guide for first time buyers

“Buying Your Home – A Guide for First-Time Buyers“ by Duncan Connor 2008

Buying Your HomeA Guide for First-Time Buyers


You’ve decided to purchase your own home, and you’re already picturing cooking-out in the yard or waking up on a sunny Saturday morning in a place you can call your own.On the road from here to there, there are turns, bumps and pot-holes to be navigated, and this presentation is your road map.

Along with a description of the process of buying your home, this presentation will let you know what to expect, what can go wrong, what might de-rail your purchase, and you’ll also see some examples of the paperwork that your realtor will work through with you.

And remember that while buying a home is a very emotional time, it’s a business transaction. Things may go wrong, and there might be a surprise or two, but it’s not personal.


There are some key pieces of information you should be thinking about when you begin to consider buying a home. Your realtor will ask you for this kind of information.

Do you have any money for a down payment? Have you been pre-qualified for a mortgage loan? When would you like to move? Where would you like to live? How many bedrooms and bathrooms? What else is important to you when deciding on a home?

Let’s take a look at these questions and think a little about why they are important.


Do you have any money for a down payment?Having money for a down payment tells your realtor, and the seller, something about you: you’re serious about buying a house, and you’ve been thinking about it for long enough to put together some money to invest.

If you have a down payment you will have a greater number of loans available to you, and you may even be able to get a better interest rate.

You will need at least 3.5% of the home’s sale price as a down payment. It is now not possible to finance 100% of your home purchase. However, if you’re a veteran of the military there are some 100% financing loans available through the VA.

Some sellers will require you to provide earnest money, and while it’s not legally required, the seller has the right to refuse to negotiate with you if you don’t follow that request.


Have you been pre-qualified for a mortgage loan?There are two kinds of predetermination of how much you can get for a loan.

The first is pre-qualification, where you provide information to a loan officer, and they produce a letter that says (something like) “If all the information they gave me about being employed, their credit status and their income is true, this buyer is able to qualify for this much of a loan at this interest rate.”

The second kind is pre-approval, is largely the same but the loan officer actually verifies the information. Typically this approval is valid for 30 days, so it’s better to wait until you’re making an offer on a home to get pre-approval for your loan. Pre-approval also means that you’ve had your credit run by your loan officer, which makes sellers take a pre-approval letter much more seriously than a pre-qualification letter.

If you don’t get pre-qualified, you may not be able to get the loan you need to buy the home you’ve set your sights on, and some realtors will not show homes to buyers who haven’t been pre-qualified.


Another thing about your lenderSellers, realtors and attorneys feel much more comfortable with a pre-qualification or pre-approval letter from a lender they’ve heard of.It’s possible that smaller lenders could go out of business in the time between agreeing to lend you the money and your closing. That’s not to say you should only use a big bank, but if your lender doesn’t have professionally printed stationery, that might ring a few alarm bells with the seller, and undermine your purchase. Have your realtor provide you with information on several loan consultants or companies that they have had good experiences with.The other thing you might consider doing, is to provide your lender with a letter authorizing them to talk to your realtor about the mortgage. This means that the lender can talk to your realtor about any missing documentation and also get any potential problems resolved without needing to use you as a messenger.Oh, and one final thing. A seller can insist that you get a pre-approval letter from a specific lender. That doesn’t mean that you have to take your loan with that lender, it just means that they want a company they recognize to run your credit.


When would you like to move?This may sound like a no-brainer, but people selling their homes generally want the purchase and sale process to take as little time as possible. Usually, it will take 45-60 days from when you put in the first offer.

If you need to give your landlord a specific amount of notice on your rental, you need to consider that carefully, too.

You will need to demonstrate that you have the funds available to close, so if you’re expecting an inheritance or a bonus from work, you might be better off waiting for that money to be in your bank account before you get into looking at houses.

Also remember that the seller can (only once) unilaterally delay closing by up to seven days, so you probably want to schedule your move-out a couple of weeks after your closing.


Where would you like to live?You may have heard that the three most important things that influence property value are location, location and location. That’s generally true, up to a point.

