Buying a house is a very exciting thing. For most people, it is near the top of their “to do before I turn ____” list. But if it’s your first home, how do you know what you need to do? There are so many steps to the process, that when you are new to it, it can be very overwhelming. There are first time home buyer classes and seminars that you can go to, some of them are very useful, some of them are just a big sales pitch, and some of them leave you asking more questions than you started with. so how do you know where to turn? Well I am here to help with that!
The very first thing that you need to do, before you sit down with with your computer and look on Zillow, or Trulia, or Google and look up houses, is find a team of people that you can trust. Your team starts out small, you only need a realtor and a loan officer to begin. There are many ways that you can find these people; you can ask a friend who they worked with, you can ask Facebook, you can look up reviews on places like Zillow and Yelp, or you can walk into a real estate office. Once you have identified one or a couple of people, you need to meet with them. I recommend going out to coffee, it’s casual and you get a genuine feel for if you trust someone when you meet face to face, and you need to like them. You will spend many hours with this person, and if you don’t get along or you have doubts about them, you are only going to drive each other crazy.
Once you have a realtor and a lender that you like, you need to come up with a game plan. Firstly, meet with your lender to determine a price range. He will need tax returns and your credit report to accurately determine what you can pay. You also need to discuss what you want to pay each month, you don’t want to get into your home and have no money left to live your day to day life. When you are talking with your lender be sure to ask about what your down payment options are, if they have any first-time home buyer credits or programs, and what the total cost to own will look like. After you have a firm idea of what your comfortable with, you are ready to meet with your realtor again.
During this meeting you will want to discuss the type of home that you want to buy. The Realtor will likely ask most of the questions for you; how many bedrooms/bathrooms do you want, do you want a fixer, do you need a yard, what areas do you like or not like, how long do you see yourself living there? Once you feel you have accurately expressed what you are looking for, you may want to come up with a list of “must haves” and “compromises”. It is nearly impossible to find the perfect house, especially for your first one, so it makes it easier if you know going in what things are truly the most important.
Now that you have had your meetings and you are happy with your team, it’s time for the fun part! We can start looking at pictures of houses and going to tour them! There are many great websites out there to use, mine is Jessica.liveportlandmetro.com and is very user friendly. The thing that is most important about the website is that you can easily navigate it and the information is accurate (please please please don’t use Zillow) and that you can get automatic updates on new listings. Once you have found a couple houses that seem to fit the bill, your realtor will schedule the houses and drive you around to look at them.
Finding the right houses is more of an art than a science, some people find the right house after they have seen only one, and some people need to look at 50 before they find one that works. There will always be something that isn’t quite right, but this is where your list of “must haves” comes in handy. If the house checks all the boxes and you like it, it may be the one! One of the biggest mistakes that I see with first-time home buyers is that they love a house, but feel they haven’t looked at enough. Then when they realize the house was the right one, it has already sold to someone else. Losing a house is a terrible feeling and you will always compare new ones to your first love. If you like it, you should write an offer on it, there are plenty of opportunities to back out of the offer if something changes your mind about it.
Now to talk about the offer process. Your realtor will go through the contract to purchase with you and answer any questions about it that you may have. It is about 15 pages so you want to sit down to go over it. We need to have decided on a price, the type of loan you will be getting, and if you need help from the seller to pay the closing costs. Closing costs are fees that both parties have to pay, for example, title fees, loan origination fees, deed transfer fees etc. You can ask the seller for help paying these up to 3% of the purchase price. Along with the contract we need to present a pre-approval letter from the lender saying he can give you a loan for the purchase amount, this generally takes a couple minutes to work up after your initial consultation. We then send all the paperwork over to the sellers to review. Generally they have 48 hours to respond and they have 3 choices, they can accept the offer that you wrote, they can send you a counter offer, or they can reject your offer. Don’t worry, the latter rarely happens. If the sellers sent over a counter offer, we can either accept, counter, or reject. This goes back and forth until both parties have agreed to the terms.
Now you can do a little dance because we almost have a house!! There are quite a few things that still need to happen, but we are at the halfway point. Generally we have 30 days to complete everything before the house is officially yours, we need to open escrow, have any inspections that you want, an appraisal, and a final walk-through. Now that we are here, your team is going to get bigger. Your realtor will open escrow for you (escrow is a 3rd party company that holds all the money until we close, they then send it to the right places) and we need to deposit the earnest money. This money is a showing of faith that you will follow the guidelines in the contract, it is usually 1% of the purchase price and you get to use it towards your down-payment or closing costs in the end. Your escrow officer will be sending you the title report so you can see if there are any liens on the house, they will work to clear all the outstanding debts on the property, and make sure you are getting what is called clear title. This ensures that no one can show up after you buy the house and claim it isn’t rightfully yours.
Next we have all the inspections. You need to have a general inspector walk through the house and look for defects in the construction, appliances, and all the major systems like plumbing and electrical. Your realtor will likely have someone that they trust, so let them do this step for you. I also highly recommend that you have a sewer inspection to be sure the pipe isn’t clogged or broken, and a radon test. If you are unfamiliar with radon, I recently wrote about it in another blog post you can find here. Depending on the age of the house, you may also want to search for an oil tank, test for asbestos, and test for lead based paint. In the sales contract you decide how many days you have to conduct all of these inspections, but you are allowed to have as many as you would like. you can expect inspections to cost you somewhere between $400 and $1200.
After you are satisfied with the inspections, we have the opportunity to negotiate repairs. An important distinction to make is that we are asking for repairs, not for upgrades. Sometimes we encounter an old water heater, but if it is working properly, we shouldn’t ask the sellers to buy you a new one. We are allowed to ask for as many things as you deem reasonable, but you can expect them to really only fix a couple of the big things, like a new roof, or electrical panel. During these negotiations we have 2 real choices. We can ask the sellers to hire someone to fix everything, or we can ask for a credit to get it fixed ourselves. The latter is only possible if we didn’t ask for the seller to pay the closing costs when we wrote an offer. There are pros and cons to both of these options, it really just depends what is going to work best for you.
Once we are through the inspections we need to order the appraisal and finalize all the loan documents. As I am not a lender, I know only the basic steps, and this is certainly something you could talk to them about. The appraisal generally costs around $400, and someone will go out to the house, look at comparable sales in the area, and decide the value of the home. Generally when we receive the appraisal it says the property came in “at value”. This means the appraiser believes the home is worth what you are paying. But there are 2 other options, it can come in under value, or over value. If it comes in “under value”, we can ask the sellers for a price reduction, we can pay the difference in cash, or we can do some variation of the two. If it comes in over-value, you know you are getting a great deal!
After we get past this step, all that is left is getting all the necessary financial records over to the lender’s underwriter, running a final credit check, and sending the entire packet over to our escrow officer. We then will all sit down to sign the closing paperwork. This is a mix of disclosures, title documents, and loan documents. After we sign, we wait for the county to record the transfer of the deed and you get keys!
As a recap of what you can expect to be paying out of pocket, I’ll use a $200,000 house as an example, with 5% down and no help from the sellers with closing costs. All the numbers are estimates.
Earnest money $2000. Due within 3 days
Inspection costs $400 general, $185 radon, $95 sewer. Due within 1 week
Appraisal cost $400. due after inspections
Downpayment 5% $10,000
closing costs 2% $2,000 plus the $2,000 earnest money.
Total cost to buy a house $16,080.
Hopefully this gives you a good idea of what the process will look like, and as always I am here to answer any questions that you have!