Real Estate 101
Buyer’s Agent vs. Listing Agent
There are usually two agents involved when you buy a home; the “buyer’s agent,” who represents you, and the “listing agent,” who represents the home seller. Dual agency is when there is only one agent representing both sides of the transaction.
Fixed Rate vs. Adjustable Rate Mortgages
Conventional loans include “fixed rate” and “adjustable rate” mortgages. A fixed rate mortgage has a predetermined interest rate throughout the life of the loan; the most common are for 30 years. An adjustable rate mortgage has a variable interest rate; the most common are for 5, 7, or 10 years. Adjustable rate mortgages can make financial sense if you’re planning to sell or refinance your home before the introductory period ends; but if you’re planning to own your home longer than five years, it’s less risky to choose a fixed rate loan.
Before you apply for a mortgage or even start looking for a home, you should get a pre-approval letter from the bank, which is an estimate of how much they’ll lend you. This letter will help you determine what you can afford, and ensures home sellers that you will be able to get a loan when needed. When you go in for a pre-approval letter you should be clear on what the bank is offering. Ask them about closing costs, what fees are involved, what you’re getting for that fee, and if they’ll lock in your loan at a specific interest rate.
Real estate agents frequently refer to homes for sale as “listings.” A “listing” on a website shows information about the home, like the price and number of bedrooms. Most agents have access to the multiple listing service, which real estate agents are required to update, so the information is more accurate than sites who aren’t affiliated with a brokerage.
After you’ve made an offer on a home, you’ll need to schedule an inspection, price varies depending on the market. The inspector will go through every nook and cranny, and review things like the plumbing, electrical, foundation, walls, heating, and appliances. Get advice from your realtor on a good inspector.
When you apply for a mortgage, your lender will require an appraisal of the home you want to buy. A licensed appraiser will estimate the home’s value based on comparable homes that have sold in the area and an investigation of the property. If the appraised value is less than the offer you are making on the home, you might not be approved for a loan. The bank doesn’t want to invest in a home that’s overpriced (and neither do you!). Before making an offer, ask your agent to do a comparative market analysis, which will tell you what comparable homes have sold for nearby.
When you put in an offer on a home, you can specify certain conditions that must be met before the deal will go through – these are called contingencies. You have to make sure you can actually get the loan (a financing contingency), that the inspection doesn’t show anything too crazy (inspection contingency), and that the appraised value is close to what you’re offering to pay (appraisal contingency). Those are just a few common examples; there are several other types of contingencies, which you should discuss with your agent. If you’re in a bidding war on a home, sometimes it can help to shorten contingency periods or waive them altogether. You may not necessarily have to pay more money, just be more flexible.
Offers and Contracts
Once you find the right home, you’ll make an offer on the property with the help of an agent. If the seller counters your original offer, it’s usually because they want more money or a faster timeline for closing the deal, at which point you’ll have to negotiate. When submitting an offer, it’s a good idea to add a personal touch by including a cover letter that explains why you want to buy the home. Choosing an experienced realtor is key to winning in negotiations.
Be prepared to pay a lot of fees when you purchase a home. Typically, closing costs will amount to 2-5% of the purchase price of the home, and that doesn’t include the down payment. Common fees include excise tax, loan-processing costs and title insurance. Ask your lender about every fee involved in the Good Faith Estimate, and see if you can shop around for a better price for those services or negotiate down. Examples include homeowner’s insurance, wire transfers, underwriting and settlement fees.
After all the negotiations are done and the seller has accepted your offer, you should receive a home title report within a week. Most mortgage lenders require you to pay title insurance as part of the closing costs; title insurers search the public records to make sure the home seller actually had rights to the title and that there are no liens on the home (like an unpaid contractor or unpaid taxes).