If you are looking for a home that backs onto a golf course, or a hi-rise condo with city views, or a farmhouse on five acres, the price-tag is probably going to be bigger than if you were looking for a town house in a subdivision, or a traditional two-story in a good school district.

Getting pre-qualified will help you decide whether the kind of home you’re looking for is something that is in the right price range for you.


Where would you like to live?While you may have questions about the house, or the neighborhood, or the schools, or the traffic, or a million other things, it is up to YOU to find out the answers to a lot of these.Not everyone has the same standards for the neighborhood they like to live in, which is why your Realtor® is prohibited from answering questions which may be considered prejudicial in terms of race, ethnicity, gender, sexual orientation, disability or familial status. These are called protected classes.Seemingly innocent questions like “Are there a lot of children in this neighborhood” or “Can you give me a breakdown of the ethnic groups in the area” are potentially illegal for your realtor to answer.If you have questions or concerns about these protected classes, the answer can often be found by getting to know the neighborhood, or by having your Realtor® direct you to a reputable demographics statistics website.


How many bedrooms and bathrooms?This one is a great big “duh!”, right?

When you start looking for a house you will have an idea of how many bedrooms and bathrooms you need. However, it’s important to note that to qualify as a bedroom, a room only needs to have a window and a closet, so pay attention to the listings you look at – there are some homes out there that have a bedroom which is a “converted garage”, and some bedrooms out there that don’t have a closet (or window). If you’re looking to use a bedroom as an office, well, maybe you don’t need an extra bedroom if the property has a “bonus room”.

For bathrooms, you might have an idea of what kind of tub you’d like, or maybe you’re looking for a specific kind of vanity set-up. You may want to consider the location of the bathrooms (I’ve seen buyers reject a house because the downstairs bathroom was right next to the dining room).

Find out what suits your needs, and what can be adapted to suit your needs, and make sure that the property has what it says it has.


What else is important to you when deciding on a home?Do you want to live close to work, or school, or friends and family? Do you want to avoid areas where there is high traffic flow, or poor access to the highway?

Do you need a fenced-in yard, or would you like a swimming pool? Maybe you’d like a home in a swim/tennis community, or maybe the idea of home-owners association dues is deplorable to you.

Do you like wall-to-wall carpet or are you interested in hardwoods? Do you spend most of you time in the garage, or do you love to create new dishes in the kitchen?

Whatever is important to you, be sure that your choice of home provides you with the right spaces to enjoy living there.

If you’re looking for a home to live in for a few years and then re-sell and move on, you might need to think about what other buyers might find important in the future.


You’re pre-qualified, you know how much you can borrow, and you have a down payment. So what happens now? Now you call a realtor! If you’ve already done that, then you know they’ve asked what kind of house you’re looking for, and what location and price range you’re looking at.

When you go to view houses, it’s important to remember that other people might not have the same sense of color as you, or your good taste in furnishings. Don’t forget that the décor and the furnishings can be changed, and you’re going to want to make it your own when you move in.

When you do find the home that’s perfect for you, you and your realtor will work together on your offer to purchase the property. Your realtor will then send that offer to the current owner. And if you thought that finding the house was exciting, then you’re going to think that the rest of the process is…well, kinda boring, and you’re going to need two pieces of information.


The first is the Seller’s Disclosure Statement, which is a document detailing the condition of the property on a specific date (usually the date the property was put on the market) and lists which items will be left in the home at closing.

The other thing you should know is information about the previous sale and any subsequent loans taken on the property. This will help you deduce how much the seller may owe and, from that, a minimum price which the seller may be seeking for their property.

Using these documents, you and your realtor will put together an offer. It will include a purchase price, probably a request for the seller to contribute towards your closing costs, perhaps a few special stipulations (maybe you want the seller to leave the fridge), and definitely a deadline date for a response.


There are several important dates in the purchase and sale contract.

Binding Agreement Date Due Diligence Period Financing Contingency Period Closing Date

These will be explained as we get to them.


After you submit the offer, it might take all the way to the deadline date for you to hear anything. Or you might hear back immediately.

