You’ve spent months scrolling through listings, drafting your must-have list and locating hidden neighborhood gems. But that’s just the beginning of the home buying process.
Home Buying Terms to Know
Purchasing your first home is overwhelming, and the legalese terms don’t help. Here’s a quick glossary of phrases you’ll hear from your agent, mortgage lender and more.
- Appraisal: A third party will evaluate what the home is worth. If it is appraised at less than your agreed-upon price, you might want to renegotiate. This fee is included in your closing costs.
- Closing Costs: This is a fee you, the buyer, pay to your lender, generally between 2% and 5% of the home’s cost.
- Comparative Market Analysis (CMA): Also known as “comps,” CMAs help you estimate a property’s value. Your realtor will use the home’s size, age, location, condition and more to determine its worth.
- Contingencies: These clauses allow the seller or buyer to back out of a contract without penalty if certain conditions aren’t met. Examples include inspection, sale, funding and appraisal contingencies.
- Home Inspection: As one of the last steps in the process, a home inspector investigates the condition of your home. They’ll write up a report listing any issues with photos. Expect to pay between $200 to $500 depending on geographic location, the size and age of the home, and other factors.
- Earnest Money: You pay this good faith deposit to an account to basically hold the property. If you purchase the home, this money goes towards your down payment. If the deal falls through — and it’s not protected under a contingency — you forfeit the money.
- Preapproval: Before you seriously start the home search process, you’ll work with a mortgage lender to determine how much money you’re able to borrow. Once you make an offer and go through the next steps, you’ll need to be officially approved for a mortgage.
- Purchase and Sale Agreement: This document includes the transaction’s finalized terms and conditions and is the final agreement of the home buying process.
What’s the Home Buying Process?
Once you’ve found the perfect home, you assemble an offer and/or purchase and sale agreement (P&S) with contingencies, complete a home inspection and appraise the home. In some states, the offer and P&S are separate documents, while in others you only submit a P&S that has your offered price.
How Much Should You Offer on a House?
Typically, you’ll work with your real estate agent to determine an appropriate offer based on a handful of factors, including:
- The seller’s asking price. The seller’s flexibility on the price they will sell for largely depends on the current market conditions. In a seller’s market where the supply of homes is low and demand is high, the seller may have several offers to choose from and will normally go with the highest. In a buyer’s market with many homes on the market, you may want to bid at least 5 percent below the asking price.
- Your financial situation. Do the calculations around your offer, including down payment, monthly mortgage payment, monthly HOA/maintenance fees, estimated utility costs, property taxes and more — and see what you can comfortably afford to pay.
- How much you want the house. How well does this property match what you’re looking for in a home compared to other houses you can buy? If it’s closer to your “dream home” than any other, you may be willing to pay more.
- Market conditions. Do financial experts say we’re in a buyer’s or seller’s market right now? What do they say about where the market is headed considering the state of the economy?
- Comparative market analysis. Your real estate agent can estimate a house’s worth based on its age, size, location, condition and more — and then compare that estimate to similar homes.
- How long the house has been on the market. A seller may be willing to accept a lower price if they’ve been trying to sell the house for a long time, which may be a few weeks.
Again, it’s vitally important to decide how much mortgage you can afford and what you’re willing to pay before you start this process. (And don’t forget about real estate taxes and home insurance premiums!) Know your final offer, keep it close and don’t be tempted to shell out more than you can afford.
Tips on Making Your Offer More Competitive
The odds are very high that you’re not the only one looking to buy the home you’re interested in. Here are some ways to make your offer stands out among the competition:
- Price your offer at or very close to the asking price.
- Remove contingencies, like selling your previous home or passing inspections, to make it more likely the sale will go through. However, this will introduce risk to you as the buyer.
- Pay a large earnest money deposit to show you’re serious and capable to buy the home.
- Offer to pay the closing costs for the seller.
- Secure preapproval for your mortgage, showing the seller that you can get financing for the sale.
Though you may really want the home, remember that new houses appear on the market essentially every day. Avoid becoming emotionally attached to the home and be prepared to walk away from the deal if it becomes unfavorable for you.
How Do You Make an Offer on a House?
In most cases, offers and counteroffers are conducted through a real estate agent or an attorney. The buyer and seller can also conduct the transaction directly.
