The Homebuying Process
My Homebuyer's Guide to the Real Estate Transaction
I have developed this informational booklet to answer some of the many questions I am sure you have, and to help avoid surprises during the purchase of your new home. The booklet contains explanations of real estate procedures, and provides you with what I hope are some useful tips. During any purchase or sale, a great deal of information is exchanged in a very short time, and this package will enable you to review some important details at your leisure.
I will be in regular contact with you during the entire process, and will work very hard to keep your transaction as stress free as possible. I believe that finding a home should be a happy and fun process for everyone. Please don't hesitate to ask questions.Agency Law Mike's Buyer-Client Services Finding the Right Home Loan Application Appraisal & Home Inspections Closing & Settlement
Agency Law - Who Represents Whom?**
In a routine real estate transaction, real estate agents normally represent the party who has signed an agreement with them to market their home, i.e. the Seller. Realtors have a responsibility to you to be honest and ethical in presenting property to you and are required to divulge all KNOWN facts and defects about a property in order for you to make an intelligent buying decision. However, at no time can they give you any information detrimental to the seller, and they must pass on to the seller any information they have about you, such as your willingness to pay more for a property than your offer indicates. You may, however, enter into a written agreement with the Agent to have him or her act on your behalf. This is called Buyer Agency or buyer representation.
In my business, I choose to offer Buyer Representation, and will specifically represent you, as my client, in the buying process, if you wish. As a member of the Real Estate Buyer's Agent Council (REBAC), I am skilled in providing excellent representation for buyers. The law requires that we have a written agreement, stating our mutual obligations. Under such an agreement, we have a legal duty to divulge to all parties that we are working under a "buyer agency" agreement. Under such an agreement, your interests will be represented. Costs are typically paid from the seller's funds at closing.
**Alabama Real Estate Law requires that both buyers and sellers of real estate sign an Agency Disclosure Form.
My Buyer-Client Services
As Your Buyer's Agent, I Will:
- Meet with buyer to determine specific housing needs and budget.
- Provide mortgage qualification assistance to facilitate the mortgage application process.
- Conduct an ongoing search of housing availability, through the Multiple Listing Service.
- Contact "For Sale By Owners" and builders as appropriate on your behalf.
- Schedule appointments and accompany buyer on all property showings.
- Complete a professional comparative market analysis on any home selected for purchase, providing factual data on recent comparable sales to assist the buyer in the offer and negotiation process.
- Assist buyer in structuring a Purchase Offer and represent buyer's interests in all negotiations with the seller, maintaining absolute confidentiality.
- Schedule appointments to provide access to the property for inspectors, appraisers, repairmen, etc.
- Manage the closing process, from contract to closing to ensure that all necessary documentation is completed and available before closing date.
- Provide a free Buyer's Guide.
- Provide a free Relocation Package if required.
- Follow client's instructions regarding any transaction, providing such instructions are legal and ethical, and maintain client's confidentiality.
- Disclose all known facts that could affect the transaction.
- Provide client with copies of all documents.
- Accompany buyer to the closing.
Traditional Customer Services
If you elect not to have your own representation, and opt for the traditional service, wherein your Realtor represents the Sellers, there are several services that I may be able to provide. The following list outlines a few of those services:
- Consult to determine your housing needs
- Suggest lenders who have performed well in the past
- Provide access to all homes currently available for sale through local brokers
- Show properties
- Estimate closing costs and monthly payments
- Make appointments and schedule conferences
- Clarify buyer's needs vs. wants, and affordability
- Explain settlement procedures
- Schedule property inspections
- Transmit offer and act as liaison between the buyer and the seller
- Disclose all known facts regarding the condition of the property (as outlined in the property condition disclosure from the owner)
- Monitor contract deadlines to ensure a trouble-free closing
- Accompany you to the closing
As you can see, there are many services provided by Realtors for Buyers. However, unless you are specifically represented under a Buyer Agency Agreement, we cannot, under law, disclose anything of a confidential nature about the seller, i.e., what is his motivation for moving, what will he "really take" for his property, etc., and in all traditional negotiations, our fiduciary duties lie in obtaining the best possible terms for our Principal, the Seller.
Agents are also required to pass on to the seller anything we learn about the buyer's position, for example, his willingness to pay more for the property than his offer suggests. It is, therefore, important that you realize that you should be careful what you divulge to any agent who is not representing you as a client.