Unless you have offered to pay the list price for the property, and haven’t requested any closing costs or made any special stipulations, you’re probably going to get back a counter-offer.

The counter offer will list changes to the original offer that would make the contract acceptable to the seller. They may ask for a higher purchase price, or offer a lower contribution to closing costs, or both. They may request that you deposit earnest money with a broker, or that the sale of the property is contingent on the seller closing the purchase of their next home, or request a different closing date.

These are all things for you to consider and accept, or return with a counter offer of your own.


Each counter offer is based on the original offer, not the previous counter offer. This ensures that all the changes are listed and easy to follow.

By the time you’ve gone through a couple of counter offers, you will probably be in agreement on the principal terms of the contract. When the buyer and seller agree to the terms and sign the contract, it is then said to be a binding agreement, and the date of the final signature is the binding agreement date.

This date is important because it is the first date of the contract and triggers duties, for both the buyer and the seller, which are time sensitive.


For the buyer, those duties are to have the property appraised by the loan company to ensure that it is worth the amount of money you want to borrow; and to ensure that adequate funds are available to conclude the purchase transaction.

This must be carried out within the timeframe of the Financing Contingency Period. Realtors representing buyers will typically request that this period lasts for 14-21 days from the binding agreement date.


If the buyer fails to secure financing for the purchase, they will receive a Notice of Declination from the lender. The notice explains that the loan application has been declined. If the buyer presents this notice to the seller within the financing contingency period, then the contract may be voided.

However, if the buyer fails to secure financing and does not notify the seller, the buyer will be obligated to purchase the home with cash on the closing date, which could be a costly position to be in.


You may also, if you wish, have the property inspected by a professional home inspector who will advise you of any defects they find in the home. You must usually pay for the inspection at the time it is carried out. It will, most likely, cost between $300 and $400.

While home inspectors provide good information, they cannot be held responsible for the condition of the property.


If you feel that the seller should correct any of the defects found by the inspector, you have until the end of the Due Diligence Period to request those repairs. If you fail to request any work to be carried out during this time, you are agreeing to purchase the home as-is.

The due diligence period is written into the contract, and will usually be 7-14 days from the binding agreement date.

If the seller refuses to carry out any of the requests made in this period, the buyer may, without any penalty, terminate the contract and walk away.


See, I told you it was kinda boring.

But there are a couple of exciting things that might give you a sleepless night or two.

The inspection reveals serious defects to the home’s structure. The seller refuses to make a minor repair that is important to you. The loan company appraiser values the home at less than the sale price. Your loan is not approved because of a problem on your credit report. A contingency is activated that may terminate the contract.


When these things happen, please talk to your realtor. There’s a good chance that they might have seen a similar situation before, and they may be able to give you advice you need to put the purchase of your dream home back on track.

Since each contract is different, and involves people, it’s not unusual for two sales to have the same problem but completely different solutions, so we won’t go into the solutions here, except to say: your realtor can’t help you if they don’t know what is going on.


Let’s imagine that the due diligence and financing contingency periods have passed without any surprises and everything is in place for closing. What happens now?

Your realtor will check that all the documents for the purchase contract are in order and send them to the closing attorney. The closing attorney is in charge of making sure that all the documents are signed, executed, and legal. When they’ve looked them over, the attorney will compile the HUD-1 Settlement Statement, commonly referred to as “the HUD”.


The HUD is a list of debits and credits. For you, there will be a debit for the purchase price, any pre-paid fees (such as annual taxes), and costs for the loan processing, appraisal and legal fees. Credits are then added which include your loan amount, any earnest money you have paid, and seller-paid closing costs. What is left is your down payment and your share of closing costs.

You may get this a couple of days before closing – try to schedule time with your realtor and loan officer to go through it so you understand each line item.


When you get to closing, you will need a picture ID (your drivers license will be fine), a check for closing costs, and any documents that your lender has requested from you. These may include original pay stubs or letters confirming that you have been given a monetary gift.

Before closing you should have some idea of how much money you need to bring to closing. The best (and preferred) way to pay closing costs is to have the bank write a cashiers check to you. You will sign it over to the closing attorney at closing. If anything goes wrong, and sometimes it does, you can simply re-deposit the check in your account.

