This week, Ralphy in New York is looking for some step-by-step guidance on buying a house. We've also launched a new round of video Answer Desk installments, which will appear every other Thursday for the next few months.
I want to know: what are the steps that I need to follow to buy a house?
-- Ralphy A., Bronx, N.Y.
It’s as easy as 1, 2, 3. And then 4 through 12. But here are - roughly - the steps you'll probably encounter.
Your brother-in-law may have different ideas about the order we've come up with. Your real estate agent or lawyer may add a few steps here or there. Through it all, keep in mind that while there are common milestones in most home sales, there’s no such thing as a “routine” real estate transaction. Each one usually has a few twists or turns – some little and some not so little. The basic steps are designed to protect buyer and seller from surprises that end up sending the deal badly off the rails.
You also need to take responsibility for keeping the process running smoothly. Even though you’re paying fees to an attorney and a mortgage broker – and the agent is getting a fee from the seller – these folks are working on multiple transactions and things sometime slip through the cracks. As you proceed, ask how long each step should take. You (usually) don’t need to badger these players to keep things moving. But if you haven’t heard back at various stages along your timeline, call and find out how things are going.
We’re also assuming you gotten past the “nibbling” stage – reading the paper, maybe going to an open house or two - and you’re ready to get serious. So treat these as general guidelines.
Step 1: Go shopping for a mortgage. It may seem backwards to shop for a mortgage before you shop for the house, but there are several reasons for doing this. First, you’ll find our how much you can borrow, which has a lot to do with how much house you can buy. Be careful not to let the lender you push you into a monthly payment you don’t feel comfortable with. There are no “rules” here – only you know how much you can comfortably handle. (For more on this, check this week's Video Answer Desk.)
It’s okay to be a little stretched, at least at first. Most people “grow into” their mortgage payments. But it’s also very easy to get in over your head. Stay away from “alternative” loans – like interest only mortgages. If the value of the house goes down after you buy it (not unreasonable in today’s market) you’ll end up owing the bank more than the house is worth.
Shopping for a mortgage will also help if you can get “pre-approved” for the amount you’d like to borrow. This means the lender has looked over your credit and financial statement and agreed to lend you the money. Sellers like pre-approved buyers because there’s less risk the deal won’t go through.
Step 2: Find a good lawyer. Ask around. Check them out on the Web. Make sure you at least talk to them on the phone and ask them how much they charge: this should be a fixed fee. Ask as many questions as you can, but you probably away won’t get more than 5-10 minutes. Lawyers bill by the hour, so they don’t like to give time for free. You’re looking for someone who is honest, direct and takes the time to explain things.
Step 3: Find out what houses are selling for in your area – and how much you’ll have to pay for what you’re looking. Look at selling prices – not asking prices. You can get these from a real estate agent or from your local paper or town/county government. When you find a house roughly like the one you want, as for three “comparables” – recent sales of houses that are roughly your target house.
Step 4: Come up with a down payment – usually 15-20 percent of that price. (This is the hard part.) You may not have to put that much down (see step 1) – some lenders will go for 10 percent or even zero. But these loans are riskier and usually more expensive. Besides, without a down payment, you don’t own even a piece of the house. The bank owns the whole thing.
Step 5: Find an agent. You don’t have to have an agent, but the real estate industry has pretty much locked up the supply of houses in the hands of agents. Ask around. Check on the Web for your state's real estate licensing board to make sure they're registered and don't have any complaints or suspensions.
You’re trying to find someone you can trust, so the first time you catch them stretching the truth, find another one. Real estate agents speak their own language: what you or I would call a broken down shack becomes a “fixer-upper with charm.” (At all times, remember that the agent on both sides of the transaction is paid by the seller.)