Should You Buy a Home Now?
Buyers frequently ask the question, "Should I buy a home?" - or more specifically, "Should I buy a home today?" I have always felt that the answer to that question is almost always an unqualified "Yes!" The reasons are relatively simple.
First of all, the price of new and resale homes has steadily increased ever since the mid-1940s. The local markets may vary - going up and down with the economy, but the general trend has consistently been rising values. Delaying the purchase of a home simply allows prices to go higher.
The second item that concerns the home-buying consumer is interest rates. We are still enjoying reasonable interest rates, so any delay could mean paying significantly higher interest rates in the not too distant future.
Do You Want to Gamble with Interest Rates?
1/4% = adds $0.20 per thousand per month on a 30-year mortgage
1% = adds $0.80
Therefore, a 2% change in interest rates equals $1.60 for every $1,000 borrowed!
Time is Money! Waiting to buy could cost you more money than it's worth.
How Do I Find the Right Home?
Some people feel that going sifting through the Internet and finding an ad that appeals to them is a good way to find a house. However, there is a better way - and that is to sit down with your Real Estate Professional, and discuss your price range, desires, preferences, needed amenities, and everything you really want and need in your next home. You will then have access to the entire Multiple List System, which covers all the properties listed for sale. You can leisurely select the homes that you would like to see. This consultation is the first step in your search for a home, and one I always perform before we look at a single house. This helps me to pick just the right homes to show you. By setting up appointments, you can see these homes in a short period of time and have a better idea of what is right for you. Jot down notes as you go from one home to the next, and feel free to discuss with me all of your likes and dislikes.
What Price Home Can I Afford?
Most people use financing of one type or another to buy a house, since few of us can afford to pay for a home in cash. The amount you can afford will depend upon how much cash you have for your down payment, plus the amount of loan you can afford according to your income and debts. Before viewing any homes, I will set up an appointment with a lender for you, so that you have an up-to-the-minute estimate on all your costs, and your qualification amount. Many lenders can pre-approve your loan before you go shopping for a house. This puts you in a very strong position when negotiating with a seller.
We've Found Our Dream House. What Now?
Once you've found the right home, you will want to review detailed information about the Purchase Agreement and decide what your offer will be. I will review the contract with you, and together with your lender will provide you with an estimate of your projected costs, based upon the offer you make. If the house was built before 1978, Federal law states that you must also receive a Lead Paint disclosure, and explanatory booklet.
How do you make an offer to purchase? Once a specific property has been selected, in order to buy the property, several things must be satisfied: the offer must be in writing, there must be mutual agreement between all parties, and there must be something of value, or "consideration," in order the make the offer enforceable. In Alabama, the consideration typically takes the form of a cash security deposit or "earnest money check."
As your Real Estate Consultant, I will complete the Purchase Agreement with you. I will explain the Purchase Agreement to you, and the various contract clauses that are placed within a contract for your protection. I will also provide you with market data in order for you to make a knowledgeable decision. If I am representing you as your Buyer Agent, I will be glad to give you an opinion as to whether I believe the home is priced in line with the current market, and to help you formulate your offer in terms that are beneficial to you.
When you have signed the Agreement to Purchase, it will be presented to the seller, either in person, or through the Listing Broker. Following presentation, several things may occur:
- Once the contract has been presented to the seller, it may be accepted unconditionally. Congratulations, you have just purchased a home, or -
- The contract may be accepted in part by the seller, but other portions of the contract altered. This is called a "counter offer." You are not obligated to the terms of the counter offer. At that point you have the option of accepting, countering, or rejecting the counter offer, or -
- The contract may simply be rejected.
Each Agreement to Purchase has a definite expiration time and date. In the event the seller takes no action prior to the expiration time/date, the contract is considered to be rejected. Please remember that any change to the contract constitutes a brand-new offer that may or may not be rejected. I'll be glad to discuss this further with you.
If either party required to sign the Purchase Agreement and attend the Act of Sale is unavailable, I will arrange with an attorney to have a Power of Attorney drafted in order to complete the sale. POWER OF ATTORNEY DOCUMENTS ORIGINATED IN OTHER STATES MAY NOT BE SUFFICIENT. CHECK WITH YOUR ATTORNEY.
