So, I’ve been in this business for a long time. One of the things that has always driven me nuts is how unprepared first-time buyers can be for what’s involved in getting through the offer process. It’s not their fault…if nobody has taken the time to teach them, how would they know? I have a lot of young folks calling me and telling me what they want to spend on a home, where they want to be, and asking when we can go look. I have to burst some bubbles sometimes, by explaining the process step by step. So, you guessed it…we’re going over that here :)
First Things First
A mortgage pre-approval is the vital first step. I think that some folks get a little insulted when I tell them that they need to speak with a lender before we go look. There are multiple reasons for this. First and foremost, many folks have gone to an online mortgage calculator before ever calling me, and have run some numbers. Thats great, except for the fact that most of those don’t take into consideration the property taxes and hazard insurance. This is a HUGE portion of the monthly payment!
Even if you had some limited knowledge of values and rates, in metropolitan areas such as San Antonio, so much of the housing is outside the city limits with a much lower tax rate than being inside the city. I have a great mortgage calculator that I can use to help, but I always defer my clients to their loan officer to get the most accurately estimated payment. Pre-approval only takes about 15 minutes, y’all!
Eventually, they’ll need what we call the “Big Three”…this will be your last two years of tax returns, last couple of months of banks statements, and your last couple of pay stubs. There is almost always extra documentation required, but this is what gets the lender started.
Oh…and the Golden Rule of mortgage lending….DON’T BUY ANYTHING DURING THE APPROVAL PROCESS! No new accounts, no new cars, no furniture, etc….not without obtaining approval from your loan officer first! This can severely throw off your numbers, and cause you to appear as a lending risk!
How Much Money Is Required
This can often times be the biggest shocker to a first-time buyer. Everyone has told them that they need x-amount of money for their down payment, but they neglect to mention the closing costs involved in obtaining a mortgage loan. The most common type of financing is FHA, government-backed loans. This currently requires a 3.5% down payment. Yes, some loans are more or less…even $0-down financing for qualifying borrowers and/or properties. But, closing costs can run from just under 3%, upwards to 5% of the loan amount. As an example, on a $200k home, you could be looking at as much as $13,000, or more, for your “cash to close”. Now, that being said, there are options out there to decrease that amount significantly…too many to mention here, but call me and I’ll explain!
Lets Go Look At Some Houses
Ok, we have a pre-approval letter in-hand. Now we decide what properties are of interest, and set up a time to take a look. I have to request the showings, and sometimes wait for the seller’s to approve them. In a hot price range, I always attempt to find out if there are any offers on the table before we schedule. Some of my clients don’t want to get involved in a bidding war, and some of them are in it to win it!
We’ve Found The One
Its perfect…it has everything you’re looking for and goes to the schools you wanted for your kids. Lets put in an offer. This is where many buyers are unaware of what comes next. Assuming that we’re not looking at a multiple-offer situation, I’ll go through the comps and value the house as if I was going to list it for sale. This tells us what it’s worth, and helps us come up with the right offer for you and your budget. We put pen to paper (er….fingers to keyboard, actually…save the trees!) and outline the details. Here are some of the important factors that must be decided…
Offer Price (duh)
Earnest Money Deposit - This is your deposit, or a “show of good faith” that you’re serious about purchasing. Typical is about 1% of offer price Date - We need to ask for enough time (usually 30-40 days when financing is involved) to get the deal done, but not so many that our offer becomes unattractive.
Option Period - This is a period of time (usually the first 7-10 days) in which a buyer has the unrestricted right (for any reason whatsoever) to cancel the contract and walk away with their earnest money deposit. Typical is a $10-per-day fee paid to the seller. (Ex: 10 day option for $100)
Concessions - There are two places on the contract where we can ask the seller to pay for something for us. One is for closing cost concessions…where we can ask the seller to provide a credit to you, to be used for closing costs and prepaids. The other is a section where we might ask the seller to provide a credit for a third-party home warranty. (This is a warranty that covers major mechanicals, renewed on a yearly basis)
Time To Submit
Okie dokie…we have the contract filled out, and ready to submit! We sign our portion, and then send it to the listing agent with a check for the earnest deposit, made out to the title company…and another check for the option period, made out directly to the seller. As an example, on a $250,000 home, we would submit with a $2500 check to title, and a $100 check to Mr. & Mrs. Seller for the option period. This is still your money, and will be credited back to you at closing. Unless you cancel during the option period, and then you walk with just your $2500 deposit, while the seller keeps the $100.
What To Expect From Here
Typically, we can expect some sort of negotiation…a counteroffer from the seller. My job is to get you the best deal you can get, and the seller’s agent is trying to get the seller the most money for their house. Lets say, in this scenario, we meet in the middle and everyone is happy. The seller signs their portion and the contract is now “executed”. The option period starts today, and we have some work to do. We’ll need to schedule a home inspection ASAP. This can usually run between about $300-500, but could be more, depending on the size of the home, and other features that need to be inspected. (such as a septic system, water well, pool, etc.)
We’ll go over the report together, and decide what, if anything, needs to be remedied by the seller in order to move forward. If there is, we’ll submit a repair request with those items, and sometimes a little more negotiation is required to nail down what each party is willing to do.
It's also worth mentioning that your lender will be ordering the appraisal soon, which is an up-front cost to you, but also built into the total estimate that they’ve given you. This is usually somewhere in the $450-550 range, and will require a check to the lender before it can be scheduled. Assuming that we “make value”, or the appraiser says that the home is worth what you’re wanting to pay for it, then we are good to go. Your job at this point is to provide the lender with any and all required documentation in a timely manner so that we can stay on track!
As we approach the closing day, be prepared for the lender to ask for some of the same documentation all over again. This may seem like a nuisance, but they have to verify that you haven’t lost your job, spent all of your money or opened any new accounts. You’ll be given your final cash-to-close amount, which can be wired directly to the title company, or brought to closing as a cashiers check. We’ll go do a walkthrough before closing to make sure that the seller has left the property in acceptable condition for you, and then we’re off to sign! You get a cool pic of you holding a giant key at the title office, and then…CONGRATS, you’re a homeowner!
I sincerely hope this post was helpful to you! Obviously, I can’t describe every single situation that could arise during the process, but this should arm you with the basic knowledge to get through most of it. Please don’t hesitate to reach out with any questions, comments or concerns…thanks for your time!