Step 6: Now find your new home. (Pick up at Step 3 were you left off.) When the time comes, don’t fall in love with the house. You may not get it. Based on the other houses you’ve seen and recent sales of comparables, make a reasonable offer. You don’t have to offer asking price, but if you "lowball," the seller may tell you take a hike. Find out, if you can, what the seller’s circumstances are. If they’ve been waiting for years and are holding out for the best price, you may not have much room to negotiate. On the other hand, if they’ve already bought another house, they may be more “flexible.” Tailor your offer accordingly.
Step 7: Wait for a reply. If you’ve bid lower than the asking price, expect a “counter offer” higher than your bid. This can go a few rounds until you settle on a price.
Step 8: Once your offer is accepted (congratulations, by the way), you may be asked to put down a “binder” (a deposit of, say, one percent) until the contract is signed; some states give you a grace period of a few days to change your mind and walk away form the deal. Or you may go straight to contract. This process varies from state to state, something you want to ask your lawyer about before you get started. Before signing a contract to buy the house, go to step 9.
Step 9: Call your lawyer. The seller’s lawyer will send the contract to your lawyer for review. Read it carefully yourself. There are “standard” clauses, but there’s no such thing as a “standard” real estate contract. (You may hear many people try to tell you this.) Understand what each clause says even if you don’t follow the language in it. This is why you want an attorney who takes the time to explain things. If he can’t or won’t, that’s not a good sign.
Go over the “contingencies” very carefully. The contract is not the final sale: it says “if all goes well” you agree to buy the sellers house at the closing. The “all goes well” conditions are the contingencies. What if you don’t get a mortgage? Without a contingency, the contract says you have to buy the house anyway. (This is a common contingency.) Others: The house has to conform to local zoning laws, the seller has to have clear title, there are no “major” problems like a faulty foundation, etc. These are negotiable: you can try to put whatever you like in the contract and the seller is free to cross them out before they sign.
The contract will also set the closing date, which is also negotiable. You need time to get your mortgage approved and close up your old home, the seller needs time pack up and to move.
Step 10: If it all checks out, sign the contract and hand over a big check – usually at least 10 percent of the cost of the house, depending on the terms of the mortgage. You maybe able to find a lender who will hand you a "no money down" loan but we don't recommend it. Because this is a riskier loan, lenders usually have to charge you a higher rate to cover that risk.
You give the down payment check to your lawyer - but they don't get to keep it. Your money goes into escrow – neither you nor the seller own it until the deal closes. If something goes wrong, you may or may not get it back. If the sale is canceled because one of your contingencies wasn’t met, you should get it back. If not, be prepared to lose all or part of your down payment – even if you don’t buy the house. You may have cost the seller another buyer by signing a contract and then not following through.
Step 11: Submit your mortgage application, along with an application fee. If possible, get the lenders to “lock” your rate until the closing date. By law, lenders are required to give you an estimate of all closing costs. All in, these can run anywhere from $1,000 to $10,000. Review all the fees before you sign the loan contract. Some common closing costs include: attorney fee, title insurance (in case the title proves faulty), appraisal fee (for the lender’s benefit, not yours - to make sure you’re not overpaying with their money), home inspection, partial property taxes (if you close in the middle of a month), courier fees, mortgage “points” (a percentage of the loan amount), government recording fee, transfer taxes.
After a week or so, call the mortgage company to confirm that they have all the pieces of paper they asked for in the application. If you’ve locked in a rate, you want to make sure the process isn’t delayed by some missing document; don’t expect them to call you if it’s not there.
Step 12: Show up at the closing and sign the papers. Don’t forget to bring lots of blank checks: you’ll usually have to write separate checks for each of the closing costs. If you’d like, you can also ask to hold the bank check for the purchase price before handing it over to the seller. It’s probably the biggest check you’ll hold in your life.
Congratulations! You’re now in debt beyond your wildest dreams! If after a few days or weeks you find yourself thinking you’ve made the biggest mistake of your life, don’t worry: it’s called “buyers remorse” and lots of new homeowners contract this disease. Give it time, watch your mortgage principal go down, figure out how much you're tax deduction is saving your and enjoy the freedom of not paying rent into someone else’s bank account.