At the time of writing the contract, you should be prepared to provide us with a check for the agreed upon deposit. Typically, purchasers will pay a cash deposit to demonstrate their good faith. This may be in the form of a personal check or cash. The deposit will usually be held by the Selling Broker in his Escrow Account, and will be credited to you at the closing.
Unless you are paying all cash and the sale does not involve a mortgage, you will be required to make official loan application, usually within five working days of the contract acceptance. Some lenders will allow you to make loan application before you find your house, and will sometimes approve your loan application in advance. Pre-approved loans can be a great advantage when negotiating your offer, as the seller will feel very comfortable accepting your offer if he knows that your loan is already approved.
The loan processor will usually require a great deal of personal, financial, and employment data. You should be prepared to provide two recent pay stubs, past two years' tax returns, bank account numbers, approximate account balances, credit card numbers, creditors' addresses, and personal references.
If you wish, I will assist you in finding the best rates and terms. You are not obligated to use any suggested mortgage company. However, I will, if you wish, research the market and make recommendations based on the best terms and service. The choice, however, remains yours.
In addition to providing your lender with all the information required, you should be prepared to pay for the appraisal fee and credit report when you make loan application. As costs change over time, ask for current fees. Currently, the amount is approximately $450.
For purchasers who are self-employed, the lender will require that you furnish a great deal of documentation to support your income history. It is recommended that you contact your lender immediately to obtain a list of current requirements. It is certainly wise to do this before you begin your search for a new home.
Depending on the activity in the real estate market, loan approval usually takes between 7 and 30 days. Your processor will provide you with an estimate of costs and a loan commitment for up to 60 days. This commitment will lock you into current loan terms.
In real estate matters, TIME IS TRULY OF THE ESSENCE! In order to ensure a smooth sale, loan application must be completed in a timely manner, and all dates on the purchase agreement strictly adhered to. As the lender verifies the information you have provided, he will sometimes ask you for more information. Please make sure that you provide all additional information promptly. This will help in making the loan process as speedy as possible.
When a mortgage loan is involved in a purchase, your lender will usually require a survey of the property. A survey is simply a one-dimensional drawing as if you were looking down onto the property from above. A survey provides:
- Lot dimensions
- The position of the home on the property, where applicable
- Location of out buildings, fences, pools, etc.
- Any encroachments
- Flood zone
It is strongly recommended that a survey be obtained on all purchases of real estate, whether or not one is required by the lender. A survey can help eliminate many boundary disputes and ensures that you are purchasing the correct property.
Even in cash sales, purchasers are encouraged to obtain a current survey, simply to protect themselves. Costs vary according to the property, but a typical residential survey is in the $300 to $450 range.
An appraisal is ordered on almost all real estate sales covered by a mortgage. The mortgage company orders an appraisal upon initial loan application.
The cost of an appraisal is normally borne by the purchaser and is customarily paid for at the time you make loan application. The cost is usually around $350 to $450. Appraisals normally take one to two weeks to complete. During very active market periods, the time it takes for an appraisal can vary significantly.
If an appraisal is not required, should you get one anyway? An appraisal is one person's opinion of the value of a particular property on a specific date. An appraisal gives some assurance to the purchaser that the price he is paying represents a fair market value, and appraisals are always recommended.
When purchasing real estate with improvements (dwellings, barns, pools, etc.) it is incumbent upon the purchaser to thoroughly inspect the property. Most Purchase Agreements allow for inspections by the purchaser, and/or his representatives. The cost is normally borne by the purchaser. A basic professional home inspection usually costs in the $300 to $450 range, depending on the property. Soil testing, radon testing, lead paint testing, and other specialized tests will cost more.
The Agreement usually specifies that inspections be completed within 10 days of contract acceptance, and items of concern to you should be addressed in writing during this time. Inspections may include, but are not limited to, home inspection, roof, plumbing and electrical systems, structural, square footage, pool inspection, well and septic system inspections, etc. The Purchase Agreement requires the property to be inspected for termites. The Seller will be required to furnish a termite letter at closing from a licensed termite inspection company.
Purchase Agreements may specify that all systems and appliances are to be in working order on the date of the act of sale. In that case, it is incumbent upon the purchaser to conduct an appliance and systems check approximately five days prior to closing and to ensure everything is as it was when the Purchase Agreement was signed. The purchaser will be required to sign a statement that everything was checked and was in working order, or the exceptions so noted.
