by Mindy Jensen
Real estate, whether a personal residence or an investment, is one of the largest purchases you will ever make. Of course you have heard this before — this is a HUGE cliche that is brought up every time anyone mentions buying a house. But it’s also true.
And if you’re buying a house to live in, chances are good you’re not going to be doing this frequently. The less often you do something, the less familiar you are with all the steps involved — and trust me, there are a LOT of steps involved in buying a house. With something as important as buying a house, you need to know what you are doing — or at least be able to understand the basic steps.
The basic steps are the same if you are buying a house as an investment with the exception of running your numbers to see what sort of return a property will give you.
Of course, the one thing that holds true for all real estate transactions is that no two are alike. If you aren’t getting a mortgage, don’t want an inspection contingency or don’t need an appraisal, these steps won’t all apply to you.
These are the things that are most confusing to newer buyers, but also happen to be really important — and can make the difference between successful buying and losing your shirt!
Buying a House: How to Prepare, What to Expect & Key Terms to Know
How to Find a Real Estate Agent
If this is your first time buying a house, you’ll want an agent to hold your hand through the process. I think new real estate agents have a lot to offer, but if they haven’t been through at least 10 real estate closings, you should choose another agent who has. You want to be able to have your questions answered with facts quickly, rather than guesswork or having to wait for them to find the answer.
A great way to find an agent is through referrals. Ask your friends, family or neighbors who they used, and if they would recommend them or use them again.
Once you have a few recommendations, start interviewing them. Ask them what percentage of their clients are first-time or newer homebuyers. Ask them how many deals they have closed this year, and how long they have been licensed. Ask them what the typical price-point is for their clients — it doesn’t help you very much if you’re looking at $200,000 homes and they typically show $500,000 properties.
If you’re buying an investment property, referrals are still the way to go, just don’t get them from friends and family unless they are investors themselves. Start at a local real estate investors meetup group, and talk to other investors in your area.
In the process of buying a house, while you are searching for an agent that fits your needs, you should also be searching for a loan that fits your needs. Every lender you talk to will have a different rate and different closing costs. While some things will stay the same, such as loan amount and property taxes, other charges vary wildly.
For my last loan, I had closing cost estimates from two different lenders that varied by $3,000. I’d rather have that in my pocket than theirs.
Talk to as many loan officers as you can. Get a quote for both their rate and their closing costs, so you can compare apples to apples. Go through the closing costs with a fine tooth comb so you can see if there are loan origination fees or other fees that some lenders charge and others do not.
Once you decide who has the best rate combined with the best closing fees, ask them for a pre-approval letter. They will need to run your credit report and look at your last two years of tax returns to be able to provide the pre-approval letter. The letter will state the purchase price/loan amount you are approved up to, and the estimated loan rate.
I have a long-term relationship with my lender and get a pre-approval letter that is tailored to each individual offer I make, so I don’t tip my hand. Why tell the seller you are approved up to $350,000, when you are making an offer of $310,000?
Making an Offer on a House
For the purposes of this section, we’re going to assume you’re at the point in buying a house that you have already found a property. Once you have found the property you want to make an offer on, the real fun begins. You, of course, wish to pay the lowest price possible. The seller, on the other hand, wants the most money for it.
Your agent should run a report to give you an idea of what comparable properties have sold for in the past 1-3 months in a hotter real estate market and 6 months or even longer in a cooler market.
You see, it doesn’t really matter what price you offer when buying a house — if the house won’t appraise out, your lender won’t give you a loan. And appraisals are based on previous sales.
You don’t want to make a ridiculously high offer only to have the contract fall through when you can’t get a loan for that price.
As your agent fills out your offer, you will be asked what you wish to pay for regarding closing costs. There are items that are traditionally paid for by the seller and items that are traditionally paid by the buyer. Just for fun, there are also items that are traditionally split between the two parties.
If you are buying a house in a hot market, competition means you’ll have to make your offer as strong as it can possibly be.
This means not only offering top dollar, but also offering to pay some of the costs normally associated with the seller or splitting them down the middle. Using a larger down payment will increase the chance of your mortgage going through, which makes you a more solid choice for the seller.
Another consideration is the type of loan you are planning on getting. Conventional loans are less hassle than any other type of loan.
Real-life example: I have one client who received two offers on their property. The first offer was at list price, which is awesome. That buyer had elected to pay only the closing costs that are traditionally paid for by the buyer and was planning on getting an FHA with 5% down.
The other offer was over asking price, conventional mortgage with 12% down, and in addition to paying all traditional buyers costs, they offered to either pay the seller’s costs outright or split them down the middle. But he also threw in some bonuses…
We are located in a hot, hot market for buying a house. The sellers are now tasked with finding a new place to live. The first day I was going to show them houses, I set up five showings in the morning and was called back by midday for three of the properties, with messages that they had received multiple offers and were reviewing them to decide which one they were going to accept.
The buyer knew the market was tight and offered to delay closing or rent back until we found a suitable property, which eased our concerns.
The buyer also wrote a letter to the sellers, extolling the virtues of the property and reiterating his interest. Both of these small considerations went a long way to the accepting of this offer — and would have swayed them his way if the offers would have been closer.
Are you trying to buy a house in a hot market? Make your offer stand out by writing a letter to the sellers, introducing yourself and your situation. There is an art to writing these letters, and first and foremost you want to be honest. Don’t tell them how much you love their house if you plan to tear it down.
While you are in the house, take note of little things that may give you some insight into the people who live there. Do you see a bunch of bikes in the garage? Mention how you like the house because it’s close to bike trails. Is the kitchen newly remodeled? Make sure to note specific things you like about it, i.e., “I love the blue tile you chose for the kitchen backsplash. Blue is my favorite color!”
