Deciding to Buy
Purchasing a property is most likely the biggest financial decision you will ever make. Whether this is your first purchase or you are an experienced buyer, this decision must be made carefully. Home ownership can be one of the most rewarding decisions a person or family can make, and can be a good long term financial benefit with historical trends appreciating at +6.3% per year.
With that said, it should be noted that ownership is not always easy and consideration must be given to your financial situation. We consistently hear about the “bubble bursting” in the media, but the resilient Denver Market has proven to be economically more stable than many areas across the country (e.g. Los Angeles, Miami, Las Vegas, etc.). Home ownership is an excellent investment; whether you are looking for your dream home, a rental property, or to expand your investment portfolio.
Step 1: Credit Check & Pre-Approval
- Credit Check: Your credit history will have a huge impact on what type of property you can buy, and at what price. It is recommended to check your credit rating with an experienced lending institution so that we can determine what you can afford when looking for properties. Your chosen lender will research your credit from the three credit reporting agencies Equifax, Experian and TransUnion. Also, everyone is entitled to one free credit report (per year) from each credit agency via the following government website: https://www.usa.gov/credit-reports.
- Pre-Qualification vs. Pre-Approval: According to the Consumer Finance Protection Bureau, there is often not a lot of difference between pre-qualification and pre-approval. Sometimes, lenders use the terms “pre-qualification” and “pre-approval” interchangeably, and different lenders might have different definitions for each. Here is how the two may differ:
- Pre-qualification is often seen as the first step in the mortgage process, and pre-approval is the next step. With pre-qualification, you’ll supply an overview of your financial history to the lender, including income, assets, debts, and credit score. The lender will review this information to give you an estimate of what you would qualify for. Mortgage pre-qualification doesn’t always require documentation of your financial history; it can often be self-reported. Mortgage pre-approval is very similar, but it usually requires documentation and verification of your income, assets, and debts. It will often require a credit check, which will result in a hard inquiry on your credit report.
- It can be tempting to start searching for a new home by browsing listings and scoping out potential neighborhoods. Before you fall in love with a house, you should get pre-approved first. A mortgage approval will help you estimate your monthly payment and understand what you can afford. An approval is a lender deciding that, based on the financial information you provide, you’re a good candidate for a mortgage.
- Regardless of whether you have a pre-approval letter or a pre-qualification letter, both can help show sellers that you’re a serious contender when submitting your offer. For a seller to confidently accept your offer, they’ll want to know that you’ll be approved for a mortgage and the home sale will close. A pre-approval letter or a pre-qualification letter can help demonstrate that you have a good chance of being approved for a mortgage for the amount that you’ve offered on the home.
- Types of Loans: There is a misconception in the home buying process that 20% down-payment is required to purchase a home. Not the case at all. In fact, as little as 3% can get you in the door depending on your credit history, income, and debts. If you’re an eligible veteran or actively serving, the VA loan is a 0% down loan program.
Step 2: Time to Go Shopping
Take a drive! Get to know the neighborhoods, complexes, or subdivisions, which interest you. Drive around and get a feel for what it would be like to own a property in the area. Start getting a sense of the properties available in those areas. As your agent, I will be searching high and low for a number of properties that fit your criteria (e.g. schools, commute time, attached or detached, condominium, etc.). As a member of the largest independent company in Colorado, I have access to a substantial number of agents and their listed properties. If interested, I have access to recent or coming soon “new builds”.
Step 3: Offer Up
Once you have chosen the property you want to purchase, your real estate agent will help you make an offer the seller will accept. We will investigate the potential costs and expenses associated with the property and help determine if the listing price reflects recent sales via a Comparative Market Analysis (CMA). Any offer presented is a legal document and once accepted is a binding contract. It is always recommended to speak with a knowledgeable attorney regarding any legal document.
Step 4: Appraisals, Inspections & Escrow
Your offer was accepted, but now the hard work begins. An effective agreement is a legal arrangement between a potential purchaser and the property’s seller. Some important tips to keep in mind to streamline the process:
- Keep written records of everything: For the sake of clarity, it will be extremely useful to transcribe all verbal agreements including counter-offers and addendums and to convert them into written agreements to be signed by both parties. I will assist you in drafting all the paperwork for your purchase and make sure that you have copies of everything.
- Stick to the schedule: Now that you have chosen your offer, you and the seller will be given a timeline to mark every stage in the process of closing the real estate contract. Meeting the requirements on time ensures a smoother flow of negotiations so that each party involved is not in breach of their agreements. During the process I will keep you constantly updated, so you will always be prepared for the next step.
