1. Are You Ready?
Knowledge and experience are the keys to successful real estate
transactions. Do your research, ask questions, then ask some more
questions, look at real estate-related websites on the Internet. All
of the work you do to prepare for probably the largest financial
investment of you life can be the essential key to your successful
purchase of your new home.
One of the keys to making the home-buying process easier and more
understandable is planning before the whole process gets underway. In
doing so, you'll be able to anticipate requests from lenders, lawyers
and a host of other professionals. Furthermore, planning will help you
discover valuable shortcuts in the home-buying process.
Do You Know What You Want?
Whether you are a first-time home-buyer or entering the marketplace as
an experienced buyer, you need to ask yourself why you want to buy.
Are you planning to move to a new community due to a lifestyle change
or is buying an option and not a requirement? What would you like in
terms of this new real estate that you do not now have? Do you have a
Whatever your answers, the more you know about the real estate
marketplace, the more likely you are to effectively define your goals.
As an interesting exercise, it can be worthwhile to look at the
questions above and to then discuss them in detail when meeting with
local a Realtor.
Do You Have The Money?
Homes and financing are closely intertwined. Financing is the
difference between the purchase price and the down-payment, commonly
referred to as debt or the mortgage. The good news is that over the
years new and innovative loan programs have evolved which require a 5
percent down-payment or less. In fact, a number of programs now allow
purchasers to buy real estate with nothing down.
In addition to a down payment, purchasers also need cash for closing
costs, which are the final costs associated with closing the loan.
Several newly emerging loan programs not only allow the purchase of a
home with no money down, but also underwrite closing costs. Be sure to
ask your Realtor and loan officer for an estimate of these closing
costs, since this is money that, traditionally, is not coming from your
loan. You need actual cash for these closing costs.
Not everyone, however, elects to purchase with little or no money
down. The less money down means higher monthly mortgage payments, so
most home-buyers choose to buy with some cash up front.
As to closing costs, in markets where buyers have leverage, it may be
possible to negotiate an offer for a home that requires the owner to
pay some or all of your settlement expenses. However, in a seller´s
market, which is when there are more buyers than homes for sale, it is
unlikely that a seller will pay any part of your closing costs. Speak
with local Realtors for details.
Other than budgeting to have cash funds to pay closing costs, you will
need something called "earnest money" when you make an offer on a
house. Earnest money is usually 2-3% of your offering price. The
earnest money, also called good faith money, indicates to the seller
that you are sincere about moving forward with the purchase of this
home and that you have made financial plans to at least have 2-3% of
the purchase price in liquid funds. Buyers with little tono money for
earnest money can send red flags to the seller and cause doubt about
the buyer´s financial ability to purchase the home.
Is Your Financial House in Order?
Those great loans with little or nothing down are not available to
everyone: You need good credit. For at least one year prior to
purchasing a home, you should assure that every credit card bill, rent
check, car payment and other debt is paid in full and on time.
Also, do not purchase any costly items before or during the escrow
period. This can have a significantly negative effect on the type of
loan you will be able to get. So hold off and buy that fabulous new
automobile after escrow closes on your new home!
2. Get a Realtor®
More than 2 million people in the have earned real estate licenses.
However, real estate is a tough business with a steep dropout rate, and
the result is that only a small percentage of those with licenses
actively help buyers and sellers.
The National Association of REALTORS® (NAR) includes 750,000 brokers
and salespeople, individuals bound together with a strong Code of
Ethics, extensive training opportunities and a wealth of community
information. NAR members are routinely active in PTAs, local
government committees and a variety of neighborhood organizations.
Being actively involved in community affairs provides Realtors with a
better understanding of the area in which they are selling.
Why Get a Realtor?
Buying and selling real estate is a complex matter. At first it might
seem that by checking newspapers and magazines or online sites, you
could quickly find the right home at the right price.
But a basic rule in real estate is that all properties are unique. No
two properties -- even two identical models on the same street -- are
not precisely and exactly alike. Homes differ as does the way each
Realtor writes a contract. Other factors also differ from transaction
to transaction, such as financing options, inspection requirements and
closing costs. This means that no two transactions are alike.
In this maze of forms, financing, inspections, marketing, pricing and
negotiating, it makes sense to work with professionals who know the
community and much more. Those professionals are the local Realtors who
serve your area.
How do you choose?
In every community, you're likely to find a number of realty
brokerages. Because there is heated competition, local Realtors must
fight hard to succeed in your community.
The best place to find a truly professional local Realtors is go to
open houses, review local advertising and web sites, ask for
recommendations from neighbors and suggestions from lenders, attorneys,
financial planners and CPAs. The experiences and recommendations of
past clients can be invaluable.
