Closing house purchase, between offer and moving in

Once your home offer is accepted, you’ll be almost there. Almost meaning about month or two, depending how fast your lender works. But first things first – home inspection.

I know that paying $400 for a guy just to come and look around doesn’t sound too attractive. Especially if you end up having an inspector that’s all suited up, i.e. if when you first meet him he immediately starts talking about things he won’t be vouching for or won’t be inspecting… well, you’ve likely paid $400 for nothing. As with agent, I really suggest that instead on relying on your friend’s recommendation you rely on scores by hundreds of people. Redfin has pretty nice Open Book of Inspection Services for every city (Chicago linked). Also, they have good Interactive Home Inspection guide. But, if you are already set on hiring professional inspector, you should only focus on one thing: get the inspector which promises that after he is done with inspection, he’ll spend time with you SHOWING you the problems and allowing you to take your own notes.

Nowadays many inspectors prefer to skip this part because it can be time consuming. Instead they take stance of – let me send you written report and everything will be in there. The problem with written reports is that they are not interactive. More often than not they are really just predefined checklist through which inspector goes and puts functional, non-functional or some variation. Dryer needs repairs. Awesome, now what exactly does that mean? Should I spend more money just to know how bad it is? Do I need to completely replace dryer? Those are the type of questions you’ll be asking yourself if you settle for just written report.

Another thing inspection wise that I recommend is testing for Radon. This decision is even harder. Radon self test kits cost something like $13. Sure, you need two (to ensure test was valid), but that doesn’t justify price tag of $150 which is how much most inspectors charge nowadays. For that amount you can easily get digital Radon meter that’ll last you for a full year.

The reason why Radon testing price is so high is that inspectors play on the price tag of Radon mitigation system. Standard system can easily cost over $2000 (when you are purchasing house for hundreds of thousands of $$$, what is two thousand more, right?). So, if you do not test and end up having to mitigate Radon anyway, instead of spending $150 you are now spending $2000. As a consequence, most people play safe and pay for Radon testing. The only advice I can offer is that you take a look at EPA’s map of Radon Zones. From my experience state EPA agencies have more accurate maps and you may wish to search for those. But, if you are in Zone 1 or Zone 2 – you should definitely test. Zone 3 – you can take a gamble, but… you know how they say – better safe than sorry.

Closing the loan

As I’ve said previously, in your Home Offer there should be two deadlines – first deadline is date by which you should secure your loan. If you were ever wondering why purchases of houses take few months, this is where you figure out why. Theoretically, closing the loan is not that complicated:

1. It starts with you signing few documents giving loan issuer authority to start the process
2. After you are done signing, you’ll be paying various fees
3. Your loan issuer will order property appraisal
3. Appraisal will need to confirm that purchase price is not too inflated or deflated
4. After appraisal is successfully completed, you’ll be asked to provide various documents for purposes of closing the loan
5. You’ll need to jump through few hoops, send in new documents, move money to that bank account, etc
6. Finally, you should get notification that you are approved
7. After this all that is left is for your lawyers figure out any outstanding issues and date two dates: final inspection and closing date

Time in which you can do all listed steps can vary greatly. I’m pretty sure that with responsive lender you can close this process under 2 weeks. Then again, it’s possible that with your lender it will take more than 2 months. This is something you need to plan in advance. Before signing off Home Offer, reach out to your lender and ask whether or not he is comfortable with date given as financing deadline. If he is not, put contingency that you get your earnest money back or that deadline is automatically pushed if your lender fails to deliver by the date. If lender is confident he’ll get job done by listed date, still put contingency just in case.

Dealing with lenders can be pretty frustrating, because more often than not you’ll start the process with one person and then when paperwork starts, you’ll be assigned to someone else. And you know how switch from sales guy to tech guy goes – suddenly there is no more yes, yes, sure. Instead you’ve get less than polite emails saying: give me this and give me that. Can I give you this? No, I’ve asked for that, go and get it. This can especially be frustrating when it comes to time sensitive material like bank statements. God forbid you send all the required documents right away and be done. If process tags along for month or so, be sure you’ll be asked to send bunch of documents again.

This is by no means complete list, but expect to be asked to send:
1. Scans of your IDs, driver’s license, passport or green card, all depending on your situation
2. Last two pay-stubs and scans of pay checks (yeah, scan those before depositing)
3. Tax returns and W2s for last two years
4. Bank statements for past two months. If you are going for 20% down payment you need to show you have enough money to close the loan
5. Company letter showing that they are aware of your house purchase and that they support it

As I said, documents may vary. Some lenders may not ask for #5. Some may say – without that we can’t proceed. Just be ready for the roller coaster ride and try to get it over as soon as possible.

My loan is approved! Am I done?

Well, almost. Depending on your situation you could be days or months away from moving in. This is where lawyers are pretty active, going over final details and figuring out closing date (before second deadline listed in Home Offer).

