Buying a Home - Getting Started
Start with the Real Estate Agent
Of course you knew we would say the agent comes first—and we do, because a full-service real estate agent will be the pivotal person who helps coordinate the efforts of all the hard-working people you need to get into your new home. The agent can direct you to a good lender and loan officer, reputable home inspectors, title company, even movers and repair contractors. At River Realty we’re not obligated to recommend an in-house lender or title company, nor are we compensated in any way—we use certain professionals simply because they perform the best. Starting with an agent you trust can save you lots of time, money and frustration, as many who have come to us can attest. For example, some buyers use the DIY approach of finding and committing to a lender online before working with an agent; yet in nearly all cases, local lenders that we actually work with can get you the loan faster, with better rates and more sensible underwriting. OK, you say, but how to find that all-important agent?
Most buyers begin the home-buying process by looking at open houses. Some don’t even know they’re interested in home ownership until they see a house that’s exciting to them.
And for some buyers, the important task of selecting an agent ends right there. Although few realize that the open house experience can be as much about finding an agent as it is about finding a house, that’s the way it works. If you click with the Realtor who greets you at the door you’ve accomplished a lot—since to find and buy the house you really want you’ll have to spend lots of time with this person. Others consciously choose an agent or company because they have seen multiple signs in a neighborhood they desire. We receive many emails from people who, after seeing our signs, checked us out online. And, of course, buyers are often referred to an agent from friends, family, or co-workers.
All of these methods are valid as long as you take some time to learn about the agent and determine that he/she is competent, able to communicate directly and honestly with you, and can answer your questions openly. So what questions should you be asking, and when do you start? We say fire away as soon as you can, on the phone or in person or on the web, whenever you’re first making contact. Here are a few essential questions:
- Do you work full-time at real estate?
- Can you help us find the right loan officer and loan program?
- Do you have enough time available to meet our needs?
- Are you familiar with the areas we are interested in?
And the agent will likely have some questions for you, such as:
- Have you already been pre-qualified by a loan officer?
- Have you already been working with a Realtor?
- What areas and type of home are you looking for?
If the answer to the agent’s question #1 is no, then the agent should suggest several loan officers who will be able to pre-qualify you right over the phone, so when you meet again you will know just how much you can spend on a home.
Before seriously looking at homes you need to find out just what you can afford, and how much it’s going to cost you. As Realtors we want to be looking at homes just as much as you do—but first let’s take a quick look at the pre-approval process.
Pre-Qualifying: Conditional Loan Approval
At this stage your contact with a loan officer is likely to be just a couple of phone conversations, where you’ll give information about your income and debt (including all obligations), and you may be asked for permission to run a credit report. Based on this information the loan officer can issue a letter that specifies a certain mortgage amount for which you are conditionally pre-approved. When you find a home you will need this letter in order to make an offer.
Buyer’s Closing Costs
You don’t know the exact amount you’ll need for a mortgage yet, so the amount stated in the pre-approval letter is hypothetical, though within your qualifying limits. At this time you may ask the loan officer for a more detailed look at the costs of your hypothetical mortgage, and receive an estimate of closing costs. The estimate shows your down payment and monthly payment as well as the various charges that make up the buyer’s closing costs, including lender fees, title company fees, and state mortgage registration tax. Several months of pre-paid property taxes and property insurance (and the initial lump sum for FHA insurance) are also considered buyer’s closing costs, as they are put into your mortgage escrow at closing. We won’t take the time to further detail the buyer’s closing costs, but be aware that they can vary greatly from lender to lender, ranging from 2% to as much as 4% of a $200,000 loan. Some of this difference depends on the type of loan and the interest rate, but lender fees can vary greatly as well.
Financing Quick Points
- We say again: when looking for a lender, it’s best to start with recommendations from real estate professionals who work with lenders every day. Your agent will know several trustworthy loan officers—and with all the complexity (read: opportunity to screw up and/or overcharge) of mortgage banking you will need a loan officer you can trust.
- Important caution: if you’re shopping around for a mortgage lender, be sure that you don’t allow every lender to check your credit. It actually will lower your credit score to have it checked too often. This isn’t a problem, however, if you check your credit yourself. Just be sure to use a service that will give you a FICO report (the type mortgage lenders use). Most lenders will accept your information to issue a conditional pre-approval, since it needs to be verified later for full loan approval anyway.
- New lending regulations require that lenders re-check your credit a second time within 10 days of closing, so don’t plan on charging the furniture for your new castle (or the boat for the moat!) until after closing.
If all went well at the first casual meeting, the agent has arranged a sit-down substantive meeting where both of you will get to know much more detailed information about each other. At this meeting the agent will outline the steps in buying a house and explain some of the forms and procedures you’ll encounter on the path to home ownership: municipal inspection reports, the Seller’s Disclosure, handling of earnest money and more. The agent will want to learn as much as possible about your desired neighborhood(s), what type/size of house you want, and how much you are able to spend to get it. By now you should be pre-qualified by a loan officer so you know what you can afford, and the agent should be able to tell you if your wallet matches your wishes.
At this first formal meeting the agent will introduce you to important buyer’s papers that are required by the state. Minnesota law requires that the agency form be signed at the first meeting. This form talks about how agents work and explains certain fiduciary responsibilities that agents owe all our clients. It is not a contract but a notice that says you, as buyers, have rights; and that we, as agents, must treat you ethically. A second form is the buyer’s contract, which protects both the buyer and the agent by spelling out the terms of the agency relationship. By signing this form, the buyer commits to working exclusively with the agent as long as they mutually agree to continue the relationship. Not everyone signs the buyer’s contract at the first meeting, but if you choose to work with that agent Minnesota law requires that you sign it soon after.