Either a title company or an attorney will be selected as a closing agent. The closing agent will hold the deposit (earnest money) in escrow and will research the complete recorded history of the property to ensure that the title is free and clear of encumbrances by the date of closing and that all new encumbrances are properly added to the title. Some properties are subject to restrictions which limit various activities such as building or parking restrictions. There may be recorded easements and encroachments, which limit the rights to use your property.
You may wish to consult an attorney or tax advisor on the best way to hold title. Different methods of holding title have different legal, estate and tax implications, especially when selling or upon death of the title holder. The two most common in residential transactions are Tenancy in Common and Joint Tenancy. Tenancy in Common is the default in Colorado unless Joint Tenancy is expressly stated in the deed.
Once your offer is accepted by the seller, you should have a certified home inspector conduct an inspection within the time frame that was agreed upon in the effective contract to purchase. You may elect to have different inspectors inspect the property, if you wish to obtain professional opinions from inspectors who specialize in a specific area and/or a general home inspector (e.g. central heating/cooling, roofing, foundation, water heater, windows, radon, lead abatement, plumbing, electrical, exterior, etc.). Each company offers different services, and I would be happy to recommend in choosing a company. I recommend choosing a company that is either ASHI or InterNACHI certified and insured. Depending on the outcome of these inspections, one of two things may happen:
- Either each milestone is successfully closed and the contingencies will be removed, bringing you one step closer to the close, or
- The buyer, after reviewing the property and the papers, requests a renegotiation of the terms of contract (e.g. repair, price reduction, seller’s concession). The purchase of a home warranty may also be negotiated to give piece of mind to the buyer following closing.
-Appraisal and Lending
It is imperative that you keep in close communication with your lender, who will let you know when additional documents are needed to approve your loan application and fund your loan. If the agreement is conditional upon financing, then the property will be appraised by a licensed appraiser to determine the value for the lending institution, via a third party. This is done so that the lending institution can confirm their investment in your property is accurate. Appraisers are specialists in determining the value of properties, based on a combination of square footage measurements, building costs, recent sales of comparable properties, operating income, etc. When you are within two weeks of closing, double check with your lender to be sure the loan will go through smoothly and on time.
If the property that you are purchasing is conditional upon an association approval; we will request the rules, regulations, and other important documents from the seller as soon as you have an effective agreement to purchase. Make sure that the application documents and processing fees are submitted to the appropriate person at the association by the required time. Fill out all of the information completely and legibly so there is no delay in processing the application. If you are required to meet with the association for your approval, make an appointment as soon as possible for the interview. Most associations require a certificate of approval before move-in. Your closing agent will request that the original copy of this approval letter be brought to the closing, so that it can be recorded with the deed in the county public records. I will help with this entire process for expediency.
If you are obtaining a loan, you will be required by your lender to purchase a certain amount of insurance on the property. The value will depend on the lending institution and the purchase price of the property. You may be able to save hundreds of dollars a year on homeowners insurance by shopping around for insurance. You can also save money with these tips:
- Consider a higher deductible. Increasing your deductible by just a few hundred dollars can make a big difference in your premium.
- Ask your insurance agent about discounts. You may be able get a lower premium if your home has safety features such as dead-bolt locks, smoke detectors, an alarm system, storm shutters or fire-retardant roofing materials. Persons over 55 years of age or long-term customers may also be offered discounts.
- Insure your house NOT the land under it. After a disaster, the land is still there. If you do not subtract the value of the land when deciding how much homeowner’s insurance to buy, you will pay more than you should.
Step 5: Closing
-Final Walk-Through Inspection
More of a formality than anything else, the final inspection takes place a day before, or the day of the closing. You will visit the property to verify that all is in working order, everything is the same as when you last viewed the property, that there are no extra items left behind, and that everything included in your purchase is still at the property (e.g. inclusions described in the contract with seller).
-Home Services and Utilities
A list of useful numbers for the activation of home services and utilities will be provided prior to closing and should be notified a week in advance of closing.
The closing agent will furnish all parties involved with a settlement statement, which summarizes and details the financial transactions enacted in the process. You and the seller(s) will sign this statement, as well as the closing agent, certifying its accuracy. If you are obtaining financing, you will have to sign all pertinent documentation required by the lending institution. If you are unable to attend the scheduled closing, arrangements can be made depending on the circumstances and the notice that we receive. If you are bringing funds to the transaction, you can elect to either have the funds wired electronically into the closing agent’s escrow account, or bring a certified bank check to the closing in the amount specified on the settlement statement. The seller should arrange to have all property keys and any other important information for you at the closing so that you may receive these items at this time.