The Home Buying Process
You have started on an exciting adventure! We've watched the MLS, and visited lots of possibilities to find you the perfect new home. But what happens when we find it? Here is a quick overview of the home buying process:
1. Make an Offer: We will work together, in conjunction with your lender, to craft a strong, competitive offer. The offer is a standard contract that is required by the Colorado Real Estate Commission. It has MANY pages. This is the only contract that is used for all property purchases in Colorado (except new builds), and it is a bit cumbersome because it must “serve many masters.” We will go over your offer carefully to make sure you understand all the pertinent areas.
Your offer will include the amount you are offering for the home, how much down payment you will be making and/or how you will be financing the home. Your offer will also have dates and deadlines for many of the key processes in the home-buying transaction that are detailed below. Many of these processes provide you the opportunity to submit a formal “objection” that the seller can accept, reject or negotiate. We watch these deadlines carefully, as they provide you the opportunity to cancel your contract (with full return of your earnest money) should you not be satisfied with the Seller’s response.
2. Earnest Money: When the Seller has accepted and signed your offer, you generally have 48-72 hours to provide Earnest Money (EM). The amount of EM is determined by the seller, but it’s generally equal to 1% of the sales price of the home (i.e., $4000 EM for a $400k home). EM is a bit of a guarantee to the Seller that you are not going to cancel or walk away from the transaction unless it’s through an approved method within the contract process. If you have gotten through the entire purchase process, and you have a change of heart and don’t show up to the closing, the Seller gets to keep your EM.
But never fear – as you will soon see, there are plenty of opportunities within the purchase process that will allow you to cancel your contract without jeopardizing your EM.
Your EM, usually in the form of a personal check, is safely held in escrow, generally by the Title Company that will be handling the paperwork on the sale. The Seller will let us know where to take the EM. That money comes BACK to you at the closing table. For example, if you were making a cash purchase of a $100,000 house, and you submitted $1000 in EM, you would only need to bring $99,000 on the day of closing.
3. Inspection: This a very critical part of the home purchase process, and you will receive a separate tutorial devoted exclusively to this subject. It is often the next deadline on your contract after Earnest Money.
Your Offer to Buy Contract will include:
Inspection Objection Deadline
Inspection Resolution Deadline
An Objection is a separate contract that you sign and submit to the Seller if you are requesting a change, improvement or negotiation. An Inspection Objection generally contains specific points that you would like to have addressed or corrected, based on the results of your inspection.
A Resolution is the Seller’s response to your Objection, either agreeing to your requests (all or in part), rejecting your requests or offering another solution to the situation.
Should the Seller not respond to your Objection to your satisfaction, and provided all of these steps have been done before the deadline stated on your offer, you can cancel your contract and have your EM returned.
4. Insurance: When your offer has been accepted, you need to notify the insurance company you will be using for your new home. There will be a deadline in your contract for this. Your insurance agent will check the history of the home and any past claims that may have been made. Your agent will also determine if the home is insurable – obviously a critical point!
5. CIC Documents: This stands for “Common Interest Community” – in other words, any property that may be in an HOA or covenant-controlled community. There will be a (very quick) deadline for the Seller to provide you with all rules, regulations, covenants, copies of budgets and recent board minutes to review. You may see a rule or regulation that doesn’t work for your specific lifestyle or aesthetic (“What? I can’t paint my house pink?!?”). If so, you have the right to cancel your contract and have your EM returned.
6. Title: The title company will provide you with a stack of documentation about your new home. Title work includes all the past owners of the property and also notes any outstanding liens against the property or easements that have been recorded. An easement is the right for specified entities to pass through your property. We don’t generally see easements on residential properties, but they are quite common in Farm/Ranch purchases.
In your offer, you will have specified that the Seller provide you with Title Insurance. This is a fee the Seller pays (it’s hefty) to guarantee that there are no problems with the title work on your new home, and that the property is “free and clear” to be transferred to a new owner. As a Buyer, your lender will also require some title insurance, as well. The amount and cost of this should be covered when you discuss the details of your purchase with your lender.
There will be Title Objection and Resolution deadlines in your offer should the title search discover a problem.
7. Appraisal: Many folks confuse Inspection and Appraisal, but they are quite different. If you are using a mortgage to purchase your home, an Appraiser will be selected by your lender (you will pay the fee as part of your closing costs). The job of the Appraiser is to determine if the home is truly worth the amount of money that the bank is loaning you. This is accomplished through an actual visit to the home to check the overall condition and amenities, as well as looking at the current sale prices of other comparable homes in the area.
Let’s say the bank approves you for a $350,000 loan, but the market is tough for buyers. You see a great house listed for $300,000, and you offer your full $350,000 so you won’t get “outbid.” Without an appraisal, if you default on your mortgage, the bank could be left holding $350k in debt for a home that’s only worth $300k. As you can imagine, the bank does NOT want that to happen. Appraisers give your lender proof that they are making a proper loan for the value of the property.
There will be Appraisal Objection and Resolution deadlines in your contract. Should the appraisal come back lower than the amount you are offering, you would lodge your Objection. There can be several outcomes to this. The Seller can lower their price to meet the appraisal, the Buyer and Seller can “meet in the middle” (with the Seller lowering the price a bit and the Buyer bridging the difference with their own cash at closing) or the contract can be terminated.
In some instances, there may be an opportunity for a second appraisal, or an appraisal review (by the original appraiser) if the Buyer or Seller feel the appraisal was incorrect. Appraisers are human and often overworked in this busy market. Perhaps the appraiser didn’t open the curtains over the sliding glass door to see that the property backed to a beautiful lake or park – something that would greatly increase the value of the property. Most properties appraise just fine – your Seller’s agent has probably done a lot of research to make sure the property is brought to the market at a fair price, and your own agent will have a strong indication about the price, as well. No one wants to see a deal fall apart at the appraisal stage.
8. Loan Conditions Deadline: This is your last opportunity to cancel your contract and have your EM returned. The Loan Conditions Deadline is usually set about 10 days prior to closing, and is included in the contract to protect you. The home purchase process generally takes about 6 weeks, but a LOT can happen in that time. What if you lose your job? Or get transferred? What if a family member requires unexpected and extensive medical care? What if your lender needs to change the conditions of your loan that are no longer satisfactory to you? As long as you submit a cancellation notice, simply indicating “Loan Conditions” by the deadline specified in your contract, you will be released from your obligations with your EM returned.
As mentioned before, the “Contract to Buy” is designed to be used for a wide variety of transactions. You may see many things in the contract that don’t apply to your particular purchase. The most important thing to remember is that this contract has been designed to PROTECT THE BUYER.
As you have now learned, there are many opportunities inherently built into the contract that will allow you to cancel with no financial penalty, provided they are done in the time frames specified in the contract.
It is important to me that you understand each of these steps, and what your rights and obligations are. I want you to have confidence in your decisions, and to “de-mystify” this process as much as possible. If you are unclear about anything, at any time, call me!
Understanding this process can relieve stress, make decisions easier, and let us actually have some fun as we shop for your wonderful new home.