed home-inspector to visit the home and report on his or her findings (and allows you to back out of the deal without penalty if serious issues are found). Now is the time to schedule this visit. Second, you'll connect with a real estate attorney who will collaborate with the seller's attorney to draft a "purchase and sale" agreement (more on this document below).
Depending on the home, your agent may conduct or recommend other research during this due-diligence window. If you're buying a condominium, for example, you and your agent might discuss the building's rules and regulations, review the condo association's financial documents, etc.
- Signing the purchase and sale.
Many homebuyers have rented an apartment before. If you're one of them, you probably remember the basic steps involved: find an apartment, submit an application, application is accepted, sign a lease, then move-in. In some ways the home buying process is analogous: an accepted offer is almost like an accepted application, and signing the "purchase and sale" (or "P&S") is akin to signing a lease. In both instances the stakes get higher and each party's commitment to the deal is solidified. Your initial offer summarized the basic points of the deal; the P&S outlines all the finer points. You'll really lean on your attorney at this stage, as he or she reviews and revises this important document to protect your interests and mitigate your risk. Once the document is complete you'll review, sign, and then put down an additional larger deposit - typically 5% of the purchase price. (It's worth noting that this deposit - as well as your initial offer deposit - is money that is applied towards your loan's down payment. If your down payment is larger than 5% then you'll simply pay the remaining balance at closing.)
- Loan approval & appraisal.
Once the P&S is signed, the last big hurdle for the buyer is officially securing your financing. During the loan underwriting process, you'll send various financial documents (bank statements, pay stubs, etc) to your lender as he or she works to approve your loan. If your offer included a "mortgage contingency", then we'll pay close attention to the contingency expiration date. (A mortgage contingency provides protection in the event that your loan application is denied. Certain requirements must be met, but essentially if your financing is denied before a specified date then you're able to terminate the purchase agreement without penalty. Naturally we want to see your loan approved before this date to ensure there is no lapse in this protection.)
During the loan approval process your lender will also hire a third-party appraiser to visit the property and provide an independent assessment of the home's value (this is the "appraisal"). Basically your lender is confirming that your purchase price is appropriate to protect them from issuing a loan based on an overly-inflated valuation. If this appraised value is equal to or greater than your purchase price, then there is no issue and the process moves forward. If the appraised value is less than your purchase price, it's likely that your lender will only lend money for the home purchase based on this lower value. (This is not necessarily a deal-breaker, however, and there are options we can explore.)
After the appraisal is complete and you receive the official loan commitment, the work on the buyer's side is largely complete. Time to close!
- Final walkthrough / closing.
Right before closing your agent will schedule the "final walkthrough," which is an opportunity to visit the property before taking ownership to confirm the house is empty and in satisfactory condition. On closing day you'll meet with your attorney to sign all the necessary paperwork consummating the purchase, and will deliver the remainder of your down payment (plus closing costs). Shortly after closing the deed is "recorded" - i.e., the document showing that you legally own the property is officially filed with the appropriate county office.
Once the deed is recorded, the house is yours. You made it! Time to pop champagne and plan your move!! :-)
(PS - Click here for visual of this timeline!)
Do you have questions about the buying process? Is it time to get started?
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