Behind the Scenes – What to expect when Homebuying
BIG Time Thanks to LaMacchia Realty (Boston, MA) for their training and inputs in this post!~
The intent of this page is to provide buyer clients with a general knowledge and understanding of how things work in a Real Estate transaction in San Diego, CA. 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. Reputable means that the lender will be able to perform within the transaction time frame – and ultimately close ON TIME. 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.
Note: Sometimes you will hear the term “pre-qualified”. Being pre-qualified is not the same thing as being pre-approved. The former means that the buyer has initially answered lender questions but not provided proof to warrant a pre-approval letter.
2. Submit an Offer to Purchase
The buyer’s agent (me! AudreyHanes33@gmail.com) 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 provisions, and contingencies. The offer is submitted electronically from the buyer’s agent to the seller’s agent. The seller will either do one of 3 things- 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 “earnest deposit” or initial deposit amount occurs shortly after the buyer and seller have formalized the residential purchase agreement or RPA, within 3 days.
Bidding wars or Multiple Offers
A multiple offer situation occurs when a seller receives two or more simultaneous written Offers 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.
3. Amounts & Dates of Deposits
On the first page of your purchase offer you will outline the amount of your initial deposit and terms of it’s delivery. The first deposit (sometimes referred to as initial or earnest money) is due three days after the purchase agreement is signed by all parties and is typically 1-3% of the purchase price. Instructions for electronic deposit or physical drop off of a check is coordinated by the chosen escrow company.
The initial deposit may be higher in order to show good faith and also beat out competitors. Think of it as putting skin in the game. The larger deposit the greater interest the buyer is showing the seller.
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.
NOTE: The internet is rife with scammers and hackers. Please do not under any circumstances provide sensitive information about you or your accounts via email. Always pick up the phone to get information verified before wiring funds.
4. Offer to Purchase Accepted
An offer is considered ‘accepted’ once the buyer and seller have 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) is 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
6. 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 this Blog by LaMacchiaRealty for more on home inspections: There is No Pass or Fail With Home Inspection . The take away: LOVE THE HOME BEFORE MAKING AN OFFER – This will make a huge difference in your outcome and experience during escrow. 😀
7. Review & Execute Escrow Instructions
The Escrow Instructions are an extensive and become part and parcel to the purchase agreement. The terms outlined in the Escrow Instructions mirror 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. This instruction is necessary to safeguard both buyer and seller. The close of escrow (COE) date is not flexible without an agreed upon extension by both parties. The escrow company will coordinate with the financial institution that will carry the loan in order close on time. The will also be the procuring cause of the new title being recorded in the county assessor’s office.
8. Continue Mortgage Application Process
The mortgage application process starts when the buyer applies for pre-approval and the lender does an initial evaluation of 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. There may be other “conditions” set by the lender during escrow. These requirements will be communicated to the buyer.
It is without question in the buyer’s best interest to provide timely and accurate information to the lender. Any delays may impede the process.
9. 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.
10. Keep Eye On the Loan Contingency Date
The loan contingency 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 “Go-Ahead” that they will provide financing to the buyer – thereby allowing the buyer to remove this contingency with confidence that the loan will fund by the close date. This date must be monitored closely and should never pass without contingency removal (executed by the buyers) or an extension if needed (executed by both parties). 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 contingency removal 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.
11. 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.
12. 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 Escrow Company and the Lender. 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 county registry office.