Purchasing a home is one of the most important personal and financial decisions you can make. If you are about to make this decision you should take the time to get educated about the process because there are a lot of legal and financial ramifications involved. Here are four basic, but important things, you should know and do before signing a contract to purchase a home.
1. Choose the Right Lender and get Pre-Approved. This has always been the most important thing to do before buying a home, but today it is even more important with all of the recent changes and restrictions in lending. The bottom line is this: if your lender cannot close your loan on the day of closing you cannot purchase your home. Most importantly, if this happens on the day of closing, you will be in default and can be sued in a court of law. All real estate contracts have default language and you should read those paragraphs and know the penalties for default before signing.
When choosing a lender, the worst thing you can do is go online and choose a lender that you know nothing about. The best thing you can do is ask your real estate agent to recommend a lender. Good real estate agents have established relationships with two or three reputable lenders and they can give you a good referral.
Choosing the right lender is also important because they can determine up front if you even qualify to purchase a home. Otherwise, unless you have the cash to purchase a home, you cannot buy a home without a loan. If you are not pre-approved you will waste your time and the agent’s time looking for a home. Any good real estate agent will require a pre-approval letter, or proof of funds for a cash purchase, before they start showing your homes. This is customary and reasonable.
2. Choose a Good Real Estate Agent. Next to choosing the right lender, you should choose a good real estate agent to represent you. This is always a tough decision because there are no real standards or criteria to follow. You can often find a good referral from friends or family who have used them and had a good experience. Try to choose an agent with at least 2 or more year’s experience. The most important factor is their real estate education. There are numerous opportunities for agents to learn but not all of them take advantage of those opportunities. Try to choose an agent that is knowledgeable and education-minded. It is also a good idea to choose an agent that is part of a larger brokerage firm; that way if legal issues arise they usually have a good support system for resolving issues or for mediation.
3. Termination and Contract Deadlines. Once you are under contract you should always know your contract deadlines. As a buyer there are usually several options for you to terminate the contract without losing your earnest money. Once those deadlines have passed, you “may” still be able to terminate, but you will forfeit your earnest money, which in most cases can be $1000 or more. A few of the basic termination deadlines are financing deadlines, the option or inspection period, receiving HOA information, the survey or the Seller’s Disclosure Notice. The financing deadline is very important because after that time period passes, you cannot use financing as a reason to terminate – which is the most common reason buyers terminate. Most financing deadlines are 14 to 21 days after the contract is signed and executed, whereas the contract deadline is normally 30 to 45 days after it is signed. That means if your lender determines on day 30 they cannot close your loan, you could lose earnest money. It is important also that you inform your lender of the financing deadline. Always look over your contract and highlight the phrases that contain the words “… this contract shall terminate.” That way you’ll know all you termination options.
4. Know Your Cost. Before signing a contract, always know what your out-of-pocket costs will be. As a buyer, there are thousands of dollars of costs associated with a home mortgage and your lender, by law, is required to provide you with a Good Faith Estimate (GFE). The Good Faith Estimate will break down all of the costs associated with your mortgage, as well as, show you what your monthly payment, taxes and insurance will be. You should look over the GFE carefully and have your real estate agent look over it to make sure the costs are reasonable and customary. In addition, you should look over it to see how much money you will be required to bring on closing day and most importantly, how much your monthly mortgage payment will be. You should know these costs before you even begin to look at houses. That way you will know if you have the cash necessary to purchase a home and most importantly, if you can afford the monthly payment. During the pre-approval process you should tell your lender how much you can afford for a monthly payment and how much cash you have for a down payment and for closing costs. Once your lender knows this, they can give you the price range of homes you need to look at in order to stay within that monthly payment. As a buyer, it is your responsibility to know the costs and what you can and cannot afford.
Purchasing a home is a big decision and there are numerous other things that are important as well, and trying to navigate the process on your own is not a wise decision. Just as you would hire an attorney to represent you in court or a doctor to treat a serious illness, you should choose a real estate professional and a reputable lender to represent you and provide you with good professional real estate advice.