The buyer is normally required to pay a deposit in addition to the offer. This deposit might be forfeited if certain conditions aren’t met, so it’s important that the transaction paperwork is completed properly.
Depending on the state, making an offer is either a one- or two-step process:
Two Steps: Offer and Purchase and Sale Agreement
You first submit an offer, which is a short form in which you commit to purchase the property from the seller at a specified price on a certain date. Your real estate agent will make your offer in writing, but it’s not just about the offer amount! As part of this process, you’ll provide an earnest money deposit that’s held in escrow. Between 1 to 2% is common here, but a higher deposit may make your offer more attractive. You’ll also decide on contingencies, like a due diligence home inspection contingency, which allows you to walk away from the purchase without penalty if the home has hidden issues.
Purchase and Sale Agreement
If the offer is accepted by the seller, both parties will then sign a purchase and sale agreement (P&S), which is a legal contract that contains all of the terms and conditions of the sale. Once signed, the provisions of the P&S cannot be changed unless you and the seller agree to amending it. Working with an attorney is recommended to ensure the paperwork is drafted properly.
While these terms can protect you as the buyer, they also set forth your obligations in the transaction. Failing to meet these obligations can compromise your protections in the contract.
The terms in the P&S will normally include:
- Names of the parties. The P&S should list the co-owners of the property, like a spouse.
- Property description. The street address and legal description, such as the book and page where the seller’s deed is recorded.
- Quality of title. This specifies the type of deed to be conveyed and the condition of the title.
- Personal property. These items are not permanent fixtures on the property, like appliances, décor or window dressings.
- Purchase price. The purchase price includes all amounts, payment methods, dates and terms of the transaction.
- Deposit. This is the earnest money deposit you pay when you submit your offer. The amount of this deposit should be listed in the contract, along with the conditions under which you forfeit it for not following through with your commitment.
- Property condition. The seller normally is required to deliver the property to you in the same condition as when you signed the contract. The P&S should state that any damage that occurs between the signing of the contract and the closing date is to be repaired at the seller’s expense.
- Inspection contingency. You as the buyer should ensure that the P&S includes a contingency allowing a home inspection by a certain date. Any problem areas found by the inspection can be fixed at the seller’s expense, lower the purchase price or allow you to cancel the transaction altogether.
- Mortgage contingency. This specifies the amount of the mortgage and the date by which the buyer must apply for the mortgage.
- Closing and possession dates. The P&S should state the closing date and the date you will take possession of the property. It should also specify that the property will be delivered without any tenants or occupants.
One Step: P&S Only
You would only submit a P&S, which contains your offered price and all of the terms of the transaction.
What Happens When You Make an Offer on a House?
Once you submit your offer, you’ll start the most stressful part of the process: waiting. There are three possible outcomes:
Rejection: In this case, it’s likely another buyer submitted a more attractive offer. You’ll receive your earnest money and continue the house hunt.
Counteroffer: You’ve entered the home-buying haggling process. Your real estate agent will help guide you on potential negotiations, like purchase price, closing costs, appliances or repair requests. Flexibility in closing date can also be helpful. Know that bidding wars can be fairly informal and go through multiple rounds.
Acceptance: Congratulations! The seller accepted your offer and your terms. Your house is now under contract and you’ll schedule your appraisal and home inspection.
When Is a House Under Contract?
Your future home is under contract once the seller has accepted the offer, but before the sale has finalized. Next on your to-do list: Complete the home inspection, meet other contractual obligations and secure your funding. At this point, your home is about to close and the status is “pending.” Assuming your appraisal and inspection go well — and you have the money — you’ll close the deal! Learn what to expect when you close on a home.
Do You Need to Have a Home Inspection?
A home may be the largest single investment you make, so you should know as much about the property as possible before you commit to the purchase. The home inspection conducted by a professional will check for structural and mechanical defects in the property. You may also choose to inspect for termites and other pests as well as environmental hazards like radon, lead paint (for houses built before 1978) and mold.
A home inspection should be done no matter the age of the home. Even if the property appears fine on the surface, a professional home inspector may uncover poor workmanship, drainage problems and unseen environmental hazards like radon. Learn more about what to look for — and avoid — in home inspections.
New Homeowner? Here’s What’s Next
As you square away the final details, you’ll want to hire contractors, find movers, turn on utilities and get homeowners insurance. Your Farm Bureau agent can build personalized coverage for your family and your new home.