“Title” shows up in several different places on your contract. How you wish to take title, title deadline, off-record title deadline, title resolution, etc. They can get confusing.
“Taking title” means how you want the title to be categorized: Joint Tenant, Tenants in Common, or Severalty. Choosing the right way to take title can have huge implications on your heirs and estate should you die before you sell the property, so know what you are choosing.
If you are buying a house with more than one person, you should decide if you want rights of survivorship, meaning you wish your interest in the property be split equally among the rest of the owners. Joint Tenancy is the only way to take title with rights of survivorship, and in many states, is the primary way for married couples to take title. Some states require a signed form if a married couple does not wish to take title in this manner.
If you want to be able to pass along the title through your will to your heirs after you die, you’ll take title as Tenants in Common. This is more commonly done for a partnership.
If you are buying a house by yourself with no one else on the title, you are taking title in Severalty, meaning you are severed from anyone else.
I could write volumes about the various nuances involving in taking title and the rules associated with them. For our purposes here, these are the basics.
After your offer has been written and signed by you, it is sent to the seller, who will either accept, counter, or reject the offer. For this article, we’re assuming the seller has accepted your offer.
The first thing up is the inspection. Unless you are a professional home inspector while buying a house, you should hire one, and hire a good one. Referrals come in handy here as well. At a recent office meeting, I asked some of the agents for a home inspector referral. Many of the agents in my office had the same recommendation. I work with a lot of agents with a ton of experience. Having a recommendation like that was huge, and I no longer use anyone else.
Try to be present for the inspection so you can ask questions of the inspector or have him clarify things on the spot. What might sound like a big issue if you are reading it from a report may in fact be a tiny thing that is easily fixed. On the flip side, you could gloss over something that is potentially huge because it didn’t sound like a big deal.
The home inspection takes several hours and covers the entire house. The inspector will test the major systems, like the furnace and AC. He looks at the foundation, the attic, and the pipes if visible. He tests the outlets and switches to make sure they work.
He does not certify that the home will be perfect. The purpose of the inspection is to get a feeling for general state of the home and the components that aren’t readily evident to regular people. The inspection is not intended to be a way to negotiate large discounts for minute issues.
Once your inspection is over, your inspector will provide you with a report of everything he found. You will have a few days to go over the report and decide what, if anything, you wish to request compensation or repairs from the seller.
I don’t recommend having the seller fix anything — I always ask for concessions. The seller is trying to leave with as much money as possible, and may choose inferior materials or the cheapest contractor they can find. Another way around this is to request XYZ be repaired by ABC Company at the seller’s expense. This way, you get to choose the company and have the work done before you move it, and the seller pays the entire bill.
Something to consider is the amount of issues discovered during the inspection. If you are buying a house with the intention of living in it, and the home has aluminum wiring — which is a huge fire hazard — or just has significantly more issues than you were expecting, you may wish to just walk away.
Inspection resolution is the deadline by which you and the seller must come to an agreement regarding any issues that have come up during the inspection. Once this deadline passes, you can no longer use inspection issues to cancel the contract and receive your earnest money back.
The appraisal is typically scheduled after the home inspection has been resolved and toward the end of the loan process. There is a fee involved, and you don’t want to pay for an appraisal before you know the property’s condition.
The lender requires an appraisal to make sure the property is worth what you are paying for it. Appraisals are based on what comparable properties in the area have sold for recently. Following the housing downturn of 2008, appraisal guidelines have become much more strict.
Not every property will appraise for the contracted price. If the appraisal comes back lower than expected, the seller will have to decide if they want to reduce their price to the appraised price or cancel the contract. Things get dicier with FHA loans and FHA appraisals. An FHA appraisal will stay with the property for 120 days, which means if the seller tries to sell it again during this timeframe to a buyer using an FHA loan, the appraisal number won’t change.
As the buyer, if the property does not appraise, you can choose to walk away from the contract, even if the seller is willing to reduce the price.
While buying a house, if you are financing your purchase with a loan, the last deadline in your contract is the loan approval. Your lender will approve or deny your loan based on the information you have provided about your financial situation along with the information about the property. You are not typically surprised with a loan denial at the end of the process — as long as your situation has not changed dramatically since you first applied for your loan and were pre-approved.
October 2015 brought changes to the disclosure rules in the form of TRID, the TILA-RESPA Integrated Disclosure. This acronym made up of other acronyms can be summarized for our purposes today as the requirement that your loan estimate be provided or mailed within three days of application, and your closing disclosure be provided at least three business days before closing. Your closing date will be changed if you don’t receive the disclosure on time, with very few exceptions allowed.
On the long road of buying a house, this is the day you have been waiting for. Rest up your writing hand for a few days before closing because you are going to sign your name about 96,000 times on the day of closing. You initial pages, sign here, here, here and here, etc., etc., etc. It will take between two and three hours for your closer to explain all the documents and indicate where you sign them. Longer if you read every word of the documents.
Make sure you understand what you are signing, and ask questions if you don’t. Your closer should be able to answer just about any question you have.
You have just bought your first home. Welcome to homeownership! Now is the time to start thinking about how you want to personalize your home. You own it, so you don’t have to get your landlord’s approval to paint the walls or plant flowers or trees. (You may need HOA approval, so if you live in a neighborhood with a Home Owners Association, make sure you know the rules before you start making exterior changes.)
**Spoiler Alert** Something is going to break. Even if you have a brand-new build, something will eventually need to be replaced. The furnace will only last so long; the AC will only last so long. You’ll get sick of the wall colors, flooring, light fixtures, and faucets. You will want or need to put money into the home at some point. Start an emergency fund now, so when the time comes to make repairs or changes, you don’t feel the pinch, or worse, have to get a loan to pay for it.
Any questions about the process? Anything I missed about buying a house?
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