Often a buyer had a friend or family member who "dabbles" in real
estate and offers to represent the buyer. More often than not, these
relationships are damaged by this home-buying process. It is better to
hire a agent who works full-time in real estate, who is current on all
of the frequent changes in the contracts and current market trends, and
who is 100% focused on finding you the right house.
In many cases buyers will interview several Realtors before selecting
one professional with whom to work. While time-consuming, this is a
very good practice. These interviews represent a good opportunity to
consider such issues as training, experience, representation and
Feel free to ask a Realtor about their
experience in the geographic area you are looking in, how many of their
transaction have fallen out of escrow in the last year and why, what
sets them apart from other agents, do they feel that they are
well-respected by the other agents in the area and what are they basing
their answer on, and when presented with a multiple-offer situation,
what strategies do they use to help their buyer get the property. Ask
for detailed answers and any written-proof of their work, such as a
list of homes in which they represented the buyer or seller in the past
year. Don´t let them give you their canned speech that is meant to
What should you expect when working with a Realtor?
Once you select a Realtor, you will want to establish a proper business
relationship. You maybe aware that some Realtors represent only
sellers while others represent only buyers. While some Realtors work
with both buyers and sellers. Each Realtor will explain the options
available, describe how he or she typically works with individuals and
provide you with complete agency disclosures as required in your
state. These forms explain to you the code of ethics and
professionalism that the agent is required to follow.
Once hired for the job, the Realtor will provide you with information
detailing current market conditions, offer strategies that are
currently working for buyers in this market, and financing options.
Remember: Because market conditions can change and the strategies that
apply in one negotiation may be inappropriate in another, this
information should not be set in stone. During your time in the
marketplace, your Realtor should keep you updated and alert you to
each step in the transaction process.
3. Get Loan Pre-approval
Few people can buy a home for cash. According to the National
Association of REALTORS® (NAR), nearly nine out of 10 buyers in 1999
financed their purchase, which means that virtually all buyers --
especially first-time purchasers -- required a loan.
The real issue with real estate financing is not getting a loan.
Virtually anyone willing to pay lofty interest rates can find a
mortgage. Instead, the idea is to get the loan that's right for you --
the mortgage with the lowest cost and best terms, such as an adjustable
rate loan versus a fixed rate loan.
Realtors routinely suggest that consumers start the mortgage process
well before bidding on a home. By meeting with lenders -- either
online or face to face -- and looking at loan options, you will find
which programs best meet your needs and how much you can afford. For
first-time buyers, I suggest that you find a local lender to work with,
rather than working with an on-line company. You want someone who is
directly accountable to you and can answer your questions.
Also meeting with a loan officer before you start looking for a home
guarantees that you know how much house you can afford. You will
already have figured out if the monthly mortgage payments for your loan
are reasonable for you and your lifestyle. Knowing the ceiling of what
you can afford, will shorten the search process and be less frustrating
to you since there will be no need to go and look at grander homes that
you cannot afford, which can be depressing.
Realtors also recommend pre-approvals for another reason: Purchase
contracts often require buyers to apply for financing within a given
time period, in many cases, seven to 10 days. By meeting with loan
officers in advance and identifying mortgage programs, it won't be
necessary to quickly find a lender, check credit, and rush into a
financing decision that may not be the best option.
What is a Pre-approval?
"Pre-approval" means you have met with a loan officer, your credit
files have been reviewed and the loan officer believes you can readily
qualify for a given loan amount with one or more specific mortgage
programs. Based on this information, the lender will provide you with
a pre-approval letter, which shows your borrowing power. You can visit
as many lenders as you like and get several pre-approvals, but keep in
mind that each one carries with it a new credit check, which will show
up on future credit reports.
Although not a final loan commitment, the pre-approval letter can be
shown to listing brokers when bidding on a home. It demonstrates your
financial strength and shows that you have the ability to go through
with a purchase. This information is important to owners since they do
not want to accept an offer that is likely to fail because financing
cannot be obtained.
How do you get pre-approval?
Real estate financing is available from numerous sources, banks,
mortgage, and in some cases, individual Realtors themselves. Based on
his or her experience, the Realtor may suggest one or more lenders with
a history of offering competitive programs and delivering promised
rates and terms. Just like you shopped around for a Realtor, shop
around for the best loan. Banks and mortgage companies hae different
programs that they can offer their clients.
