Congratulations – you found your Buyer Agent – you found your lender – you were pre approved for your mortgage – you went out looking for a home and found one – you wrote your offer – AND YOUR OFFER WAS ACCEPTED!!! Time for celebration – but only for a day!
Now the fun part begins – getting your offer closed!
So what are the next steps?
In your contract, you wrote in a period of time in which to do any and all inspections of your choice. You and your Buyer Agent should have discussed the inspections you want to do. Even if you decide to purchase your home as is, you will still be doing inspections if you made your contract contingent upon your right to do inspections! The contract will state how long you have to do your inspections AND get any repair requests to the seller! In our area, the inspection paragraph in the contract says that you must do a few things when you make your repair requests to the seller: provide an addendum stating what repairs, if any, you want the seller to do; provide an estimated cost for those requested repairs; and attach a copy of the inspection report with your addendum. Not providing even one of these things could cause you to lose the right to negotiate repairs or even allow you to terminate the contract if the seller chooses not to accept your repair requests! And our contract is very specific in how long the negotiation is to take place: after receiving the repair addendum, the seller then has 7 calendar days to respond to your request (called “The Negotiation Period”) – it is during this time period that you have the right to continue to modify your repair requests (as long as they are defects and as long as they were noted on the inspection report). If no agreement is reached then there is another 2 day window in which either party can choose to accept the last response, or terminate the agreement. And if, by 5 pm on the 2 day window, there is no agreement, then the agreement will terminate! So when you are doing inspections, please be aware of your time frames!
In our contracts, there is language that says that you must make loan application with your lender within 7 days of contract ratification! That means you will need to get with your lender, lock in your interest rate and begin providing to the lender all the paperwork that they request in order to put together your loan file that will eventually be sent to the underwriter for review. What are some of the things the lender will be looking at?
- Bank Statements – they will want to see several months of your bank statements as well as any investment and savings accounts you may have! This helps them verify your cash for closing, as well as how much income you are depositing. It also lets them flag out any large deposits that may have gone into your account – if there are any, the lender may want to know what it was for and where the money came from!
- Tax Returns – the lender will generally ask you to provide 2 or 3 years of your tax returns, including all schedules! Again, this helps them verify your income!
- Credit Report – when you originally talked to the lender, they may have run a credit report that was a summary of your full blown credit report! Now the lender will want to see the entire credit report to see if there are any issues that may need further explanation!
- Debts – your credit report will show what debt you have – credit cards, student loans, car loans, etc. The lender wants to make sure that you are not overextending yourself and that your income will be enough to not only pay your creditors in a timely manner, but also keep up your home and maintain your home!
- Payment History – the lender is going to look at your payment history – have you made your payments on time each month? Or are you always behind on your payments? If you are not making payments on time each month, the lender may want an explanation!
- Derogatory Information – if you declared bankruptcy or defaulted on a creditor, this will show up on your credit report and will most likely require an explanation in writing to the lender!
- Co-Signers – If you are a co-signer on another person’s credit (ex – you co-signed for a child for a car loan), this will definitely show up on your credit report and could impact your credit score. If the person you co-signed for has handled their credit responsibly, it may help your credit score, but if they didn’t it could have a negative impact on your score and may have a negative impact on your mortgage application!
The contracts in our area say that the lender must order an appraisal within 15 days of contract ratification! It does not mean that the appraisal has to be done, but that it has to be ordered within that time period. What is the appraisal?
In short, a home appraisal is the process in which a licensed appraiser goes out to the house you are buying and determines the fair market value of the home. If you think about it, the listing agent has a vested interest in the house selling for the highest possible price, while the Buyer Agent has a vested interest in making sure you get the best price possible for the house. The licensed appraiser is being hired by the lender to make sure that the value you are paying for the house (and that they are ultimately lending you money one) is what the house is truly worth on that day! The lender is basing the loan on the appraised value, not on the listing price! The appraiser is what I call the independent third party that will get paid whether you buy the home or not!