Please note that the agreed price for the property will be based on its existing condition and the seller is not obligated to make any repairs discovered by an inspection, unless so specified in the Purchase Agreement. The inspection should be for the purpose of determining the physical condition of the property so that the buyer can make a knowledgeable decision to purchase, and not for the purpose of establishing a list of cosmetic repairs for the seller to perform. An inspection report should not be considered an opportunity to re-negotiate the contract unless a major defect is discovered. You may then have a valid reason to ask for repairs or for release from the contract.
I STRONGLY RECOMMEND INSPECTIONS FOR YOUR OWN PROTECTION.
Prior to closing, you MUST be able to show proof to your lender that you have obtained adequate insurance on a property with improvements. There are so many different types of insurance policies available that it would be impossible to cover them all in any detail. It does pay, however, to shop around to obtain the best possible price and terms. You may wish to investigate the difference between simple coverage and actual replacement cost coverage. Replacement cost coverage costs a little more, but the coverage escalates with the value of the home. This could be a significant advantage in the future. Homeowner's policies do not usually cover damage caused by rising water, and your lender may also require that you carry flood insurance on the property. If flood insurance is not required by the lender, it is still wise to purchase it, and it is relatively inexpensive. As we are located in an area that may be affected by tropical weather systems, it is a prudent measure. Do not wait until the last minute to begin researching your home insurance options.
At the closing table, you will notice that, if there is a mortgage involved in the sale of the property, you will probably have to split the cost of an "owner's title insurance policy." This is a cost that is normally split between the purchaser and seller and covers the lender and the purchaser in the event there is a title problem in the future.
Reasons to Buy Owner's Title Insurance
- Conveyances altered before recording
- Instruments executed under fabricated or expired Power of Attorney
- Fraud, duress, or coercion in securing essential signatures
- Deeds delivered after death of grantor or grantee, or without consent of grantor
- Invalid, suppressed, undisclosed, and erroneous interpretation of wills
- Undisclosed or missing heirs
- Deeds by persons of unsound mind
- Deeds by minors
- Deeds by persons supposedly single but secretly married
- Birth or adoption of children after date of will
- Mistakes in recording legal documents
- False representations in appointment of Guardians and Administrators
- Undisclosed community property rights
- Liens for unpaid estate, inheritance, income, and gift taxes
- Destruction or mistakes of records that may later appear
- False or misleading statement of fact
- Tax titles invalid because of irregularity of proceedings
- Reversals of court decisions
- Defective foreclosures of mortgages
- Old unsettled estates
- Errors by administrators and executors
- Insufficient evidence to establish title by inheritance
- Falsification of records
- Illegal acts of trustees
These are just some of the problems that may arise after a sale. Of course, the vast majority of sales are completely unencumbered by any defect in the title, but the relatively low cost of owner's insurance can bring much needed peace of mind.
Taxes and Homestead Exemption
Madison County has a Homestead Exemption that is applied to all primary residences. As you are probably aware, homes are assessed for tax purposes. Once your Homestead Exemption is applied for, your taxes will be 10% of the assessed value x the millage rate. Application for the exemption may be made at the Assessor's Office. Your closing attorney will explain the application process in more detail.
REMEMBER, FAILURE TO APPLY FOR HOMESTEAD EXEMPTION COULD COST YOU A GREAT DEAL OF MONEY!
This remains an area where many homeowners are confused. When paying rent, the tenant pays in advance of actually renting the property. When you close on the home you are buying, the first full payment does not become payable until some 30 to 45 days later. However, at closing, you will pay interest from the date of closing until the end of the month in which the property is closed. You then "miss a month" and your first full payment becomes due on the first of the subsequent month. The confusion exists primarily when the property is sold. Simply remember that your payment is after the fact, rather than before the fact. For example, a mortgage payment which is due on the first of August pays the interest for July.
The term "closing costs" covers a multitude of fees that are involved in any real estate transaction. The lender will have fees that you will be responsible for paying, and the closing attorney will also have fees for researching the title, preparing paperwork, etc. A simple rule of thumb to follow is to ask who is responsible for which cost. The following are some items that are normally considered purchaser’s closing costs:
- Purchaser's attorney fees
- Title search or abstract
- Recording fees
- Lender's title insurance
- Purchaser's title insurance
- Document preparation
The following items are also included in the term "closing costs" and are fees involved in obtaining your loan:
- Discount points
- Origination fee
- VA funding fee (if you are using a VA loan)
- Underwriting or processing fee
- Credit report
- Flood certification fee
What are "pre-paids"? This is a description that simply means TAXES AND INSURANCE. In order to purchase a home, a buyer must have sufficient cash available, in addition to his down payment and closing costs, to pay for approximately 15 months of homeowner's insurance and 3 months of taxes. There are few, if any, loan companies that will permit a seller to pay for a purchaser's pre-paid items.