The loan officer will carefully review your financial situation,
including your credit report and other information. The lender will
then suggest programs which most-closely meet your needs. For
instance, a first-time buyer may qualify for state-backed mortgage
programs with little money down and low interest rates, while a repeat
purchaser with more equity (money invested in the home) might want to
get a 15-year loan and the lower overall interest costs it represents.
Typically, first-time buyers opt for the traditional 30-year or 15-year
loan, with either a floating interest rate or a fixed rate of interest
over the life of the loan.
4. Secure Funding
Often the cost of real estate financing is routinely greater than the
original purchase price of a home, after including interest and closing
costs. Because financing is so important, buyers should have as much
information as possible regarding mortgage options and costs.
What kind of loan?
There are thousands of loans available out there from a variety of
lenders, but in general, the mortgage you choose will likely be
determined by at least several key factors:
• What will the amount of your down-payment be? Loans with 5
percent down or less are now widely available -- in fact, loans from
major lenders with no money down have appeared in recent years.
• If you place less than 20 percent down, lenders will want the
mortgage guaranteed by an outside third party such as the Veterans
Administration (VA), the Federal Housing Administration (FHA) or a
private mortgage insurer (PMI, or private mortgage insurance, is
required by lender to protect against any mortgage defaults). More
than 2.5 million VA, FHA and PMI loans are generated each year.
• How's your credit? The best rates and terms are only
available to those with solid credit. To get the best loans, make a
point of paying credit cards, installment payments, rent and mortgage
bills in full and on time.
• Are you a first-time buyer? It might seem that "first-time
buyer" means someone who has never owned property before, but under
most state programs, the term refers to those who have not owned
property within the past three years. State-backed first-timer programs
often feature smaller down-payments and below-market interest rates.
For details, speak with your Realtor.
How do you get a loan?
To obtain a loan you must complete a written loan application and
provide supporting documentation. Specific documents include recent
pay stubs, rental checks and tax returns for the past two or three
years if you are self-employed. During the pre-qualification procedure,
the loan officer will describe the type of paperwork required.
do you get a loan?
Mortgage financing can be obtained from mortgage
bankers, mortgage brokers, savings and loan associations, mutual
savings banks, commercial banks, credit unions, and insurance
companies. A growing number of REALTORS® can also arrange financing.
5. Look at Homes
Some 6 million new and existing homes are sold each year. There's no
shortage of housing options, but with so many choices the challenge
becomes finding the property which best meets your needs, in the area
that you want.
The housing market is complicated because the stock of homes for sale
is always in flux. If it were possible to have a complete list of
every home for sale at this very moment in a given community, such a
list would become obsolete within seconds as new homes become available
and properties now for sale are put under contract.
In effect, buyers are looking at a moving target in a marketplace that
is never static. Because of this, it is important to know as much as
possible about the choices in preferred markets, and the way to do that
is by working closely with a local Realtor who has a good "lay of the
What are you looking for?
A home is more than just a collection of bedrooms and bathrooms.
Several properties -- each with four bedrooms, three baths, and the
same price -- may well represent radically different designs, commuting
distances, lot sizes, tax costs, interior dimensions, and exterior
Each of us is different and so it's important to list the features and
benefits you want in a home. Consider such things as pricing, location,
size, amenities and extras, such as a pool or extra-large kitchen, and
design, such as one floor or two, Colonial or modern, etc.
Next, it's important to consider your priorities. If you can't get a
home at your price with all the features you want, then what features
are most important? For instance, would you trade fewer bedrooms for a
larger kitchen? Is a longer commute worth a bigger lot and lower cost?
Which features are requirements for you and which features have some
Lastly, consider your needs in several years. If you'll need a larger
home, maybe now is the time to buy a bigger house rather than moving or
expanding in the future. If you expect your income to increase soon,
perhaps you should consider a more expensive home financed with a loan
program where monthly payments increase in the future.
Where should you look?
All neighborhoods and communities have a special nature that gives them
identity and value. One community may be well known for historic homes
while another offers both suburban living as well as easy access to
downtown office areas. At any given time, REALTOR.com® offers about
1.4 million homes online. By any standard, it's the largest source for
property information online or off.
How do you find a house?
Some buyers like to search the Internet by looking at listings on the
basis of location or price; others prefer to have local Realtors
suggest properties; and many buyers prefer both approaches. Statistics
show that almost 80% of buyers start their search and research in the
Internet, which has vastly changed the real estate world.
Regardless of your choice, it's important to target your search. By
using basic measures such as general location and affordability, you
can refine your search and focus on homes that offer the most desirable
As a guide, you should maintain a file with information on each of the
homes you like. You can print out listing pages from the Internet and
then make notes for each one -- what you like, questions, Realtor
contact data, etc.