So how does the appraiser come up with the value? After all, no two houses are the same! To be able to come up with the value of the home, the appraiser will look at the following:
- Comparable Properties That Recently Sold – the appraiser will pull homes in the neighborhood or close by the home you are buying that are as alike to the house you are purchasing as possible! For instance, if you are buying a ranch styled home that was built in 1980 but hasn’t been updated, they are not going to pull a two story house that was built a year ago as a comparable property! So the appraiser will generally pull ranch styled homes built around the same time in the same neighborhood or comparable neighborhoods that are close by! Adjustments can then be made for differences such as bedrooms, baths, size, etc.
- Condition – if the home you are purchasing has not been updated, but other comparable homes have been updated, the appraiser will adjust for this difference! The condition, age & quality of materials used to build the house may affect the value!
- Location – if the home sits on a corner lot where the street is a major cut through street or backs to an interstate, the appraiser will take that into consideration when valuing the property!
- Lot Size – if the home sits on an acre parcel while other homes in the neighborhood will be on quarter acre parcels, this will affect the value. Likewise, if the home is on an acre parcel but most of the acreage is unuseable, this may also affect the home’s value!
- Upgrades & Improvements – if the home has had recent improvements done, such as an addition or renovated bathroom and kitchen, this will also be taken into account by the appraiser and affect the value!
- Amenities – if you are living in an area where a pool is a highly desirable amenity or you are living in an area where a pool is only usable 3 months out of the year and not as highly desired, this may affect the home’s value!
If you made your contract contingent on the home appraising for the purchase price, and the appraisal comes in lower than your purchase price, what are your options?
- Pay The Difference – some people may choose to make up that difference at closing! If you choose to go that route, it will have an effect on the cash you need to bring to closing, or it may affect your loan and your lender may choose to restructure your loan! Talk to your lender about these options if you do decide to pay the difference at closing!
- Dispute the Appraised Value – sometimes the comps that an appraiser uses may not always be the best ones! In that case, the buyer would have the option to go to the lender to see what the steps would be to dispute the appraised value! In this case, it is the appraisers call as to whether or not they wish to amend the appraisal AND it would be the lender’s call as to whether or not they wish to order a second appraisal to be done on the property!
- Terminate the Contract – in this case, our contract says that you would have the right to terminate the contract within a set number of days after the appraisal has been received! If you want to go this route, then you need to make sure you sign both a Release of the Earnest Money Deposit as well as a Termination of the Contract! This will ensure that not only are you terminating your contract but you will be getting your earnest money deposit back from the escrow agent holding the funds!
Once the file has been prepared for the underwriter and the appraisal has been received, the entire file will be sent to the lender’s underwriter, who will then review the entire file and issue loan commitment if they are good with everything in it. Hopefully, your loan officer and their processor are familiar with the underwriter’s requirements and have put the entire package together with all the needed documents so nothing is missing from the file! The loan commitment is the bank’s way of saying that they are committing to loan you the money you need to buy the house at a certain interest rate and on a certain loan type. The loan commitment is good for a period of time and will expire at some point in the future, so make sure you know when your loan commitment will expire in case there are any last minute delays in closing!
While you are doing your inspections, and the lender is working on the loan items, your settlement agent or attorney will be doing a title search for the property you are buying! In your contract, the language says that the seller is agreeing to convey to you the property by general warranty deed and with a clean and marketable title! What this means is that the title that the seller will be passing to you are closing needs to be free from any liens or clouds that a reasonable buyer would find objectionable! For instance, most titles will have the current mortgage as a lien on the property – when you close on your loan, your settlement agent will go ahead and pay off the mortgage that is currently held by the current owner and that lien will be removed from the title and your mortgage will then be added to the mortgage. This is a type of lien that would be normal in a title search!
But title searches can also turn up some not so good title issues – for instance, if there are past due child support or alimony liens on the property. There can also be past due tax liens on the property. If work has been done on the property and the owner did not pay the contractor, this could lead to a mechanics lien! The title search will make sure that these things are taken care of before you get to the closing table so that closing is not delayed and you will get a clean title that you can pass on to your buyer when you go to sell the home!
I know that this has been a fairly long post on what happens after you have an offer accepted, so hopefully your Buyer Agent is keeping you updated on what is happening along the way!
Have a question? Thinking of buying your first home? I work with many first time home buyers throughout the Richmond area! If you have questions or want to discuss whether it is the right time to buy a home, feel free to contact me and we can talk – no obligation, no pressure!