The closing meeting will take 1-2 hours, depending on how much needs to be signed, explained or amended to make it work.

Surprises at the closing table are not unusual, but the important thing to remember is that if problems can be worked out by everyone around the table, it’s far more preferable than allowing the deal to fall through.


HOW MUCH DOES IT COST?

When you’re buying a house, there are some costs that you have to pay out of pocket, and some that you can roll into your mortgage loan.

Talk to your mortgage officer about which costs can, or will, be included in your loan.

The costs you can reasonably expect to pay before you get to closing are:

Home inspection – about $300-$400Earnest money – about 1% of the purchase price. Can be negotiated with the seller, and is not a legal requirement, but is a great way to show the seller that you’re serious.


The Steps1. Get pre-qualified2. Find a property3. Submit an offer4. Negotiate the offer to an agreement5. Get through Due Diligence and Financing Contingencies

• Arrange for a home inspection and request any repairs• Submit all documents required to get your loan

6. Work with your realtor and loan officer to determine how much cash you need for closing - this will be at least 3% of the purchase price

7. Go to closing and sign all the papers8. Now you’re ready to move in


GLOSSARY

Binding Agreement / Binding Agreement DateBrokerClosing CostsCounter-offerDeadline DateDue Diligence PeriodEarnest moneyFinancing Contingency PeriodHUD-1 Settlement StatementNotice of DeclinationPurchase PriceSeller’s Disclosure StatementSpecial Stipulations


GLOSSARY

Binding Agreement / Binding Agreement DateWhen the most recent offer or counter offer is agreed and signed by the buyer(s) and seller(s) it is said to be a binding agreement, the date that the final signature is written on the contract is the binding agreement date.BrokerA broker is a person or company which is licensed to work on behalf of buyers and sellers in a real estate transaction.Closing CostsThe costs associated with the purchase and sale transaction. They include commissions, pre-paid items such as mortgage insurance, escrowed items such as homeowners insurance and one-off items like a minimum 3.5% down payment.Counter-offerAny offer that is submitted to either party may be counter-offered. This is normal, and you should expect at least a couple of rounds of offer/counter-offer.


GLOSSARY

Deadline DateThe date by which the current offer or counter-offer must be responded to. While there are no specific rules about this, it’s not advisable to have a deadline at 12:00 since many people mistakenly write 12:00am when they mean noon, rather than midnight. Due Diligence PeriodThe period of time, beginning on the binding agreement date, in which you may carry out professional home inspections and request any repairs to the property.Earnest moneyMoney paid to a broker to be used for any costs on the HUD-1. The broker will deposit your check, and some may request earnest money in the form of a cashiers check. The holding broker will provide this money to the closing attorney at closing.


GLOSSARY

Financing Contingency PeriodThe period of time, beginning on the binding agreement date, in which you must secure your financing. If you fail to secure financing, tell your realtor immediately so that they can let the seller know. If you don’t, you may be expected to purchase the house with cash, and may even be sued by the seller.HUD-1 Settlement StatementThe list of debits and credits in the transaction. Buyers are debited the agreed purchase price, the costs associated with the loan, pre-paid items, escrowed items. Buyers are credited with the earnest money, down payment, their mortgage loan and any other checks they bring to closing. The debits and credits should balance and cancel each other out.Notice of DeclinationA letter from a lender which states that financing at specific terms was refused. You will need to have your realtor fax this to the seller during the Financing Contingency Period.


GLOSSARY

Purchase PriceIn each offer this is the price you want to pay for the property. Each counter offer is the amount that the seller would like you to pay for the property. When the buyer and seller agree, it is the Agreed Upon Sale Price, which is used in the Appraisal Exhibit.Seller’s Disclosure StatementWhen the seller puts their home on the market, they are required to make a statement regarding the condition of the property, and which appliances and furniture will or will not be included in the sale.Special StipulationsAny additional conditions for the seller to consider. For example, if you want the fridge to be included, or if you want the seller to pay for a year of yard service up-front, or even the home inspection, you can put it here.