Finances and the Real Estate Process
Have you ever felt overwhelmed about making a home purchase? Understanding the financial preparation and associated real estate process may help manage expectations and ease your angst as you navigate the process.
Accepting your financial situation is critical; especially if you already own a home and are looking to buy another. Will you have to sell first or if you can buy and then sell? This question is best answered by the assistance of a lender and a REALTOR®. The lender will assist you with understanding your ability from a financial stand point and the REALTOR® will help you understand the pros and cons from a market perspective, ie, is it a sellers’ or buyers’ market? How much do I think I can sell my house for? How will either a sellers’ or buyers’ market affect me?
If you have to sell your current home before purchasing a new one (known in real estate as a contingent offer) you will usually be negotiating from a position of disadvantage. However, a REALTOR® may be able to assist you with listing your home first and getting it under contract to a point that is more advantageous for you. As an example, a REALTOR® would likely look to have you close on the home you are selling before closing on the home you are buying, which can improve your leverage in negotiating on a new home purchase. For the sake of further discussion we will assume you can purchase without selling or do not currently own a home.
A good way to start is to find a lender and complete their pre-qualification process in order to determine your maximum loan value prior to making an offer on a property. Obviously, you don’t have to buy at that price but you also don’t want to look at houses you can’t afford. Once your lender determines your maximum loan value you should ask him to provide a Good Faith Estimate (GFE) for all associated costs. Most buyers focus on the costs associated with principal, insurance, taxes, and interest (PITI) that equate to your total monthly mortgage payment. Remember, any associated HOA fees are separate. Additionally, there are other associated costs to understand ie, closing costs and pre-paids, the down payment (if required), and other monies based on the type of loan you are going to use. Different loans vary on down payment required and seller concessions you can ask for. Your lender can explain those options to you. Further, your lender will also ask you if you want to pay your own taxes (no escrow) or if you want to pay your taxes (escrow). If you pay your own taxes than your monthly mortgage will be lower but you will have to ensure you are prepared to pay your taxes in their entirety when due.
Ok, so why is understanding my Good Faith Estimate (GFE) so important upfront? How can that information help me navigate the process?
- It will let you know the maximum amount you can borrow toward a home purchase.
- It provides an estimate of your monthly mortgage payment either with or without an escrow account.
- It provides an estimate on your down payment, closing costs, and pre-paids which are key numbers to understand when negotiating your offer (total amount you as a buyer may need to bring on the day of closing).
How can the data from the GFE help me and my REALTOR® negotiate the best offer?
- Your REALTOR® will compare the current list price of the home with their own Comparative Market Analysis (what have similar homes sold for in the last month in the area).
- Based on your loan type and down payment and closing costs you and your REALTOR® can decide if you want to try and have the seller reduce their sales price and/or provide assistance with your closing costs.
- These days, on average (based on current average interest rates) your mortgage payment is effected by a +/- of $6 for every $1000 you finance. Thus, a difference of +/- $10,000 in sales price is around a +/- $60 in your monthly mortgage payment.
- Consequently, you can determine if it’s more important to keep money in your pocket upfront (lower your closing costs) by trying to negotiate that into the deal. Or, limit the amount of money you pay over the life of your mortgage payment.
- Knowing all this information ahead of time will expedite your ability to negotiate when time is of the essence!
Lastly, you’ll want to be familiar with the general timeline and associated milestones for a contract based on financing in Texas. Normally they run thirty to forty days from the date you have an executed contract (the day you have both the buyer and sellers signatures on all necessary documents) to closing and funding (the day the property exchanges hands after signing all necessary paperwork with the title company). Key parts of the process are:
- In order to get to an executed contract you have to have an agreed upon sales price coupled with additional key terms of the contract (title company, amount of earnest money, length of option period, option fee, closing date, closing costs, HOA documents, survey etc.). This process can generally take anywhere from 48 to 96 hours depending on how many offers are involved and how contentious the terms are to the parties.
- Once the contract is executed the buyer generally has 48 hours to provide the agreed upon option fee (money paid to the seller to acquire time to perform inspections and opt out of the contract with no penalty) to the seller and the buyer’s agent must get the contract and agreed upon earnest money to the title company so the contract can be receipted. Earnest money is a negotiated good faith amount put toward the purchase of the house upfront by the buyer (it acts as a deposit against the total amount due when closing).
- Subsequent to the contract being executed and receipted, you move into the option period based on the time frame negotiated into the contract (generally ten days). This time is used to inspect the home and negotiate repairs (a second round of negotiation). The first negotiation involved procuring an executed contract as discussed above.
- The option period is when contracts have the highest probability of ending as the buyer has the unrestricted right to terminate and will only lose their option fee (normally $100 or $10 a day for a $10 period) if they decide to not proceed.
- After the option period, buyers can generally only terminate and keep their earnest money if the seller defaults on an agreed upon term or buyer financing falls through and seller is notified in the time frame described in the contract (normally twenty one to twenty five days from date of execution).
- Once the option period is complete, lenders normally order the appraisal. The appraisal process usually takes around ten business days to be completed. The appraisal is normally a buyer expense so you don’t want to order it until you are out of the option period and sure you are proceeding with the purchase.
- If the appraisal comes in below the agreed upon sales price you have one of four options: continue with the terms of the contract as written – you pay above the appraisal, have the seller make up the difference, you and the seller split the difference in some fashion, or you terminate the contract.
- The remaining fifteen to twenty days until closing involves ensuring all financing paperwork is satisfied by your lender’s underwriting team.
image courtesy of Gabriel White