Now, if there were any outstanding contingencies, try to figure them out as soon as possible. If seller took upon himself to remedy Radon issue, that needs to be done before closing date. Especially in case where something was being fixed, be sure to schedule final inspection. Property may have completely changed between you giving Home Offer and now. For all you know maybe it was humid summer and mold started growing.

I’ve had really bad experience of skipping final inspection (because I was unaware of it). When I moved into my new home, radon pipe on the bedroom ceiling greeted me. Good luck sleeping in there. I’ve reached out to my lawyer and 2 days later he replies – well, you signed papers, it’s your problem now.

So, learn from my mistake. Agree on closing date, but set final inspection date a day before it. Tour the property and check if everything is as it was when you gave Home Offer, or if it’s been fixed as agreed. Everybody other than you will be gone tomorrow and there is nothing you’ll be able to do. Until you sign the papers, you have the power to change the things and get others to help fix the problems. That power is gone immediately when you get the keys to the property.

Moving and how it fits into the picture

I plan on writing separate blog post regarding moving as it is complex topic. In the context of closing house purchase, just be aware how it’ll influence you. Especially if you are moving to a new city or state, there are tons of things that need to be done. Those things can keep you occupied and shift your attention from important house purchase decisions. Do not let that happen. Especially if you are moving to new city plan to arrive there at least a day or two before closing date. Do that final inspection and work on any issues that have popped up in the meantime.

Closing house purchase process, closing date

Closing date is an interesting combination of exciting and boring. You lawyer should guide you through signing more than hundred papers. You’ll probably be amazed at how majority of those 2 page documents can be explained in a sentence.

Again, the most important thing – everyone will be gone after the meeting is over. Your agent and your lawyer are not there to help you. Unlike you, everyone else is there to collect their share of money you are providing; so they’ll try to get things over as soon as possible. If you are satisfied with terms and conditions, by all means, do not waste people’s time and let them proceed. But if you are not comfortable with ANYTHING, speak up. If there were problems during your final inspection, postpone closing date. Do not give in to any promises that are not on written down and signed.

Once closing is over – it’ll be you and keys to your new home. Your bank account will probably be quite lighter. You’ll be in for a few decades of mortgage payments.

You better be happy with what you’ve got now.

Home loan pre approval, research with Redfin, Trulia and Zillow

After deciding that it’s time to purchase a house you basically need to do two things:

1. Get pre-approved for home loan so that you know which houses are within your reach
2. Start browsing popular sites like Redfin, Zillow and Trulia and building up your list of properties you want to look in person

Most people start with #2 because it’s easier. Also, first time home buyers obviously have no idea how the whole home loan preapproval process goes, so in most cases they are thinking “let me first find a house I like, then I’ll figure out financials”. This thinking can actually work in your favor in case you are not 100% sure you’ll be buying house. We’ll explore that, along with other scenarios in section that follows.

Home loan pre approval process

The benefits of home loan pre-qualification boil down to two things: real estate agents taking you more seriously and getting insight into financials of house purchase.

Before you are pre-approved, your or seller’s agent don’t have any firm guarantee that you’ll be able to purchase house they are showing you. So, if you are already pre qualify they’ll be bound to take you more seriously.

Also, pre-approval helps you kickstart longest part of home purchase – closing loan. Instead of finding your dream house and then figuring out financials, you’ll be bound to figure out financials right away. When you truly understand how the process goes, financials are not that hard. We can break them down into:

1. Credit score – this influences loan APR you’ll be offered. Say ranges are 760-850+ for 4%, 700-759 for 5%, 670-699 for 6%, etc… If you credit score is 710 you’ll obviously get base APR of 5%. Take a look at How credit scores affect mortgage rates article that gives more detailed example.

2. Ratios tied to your income – the simplest check I can offer is: your mortgage payment (including taxes and HOA) should not exceed 25% of your monthly paycheck. Keep in mind that you should subtract all fixed credit payments you currently carry… like car loan payment for example. Zillow has great Affordability calculator. Simplest version just requires that you provide your annual income, monthly debs and down payment in order to get maximum house price that you can afford. Even better, calculator has advanced mode in which you can add property taxes, HOA dues, etc… so definitely check the given link to home loan calculator.

Finding loan issuer that can pre approve you is not hard in today’s market. Both Zillow and Trulia offer great mortgage marketplaces in which you can see all the lenders available, plus customer reviews for each of them:

Zillow even offers step-by-step home loan preapproval wizard that can guide you through the whole process. I found it too cumbersome – during my search for pre-approval, I just emailed agents that had best combination of offered APR and customer reviews on Zillow Mortgage Marketplace.

Before closing this section, a word of warning on something we talked about. In case you haven’t firmly decided that you will be buying a house, it’s actually better NOT to get pre-approved. First off, process is not exactly trivial. You’ll need to fill detailed application that includes giving away your Social Security Number (SSN). On top of that, each pre-approval process includes credit score check, which brings down your score by at least 5 points (each time).

In my case, I reached out to 3 lenders, and after talking with them I’ve filled full application only with 1. In ideal scenario, I advise you to do the same.