Home Warranty Plans
When investing in a home, be it new or previously owned, it is always a good idea to have some type of warranty placed on it. There are several Homeowners Warranty Plans available. They are similar, in that they all cover mechanical items only and not structural items. Typically, plans cover air conditioning units, heating units, electrical and plumbing systems, built-in appliances, etc. Some restrictions apply to each plan, and each plan has some form of deductible.
Sometimes, sellers offer a Home Warranty Plan with the home, in which case the seller pays for it. However, in the event a seller does not provide a home warranty, the purchaser can buy one. The warranty plan normally runs for one year from the date of purchase. Some plans are renewable. Costs vary, but typically are in the $350 to $450 range. You may purchase additional coverage for such things as swimming pools and spas.
Please understand, machines being what they are, an appliance or air-conditioning unit may work perfectly one day and fail the next. There is usually no warning when a machine is about to fail, and it would be most difficult to prove that a seller had prior knowledge that something was defective. The warranty plans have saved homeowners millions of dollars. Imagine, should an air-conditioning compressor fail, the repair could cost hundreds of dollars to repair or replace. For the simple payment of a small deductible, the compressor may be repaired or replaced.
HOME WARRANTY PLANS ARE WORTH THEIR WEIGHT IN GOLD!
What Happens at the Closing or Settlement?
This is the time when the buyers, sellers, real estate agents, and the lender's representative meet to sign the final papers to transfer the title from one owner to the next. At this time, the buyer brings a check for the cash down payment and closing expenses, the bank brings the check for the amount of the loan, and the seller brings the keys to the house. The seller signs the title (or deed) over to the buyer. Other documents relative to Federal law are signed by both the buyers and sellers, and a settlement sheet is drawn up so that all parties understand their costs. If a loan is involved, there will be several papers relating to the loan to be signed by the purchasers. All costs will be shown on the Settlement Statement, often referred to as the HUD form. This form is furnished to give you a written statement of your actual settlement costs. If possible, I will review the Settlement Statement and closing procedures with you prior to closing. Typically, when you leave the table, you will have the keys to the house, you will have signed the mortgage, and you can take possession of your new home!
WHO PAYS FOR WHAT? Many of these items are negotiable and one party or another may pay them. Most of these items are negotiable. It is common in our area that a seller will pay all or some of the purchaser's closing cost. This can be negotiated as part of the contract.
|VA Funding Fee *||X|
|Loan Application Fee||Negotiable|
|Lender's Title Insurance||Negotiable|
|Homeowners' Warranty Plan||Negotiable|
|Real Estate Commission||X|
|Tax Service Fee ***||Negotiable|
* In VA sales, the VA Funding Fee can be paid by the purchaser, paid by the seller if he agrees, or the purchaser can include the fee in the mortgage amount.
** In FHA and VA sales, the underwriting fee must be paid by the seller.
*** In FHA and VA sales, the tax service fee must be paid for by the seller.
Reminder: This table represents costs NORMALLY paid by either party. Almost anything is possible, provided all parties agree, and it is within the law and complies with the mortgage company's underwriting guidelines.
Fair Housing and the Law
It is very simple. RE/MAX Alliance, and their associates, do not discriminate in any way involving the listing and/or sale of real estate. Prospective purchasers who are financially qualified to look at properties will be shown properties regardless of race, color, religion, sex, age, familial status, handicap, etc.
I hope the information in this booklet has been helpful to you. Buying a home is an exciting and often scary experience. I will work hard to make sure that you not only find the home you want, but also that you have an enjoyable time.
I have covered a great deal of material in this booklet. If you have any questions on any of the things covered, or any other real estate matters, please don't hesitate to call me at 256-508-0211.
The information contained in this document was obtained from sources deemed to be reliable. It is believed to be accurate, but is not guaranteed. The buyer should carefully verify all facts and figures. Information contained herein is not intended nor should it be construed as legal advice.