The intent of this page is to provide buyer clients with more knowledge and a clear understanding of how things really work in today’s Real Estate transaction. What follows is a breakdown of the most important steps in a buyer transaction:
1. Obtain a Mortgage Pre-Approval Letter from a Mortgage Broker/Lender
If the buyer is planning to obtain a mortgage to finance their purchase, they need to consult with a reputable lender before even looking at properties. It is important for the buyer to know how much they can afford to help narrow their focus and save them time in the long run. A pre-approval is a “preliminary” approval letter provided from a lender once a thorough analysis of their income and expenses is conducted and the buyer submits all required documentation. The buyer needs a current (issued within 30 days) pre-approval at the time of offer. This letter is submitted as a part of the offer package to provide assurance to the seller that they are financially qualified to purchase the home.
See Blog: How Much Do I Need To Have In Order To Buy
See Blog: Getting the Right Mortgage Broker
2. Submit an Offer to Purchase
The buyer’s agent prepares the Offer to Purchase, which outlines the main terms the buyer is offering to the seller to purchase their property. This includes price, deposit amounts, performance dates, additional provision, and contingencies. The offer is submitted electronically from the buyer’s agent to the seller’s agent. The seller will either accept, reject, or counter offer. Once both parties come to an agreement, the offer is signed. Acceptance must be communicated to make it a legally binding and enforceable agreement. Delivery of the deposit check occurs at this time.
See Video: How Much Should I Offer
Possible scenario: Multiple Offers
A multiple offer situation occurs when a seller receives two or more simultaneous written Offers to Purchase on their property. If the seller’s agent knows that several offers are forthcoming, an “offer deadline” is typically set- meaning all offers must be submitted by a particular date and time. Without seller permission, the seller’s agent is not allowed to disclose the offer price and terms of the other offers to the other bidders. Once the seller has reviewed all offers typically they will: accept the offer with the best price and terms, select one of the offers and negotiate in order to come to an agreement, or ask for a “highest and best” from all the bidders to see if any buyer will sweeten their offer. In most cases the seller accepts one of the offers without negotiation so it is important for a buyer to make their best offer at the time of the offer deadline.
See blog: Sorry We Don’t Know How Much Others are Offering
See blog: Bidding Wars: Be Ready to Strike and Win
3. Amounts & Dates of Deposits
The first deposit is due at the time the Offer to Purchase and is typically $1,000. The buyer’s agent will include a copy of the check when the offer is submitted electronically and will immediately deliver the deposit check to the listing brokerage in the agreed upon manner once the offer is executed by both parties.
The second deposit is due with funds available the same day the Purchase and Sales agreement is executed. This deposit is typically 3-5% of the purchase price.
Deposits may be made by personal check, unless a certified check is specified. The deposits are typically held in the Listing Brokerage’s escrow account, so the check should be made payable to the Listing Brokerage unless otherwise specified. If a buyer utilizes a contingency or defaults on an obligation outlined in the offer, a mutually agreeable release must be executed by all parties before any funds can be released.
4. Offer to Purchase Accepted
An offer is considered ‘accepted’ once the buyer and seller come to an agreement, both parties sign the offer and acceptance is conveyed. This creates binding and enforceable obligations of the buyer and seller.
5. Schedule Your Home Inspection(s)
The deadline for inspection(s) and type(s) of inspection(s) is/are outlined in the Offer to Purchase and is typically within 7-10 days of offer acceptance. The inspection(s) should be scheduled immediately to have enough time to conduct and review the inspection(s) results.
6. Hire a REAL ESTATE Attorney
It is critical for the buyer to hire a real estate attorney when purchasing a property, one whose primary focus is on real estate conveyance and will protect the buyer’s best interest every step of the way. A real estate attorney will prepare all legal documents, ensure there aren’t any liens, easements or covenants on the property, and make sure the property has clear title. They are well versed in current real estate contract language as well as the recently introduced “Know Before You Owe” guidelines of TRID (TILA-RESPA Integrated Disclosure).
See Blog: Why You Need a Real Estate Attorney When Buying a Home
See Blog: Know Before You Owe
7. Conduct the Home Inspection(s)
If the home inspection reveals any unknown or undisclosed material problems, the buyer may attempt to renegotiate their offer terms or back out of the sale based on the results of the inspection. If parties are unable to come to an agreement, buyers are entitled to the return of their deposit as long as they provide notice prior to their contingency date and once a release has been signed by both parties.
See Blog: There is No Pass or Fail With Home Inspection
8. Review & Execute the Purchase & Sales Agreement (P&S)
The P&S is an extensive legally binding contract between the buyer and seller drafted by a real estate attorney. The terms outlined in the P&S reflect the terms laid out in the original offer unless there was an agreed upon change. This agreement defines what each party must do prior to and up to the closing in order to complete the sale. The P&S has clauses to safeguard both buyer and seller. To best protect the buyer’s interest, they should work with an experienced real estate attorney. The execution date of the P&S is not flexible without an agreed upon extension and buyer should aim to sign prior to the due date. Second deposit funds are due on the P&S date and they must be available for delivery at that time.
9. Continue Mortgage Application Process
The mortgage application process starts when the buyer applies for pre-approval and the lender does an initial evaluation the borrower’s buying power. As mentioned, it is based on the analysis of the borrower’s income, assets, and creditworthiness. The lender will outline all of the items they need from a buyer at the forefront of the process. It is without question in the buyer’s best interest to provide timely and accurate information to the lender.
10. Lender Orders Appraisal
An appraisal is an evaluation of a home’s value conducted by a licensed appraiser that is hired by the buyer’s mortgage company. The appraiser is an unbiased 3rd party and the purpose of an appraisal is to allow the lender to ensure that the home’s value is enough to warrant a mortgage in the amount that the buyer is seeking. Buyers/sellers/agents/lenders have no control over the amount of the appraisal outcome. The appraiser has specific guidelines to adhere to in order to determine the appraised value. If the appraisal were to come in low, there are options that depend on the circumstances and the buyer’s agent will explain them.
11. Keep Eye On Mortgage Commitment Date
The mortgage commitment date is a critical date to keep track of during the transaction as it is the date by which the lender needs to provide a commitment that they will provide financing to the buyer. This date must be monitored closely and should never pass without commitment, extension or notice of termination. Buyers may request an extension from the seller prior to the mortgage contingency date if they need additional time to obtain their mortgage. If they are unable to get a mortgage, they must notify the seller prior to the commitment date in order to have their deposit returned. If the buyers are denied a mortgage after this date the seller is usually entitled to keep the deposit. Please keep in mind that the mutually agreed upon deposit release guidelines would apply under these circumstances.
12. Schedule & Conduct Final-Walk-Through of Property
Before the buyer closes on a property, a final walk-through at the property needs to be conducted. The goal is to ensure that the property’s condition hasn’t changed since the buyer’s last visit, any agreed upon repairs have been made and the agreed upon terms of the contract have been met. Ideally, the walk-through should be conducted the morning of or the evening before the scheduled closing date.
13. Time To Close
The closing date is the date on which the deed is executed and transferred to the buyers, and buyers officially take ownership. The specific time of the closing is usually scheduled between the buyer’s attorney and the buyer. The date itself is usually a firm date that is not easily changed. Sometimes mortgage delays from the buyer or title delays from the seller can cause a closing to be delayed. If a delay does occur, an extension may be granted and both parties would have to agree to a new date. The property does not officially transfer to the buyer until funds have been dispersed and the property goes on record at the Registry of Deeds.