Besides, now that you know that basic ratio (mortgage payment not exceeding 25% of your monthly paycheck), have link to affordability calculator and know where to get preapproved, you already better positioned then I was. Since I didn’t knew that basic ratio, I needed to get pre-approval just to get solid idea on home loan I can afford. You already enjoy knowledge of what comes next and what is it that you can afford. So inverting steps – visiting a few houses and getting pre approved only before you want to give formal offer – is something you can easily do.

Tips and tricks of house hunting over Internet

Nowadays, there are numerous sites that can help you find houses worth visiting in person. I would recommend using following three, in order in which I’m giving them:

1. Redfin – the best site in my book because of two things: they have most accurate data and they allow you to easily schedule tours with their agents. Other positives of Redfin that I would emphasize include advanced search, nice integration with school reviews and finally recently launched 3D Walkthough that allows you virtually walk through some of the houses.
2. Trulia – out of three Trulia is probably the sexiest looking, true HTML5 website. The biggest selling point of Trulia are easy to use map overlays – so when searching you can easily see the crime rate of an area, schools, amenities nearby, whether or not property is in a flood zone, and so on.
3. Zillow – third place doesn’t mean that Zillow is a bad site. On the contrary, as you saw in pre-approval section, Zillow offers lots of great tools for prospective home owner. Just, everything search-wise, Redfin and Trulia do slightly better. Finally, data on Zillow is noticeably worse, especially when compared to Redfin.

Chances are that you’ll be finding all available houses for purchase by just sticking with these three websites. But of course, your options don’t end there – just Googling for “find house to purchase” gives you tons of real estate websites – like Realtor and HomeFinder . Use whatever is easiest for you.

Somewhat different are sites like ForSaleByOwner and Remember how in previous article I’ve talked about hefty real estate agent commissions? Well, these sites may contain listings not found on Redfin/Trulia/Zillow since owner decided to list property on their own and not give in to extra real estate agent fees.

Other than strictly real estate, there are some other useful websites. First that comes to mind is Walkscore which shows you how walk-able certain neighborhoods are. For most people, driving is not a problem… but some of us want to have a grocery store, park or coffee shop nearby – one that we can walk to in under 5 minutes. For example, area in which I live now has a sports bar with 1/2 off burgers and $2 draft beer during every Monday or Thursday Night Football… it’s truly nice perk in winter when you just want to get out of house, but don’t want to deal with traffic.

Also, review sites like Yelp can be quite helpful. They can show you whether or not property is in popular area. I mean, if houses cost approximately the same and one is in area with 10 great food joints, while the other is 5 minute drive away from closest store, you’ll obviously go with the first one.

One thing that I couldn’t find is definite forum on which you can get answers to questions you have and interact with other buyers/sellers. Don’t get me wrong, it’s not like there are not options. Redfin has pretty good forums. Zillow has nice Q&A website. Just I can’t truly recommend either – so if you are stuck with questions, the best thing I can recommend is leaving comment here.

Wrap up

Now that you are armed with knowledge on home loan pre approval process and websites for home search, start building your list. Again, do not start home loan preapproval process until you are 100% sure you’ll be buying a house. Ideally, you should be aiming to give formal Home Offer within 30 days of getting pre-approved. Once they start house searching process most people overwhelm themselves. To repeat myself, for now just FOCUS on two things:

1. Building a list of at least 5 houses you want to see in person
2. Making sure that monthly payment for each house (mortgage+taxes+hoa) on the list is below 25% of your monthly income (paycheck – existing credits you carry, like monthly payment for car loan for example). If in doubt, use Zillow Affordability calculator.

That’s it. Do not worry too much about anything else. To give you a peek of what follows, and how easy it is overwhelm yourself, here are the steps that stand between having a list and moving into house that you’ve just purchased:

1. Getting home loan pre approval
2. Finding an agent to take you on a house tour
3. Signing contract with agent to represent you during house purchase
4. Hiring building inspector and giving formal Home Offer for property you want to buy
5. Hiring attorney to guide you through closing process and help you with contingencies on the purchase contract
6. Closing loan with issuer that pre-approved you
7. Final inspection
8. Closing date, scheduling date when you and seller will be signing 100+ papers and exchanging money and house keys

Keep in mind that steps I gave are for conventional house purchase. Meaning, if you are looking to purchase foreclosure or a short sale – there may be extra steps – like both you and seller waiting few extra months on whoever is holding the deed (loan issuer / bank) to approve the purchase.

Also, ordering of steps is not set in stone. You can hire an attorney before giving formal offer – so that he goes through offer you are signing and make sure that it doesn’t bind you to purchase house in case inspector discovers something quite problematic. Also, you can reject signing contract with an agent or getting home loan pre approval all the way until you give formal offer. There are lots of intrinsic details that I’ll be covering and that can save you quite some time / money… for now just follow what I’ve said in this and previous article, revisit your reasons for becoming a home owner and make sure that properties you are looking at align with those reasons.