6. Choose a Home
There's no doubt that choosing a home is a big decision and you want to do it right.
As a buyer, here's what actually happens. A home has been placed on
the market for which the seller has established an asking price as well
as other terms. In effect, this is an offer. At this point, you have
three choices: accept the seller's offer and create a contract; reject
it and not make an offer; or suggest different terms and make a
counter-offer. If you choose this last option, the seller may accept,
reject or make a counter-offer.
No aspect of the home buying process is more complex, personal or
variable than bargaining between buyers and sellers. This is the point
where the value of an experienced Realtor is clearly evident because
he or she knows the community, has seen numerous homes for sale, knows
local values and has spent years negotiating realty transactions.
Is it THE house?
A house is shelter, but a home is far more. It's where you live,
relax, entertain friends, raise families, and work. A home is where you
spend much of your life, and so choosing a house is an enormous
How do you know if a house is THE one?
Probably the best approach is to look at as many homes as possible,
both in person and on-line where you can quickly and easily view huge
numbers of homes, check prices, take video tours and view extensive
neighborhood information. Once your choices have been narrowed, you
can then contact a local Realtor, if you haven´t chosen one yet to find
specific information and options.
Can you really afford it?
Remember Step 2 - the pre-approval process? Getting pre-approved
means you have a very good idea of how much you can borrow, what loan
programs will most likely work best in your situation and how much home
you can afford.
How reliable is a pre-approval?
While pre-approval is not a loan commitment, it's still necessary for
lenders to check such items as appraisals and the latest credit
reports. Despite fluctuating interest rates, pre-approval nonetheless
provides a reasoned, careful analysis of what you can afford. After
all, loan officers are routinely paid only when loans are originated.
It doesn't make much sense for loan officers to suggest high loan
limits that later can't be delivered.
Also, be aware that a pre-qualification letter is not a pre-approval
letter. A pre-qualification letter is virtually useless, since it is
not based on the loan officer actually seeing your credit or employment
information. Pre-qualification letters are written based on what you
tell a loan officer. As a result, a pre-approval letter which has
required the loan officer to research your financial situation is much
7. Make an Offer
Realtor groups, working with legal counsel, have developed forms that
are appropriate for realty transactions in specific communities. Such
documents include numerous sale conditions and their wording should be
carefully reviewed to assure that they reflect the terms you want to
offer. Realtors can explain the general contracting process in your
community as well as his or her role.
While much attention is spent on offering prices, a proposal to buy
includes both the price and terms. In some cases, terms can represent
thousands of dollars in additional value for buyers -- or additional
costs. Terms are extremely important and should be carefully
You sometimes hear that the amount of your offer should be X% below
the seller's asking price or Y% less than you're really willing to pay.
In practice, the offer depends on the basic laws of supply and demand:
If many buyers are competing for homes, then sellers will likely get
full-price offers and sometimes even more. If demand is weak, then
offers below the asking price may be in order.
How do you make an offer?
The process of making offers varies around the country. In a
typical situation, you will complete an offer that the Realtor will
present to the owner and the owner's representative. The owner, in
turn, may accept the offer, reject it or make a counter-offer.
Since counter-offers are common (any change in an offer can be
considered a "counter-offer"), it's important for buyers to remain in
close contact with Realtor during the negotiation process so that any
proposed changes can be quickly reviewed.
How many inspections?
A number of inspections are common in residential realty transactions.
They include checks for termites, surveys to determine boundaries,
appraisals to determine value for lenders, title reviews and structural
Structural inspections are particularly important. During these
examinations, an inspector comes to the property to determine if there
are material physical defects and whether expensive repairs and
replacements are likely to be required in the next few years. Such
inspections for a single-family home often require two or three hours,
and buyers should attend. This is an opportunity to examine the
property's mechanics and structure, ask questions and learn far more
about the property than is possible with an informal walk-through.
8. Get Insurance
No one would drive a car without insurance, so it figures that no homeowner should be without insurance.
The essential idea behind various forms of real estate insurance is to
protect owners in the event of catastrophe. If something goes wrong,
insurance can be the bargain of a lifetime.
What kind and how much?
There are various forms of insurance associated with home ownership, including these major types:
Title insurance: Purchased with a one-time fee at closing,
title insurance protects owners in the event that title to the property
is found to be invalid.Coverage includes "lenders" policies, which
protect buyers up to the mortgage value of the property, and "owners"
coverage, which protects owners up to the purchase price. In other
words, "owners" coverage protects both the mortgage amount and the
value of the down payment.
