From Contract to the Closing Table: The Process of Purchasing a Home - Part 1
One of the most common questions we get asked is what to expect when buying a home. The process itself is complicated and can seem quite daunting for someone new to the process or even for someone that hasn't done it for a long time. Lets break it down into the individual parts in order to make it easier to understand.
Where to Start?
These days the vast majority of buyers start by browsing homes online. Heck, that is why we offer an MLS feed on our own website. Buyers often start looking 2 years or more in advance of their purchase. This is helpful in learning what features you like or what you are comfortable spending. We typically recommend starting the actual process about 3 months before your desired move date. We have occasionally had clients that had to move within weeks of contacting us but that is a recipe for disaster. Once you are ready to get the process started you need to get in touch with 2 people: a mortgage professional and a REALTOR®. Both of these professionals will be instrumental to helping you achieve your goal.
A mortgage professional will work with you to get you approved for a mortgage. They will start by having you fill out a loan application. This will be followed by pulling your credit score. Different loan types have different requirements but you will typically need a 640 or higher. You will be asked to provide a couple months of bank statements and pay stubs along with the past 2 years of tax returns. Once you have done this, they will provide you with a pre-approval letter stating what you qualify for.
A REALTOR® will start by learning about your wants and desires. Along with your approval amount they will be able to guide you in your process of finding a home. They will show you homes and discuss the pricing compared to recent home sales. This process can take from days to weeks or even months while you find the right home.
I Found My Home, Now What?
Once you find the right home you and have your pre-approval letter you can make an offer. As mentioned previously, your REALTOR® will discuss pricing. Every situation is unique and the home might be overpriced, underpriced or priced perfectly. Realize that just because the house is overpriced doesn't mean the seller will be willing to accept a lower offer. Sometimes they owe to much and cannot afford to sell for less, but often they feel that it is worth what they want and will hold out in hopes someone will come along and pay their asking price. In cases where the house is underpriced, you might find a bidding war. This is been very common over the past decade and especially since the start of the COVID-19 pandemic.
In addition to price, there are other things to take into account when making an offer. One such thing is the closing date. 30 days is pretty typical, but the lender might need more time or they might be able to close sooner. Make sure they are part of this discussion so the deal isn't derailed later on in the process. In addition to the lender, the seller might have a preference on closing date. They might need the funds by a certain date in order to buy their next home. Or they might be paying two mortgages and want to hurry up and get this home paid off.
Closing costs are also part of the offer. Some costs are paid for by seller's and others are paid for by buyers. And some are negotiable. One such closing cost is Title Insurance. See our blog post outlining this important policy. The seller will take these into account when they review your offer.
Seller leaseback is when the buyer gives the seller a lease for a certain amount of time after closing. This can make your offer more attractive to the seller, especially in a multiple offer situation. Leasebacks can range from just a day or two up to several months. However, when a loan is involved there is a 59 day limit.
After making your offer comes one of the hardest part... waiting for a response. This can be hours or even days. In a multiple offer scenario, the sellers will usually set a deadline a couple days out in order to allow for all the potential buyers to have time to get their offers in. Once you get a response, you might have to continue negotiating. Every situation is unique. Some sellers accept the first offer and others will go back and forth several times before executing a contract. In multiple offer situations the seller might just accept their preferred offer, or they might negotiate the top couple offers. Again, there is no standard.
We Got the House!
Once you have an executed contract things get busy. The first thing you will need to do is write a check or send a wire. You will have to pay an earnest money deposit that usually equals 1% of the purchase price. This shows you are serious and puts some money on the line. That said, there are over 30 ways to get out of the contract and receive your earnest money back so you don't need to worry to much about it.
You also need to pay your option fee if this is part of your contract. This non-refundable fee pays the seller for the time they take the home off the market for you to go through the buying process. Typically you will combine the option fee and earnest into one payment to the title company. If you want to learn more about the option fee and what it is used for, see our article on the subject.
Next thing you need to do is schedule a home inspection. While not required, we highly highly recommend this. It is important to know if the home has any major defects before you buy it. It is important to understand that home inspectors are not perfect and there is no guarantee that they will find every issue. Specifically, they can't see inside walls or under ground. They will do their best to inspect everything they can, but I have occasionally seen where they miss things such as sewer blockages and mold inside walls. For certain major systems, if they see potential issues they will typically recommend having a contractor double check. Things such as roof, foundation, HVAC, and electrical.
There are other inspections you may choose to have. One important one is the wood destroying insect (WDI) inspection. More commonly referred to as a termite inspection, they will look for any infestation of termites or carpenter ants. They will also look for "conducive conditions". This means things that can cause an infestation in the future. WDI inspection is one inspection that might not be optional. If you are using a VA loan, you will be required to get one.
If the home as a pool and/or spa you will probably want to get that inspected. If the home was built prior to 1978 you might want to get it inspected for lead paint. There are specific tests for mold and asbestos, although most buyers don't do these tests. You might want to have the foundation looked at by an engineer if you have any concerns. While not really an issue in Texas, in other areas it is common to get the home tested for radon.
One test that is a bit different than the others is the hydrostatic test. This is a plumbing test that involves pumping the sewer system full of air in order to test for leaks. This is a bit controversial in that some people say that this can cause leaks instead of just checking for leaks. Plumbers that I have spoken to have assured me that this is not the case, but the State of Texas has determined that there is a risk so they require the seller to approve this inspection. Every other inspection is allowed by the Texas real estate contract but hydrostatic tests alone requiring approval.