Homeowners' insurance provides fire, theft and liability coverage.
Homeowners' policies are required by lenders and often cover a
surprising number of items, including in some cases such property as
wedding rings, furniture and home office equipment.
Flood insurance: Generally required in high-risk flood-prone
areas, this insurance is issued by the federal government and provides
as much as $250,000 in coverage for a single-family home plus $100,000
for contents. Local Realtor can explain which locations require such
With new homes, buyers want assurance that if something goes wrong
after completion the builder will be there to make repairs. But what if
the builder refuses to do the work or goes out of business?
Home warranties bought from third parties by home builders are
generally designed to provide several forms of protection: workmanship
for the first year, mechanical problems such as plumbing and wiring for
the first two years, and structural defects for up to 10 years.
Home warranties for existing homes are typically one-year service
agreements purchased by sellers. In the event of a covered defect or
breakdown, the warranty firm will step in and make the repair or cover
Insurance policies and warranties have limitations and individual
programs have different levels of coverage, deductibles and costs. For
details, speak with REALTORS®, insurance brokers and home builders.
Go to any local courthouse and you can find property records
detailing real estate ownership in your community -- sometimes records
that date back hundreds of years.
These records are important because they provide today's owners with
proof that they have good, marketable and insurable title to the
property they are selling. Equally important, such records enable
buyers to provide proof of ownership when they sell.
The closing process, which in different parts of the country is also
known as "settlement" or "escrow," is increasingly computerized and
automated. In many cases, buyers and sellers don't need to attend a
specific event; signed paperwork can be sent to the closing agent via
In practice, closings bring together a variety of parties who are part
of the "transaction" process. For example, while the history of
property ownership has been checked, it's possible that the records
contain errors, unrecorded claims or flaws in the review itself, thus
title insurance is necessary. At closing, transfer taxes must be paid
and other claims must also be settled (including closing costs, legal
fees and adjustments). In most transactions, the closing agent also
completes the paperwork needed to record the loan.
What to expect.
Settlement is a brief process where all of the necessary paperwork
needed to complete the transaction is signed. Closing is typically
held in an office setting, sometimes with both buyer and seller at the
same table, sometimes with each party completing their papers
Whatever the case, the result is that title to the property is
transferred from seller to buyer. The buyer receives the keys and the
seller receives payment for the home. From the amount credited to the
seller, the closing agent subtracts money to pay off the existing
mortgage and other transaction costs. Deeds, loan papers, and other
documents are prepared, signed and filed with local property record
What you need to do.
One of the best parts of settlement is that buyers and sellers need to do very little.
Before closing, buyers typically have a final opportunity to walk
through the property to assure that its condition has not materially
changed since the sale agreement was signed. At closing itself, all
papers have been prepared by closing agents, title companies, lenders
and lawyers. This paperwork reflects the sale agreement and allows all
parties to the transaction to verify their interests. For instance,
buyers get the title to the property, lenders have their loans recorded
in the public records and state governments collect their transfer
10. What's Next?
You've done it. You've looked at properties, made an offer,
obtained financing and gone to closing. The home is yours. Is there
any more to the home-buying process?
Whether you're a first-time buyer or a repeat buyer, there are several more steps you'll want to take.
Those papers you received at settlement are extremely valuable, so
hold on to them! In the short-term they can help establish tax
deductions for the year in which the property was purchased. In the
future, such papers will be important for tax purposes when the
property is sold, and in some cases, for calculating estate taxes.
Also at closing, determine the status of the utilities required by the
home, items such as water, sewage, gas, electric and oil service. You
want utility bills to be paid in full by owners as of closing and you
also want services transferred to your name for billing. Usually such
transfers can be done without turning off utilities. Realtor can
provide contact numbers and related information.
About two weeks after closing, contact your local property records
office and confirm that your deed has been officially recorded. Such
records are public notices that show your interest in the property.
It is generally understood that sellers will leave homes "broom
clean" when moving out. This expression does not mean "vacuumed" or
"spotless." Broom clean makes sense because it means the house is ready
to be painted and cleaned.
Your home, your money
For most owners a home is the largest single asset they hold, so it makes sense to protect that asset.
Many owners make a photo or video record of the home and their
possessions for insurance purposes and then keep the records in a
safety deposit box. Your insurance provider can recommend what to
photograph and how to secure it.
You want to maintain fire, theft and liability insurance. As the value
of your property increases such coverage should also rise. Again, speak
with your insurance professional for details.
Lastly, enjoy your home. Owning real estate involves contracts, loans,
and taxes, but ultimately what's most important is that homeownership
should be a wonderful experience.