Tuesday, September 20, 2011

Buyer's Guide - Step #7 - Offer Accepted, Now the Real Work Begins

You've come a long way and you should be full of energy at this point - and you are going to need it.

Once a seller accepts your offer, Realtors refer to this as "having an AO on the house".  This means an offer has been accepted and no further showings or bids should come in or be accepted.  This, like a buyer's down payment, is to show that the seller is serious about getting this deal done and that a buyer shouldn't worry about having to deal with competing bids.

The next few steps all are done in parallel.  You need to have an inspection of the house done, have a lawyer draft or edit a contract for you, and have your mortgage broker / banker work towards getting you a mortgage commitment which will include a home appraisal.

Home Inspection
Your Realtor should be able to refer you to someone who can do an inspection for you.  You'll schedule a time for the inspection with the seller - it's an added bonus if the seller is at the house so that you can ask any questions.

The purpose of the home inspection is to make sure you are getting a house that is worth your offer.  To this point, you've probably only walked through the house, but you don't know if there are termites or if the roof is leaking into the attic, etc.  The home inspector's job is not to tell you if you are getting a good deal or not.  He'll instead point out any safety concerns or items that need fixing or replacing, and help you understand the overall condition of the house.

The inspection is also your last real chance to make adjustments to your offer.  If you find out that the roof needs replacing, you can go back to the seller and ask them for $15,000 to fix the roof or ask them to fix it before closing.

Drafting of a Contract
Your lawyer will receive a draft contract from the seller's attorney outlining the deal.  There are some key points to look for or have added to the contract if they aren't in there already.  I'm not a legal expert, but you'll find that the horror stories you'll hear often relate to details left out of the contract.
  • Inclusions / Exclusions - the contract should clearly let you know what you are buying.  The seller must list any exclusions and you should check this list to make sure that new washer/dryer you were excited about aren't on the list.  Make sure that if there is anything out of the ordinary that you think should be included is listed.
  • Down payment - make sure the draft of the contract has this correct.
  • Types of mortgages accepted - our original draft said "no VA, FHA mortgages" which was clearly not acceptable to us
  • Contingencies - this is the area to focus on.  Contingencies are ways in which you can legally back out of the deal.  If you back out of the deal for reasons outside of the contingencies, the seller can keep your down payment.  You'll read that often a seller won't choose to do this because it usually leads to lawsuits.
    • Mortgage Commitment - this says that if your bank won't commit to a mortgage, you can get out of the deal.  Even though you've been pre-qualified and pre-approved, banks can change their minds and you could be in a terrible bind.
    • Satisfactory Appraisal - this is becoming more and more important.  Without this contingency, if the bank's appraisal came in below the agreed on sale price, the buyer would have to fund the difference in the purchase price in cash.  Therefore, it is important to have this contingency and have it give the buyer an exit if the appraisal comes in more than 1% or 5% below the sales price.  Here is a story about how low appraisals are blowing up deals more frequently.
    • Good faith - there will usually be a paragraph that will say the buyer must pursue a loan in good faith.  In other words, if you decide you want to back out, this would prevent you from dragging your feet or not being cooperative with the bank in the hope that the seller gets frustrated and cancels the contract.
  • Condition of Property - this is a paragraph that says the Buyer has done a full inspection and is fully aware of the condition of all the elements of the property.  It'll be too late after this point to say "oh, I didn't realize the house had a radon problem".  There will also be language that will say "plumbing, heating, appliances" etc., will be in "working order".  This means that if the neighborhood experiences flooding and the basement is full of water, the seller doesn't have to buy a new washer/dryer if they are still in working order.
  • Defaults and Remedies - read this one carefully.  It usually will say something like "if the buyer willfully defaults, the seller keeps the down payment and no one can argue that they are owed more or less".
  • Closing Date - this is generally described as an on or about date.  It is understood that things may turn up that delay the process slightly.  Some contracts though include penalties such as $100 per day for each day of delay.  Keep an eye out for something like this - you can put forth your best efforts, but delays can often occur because of things that are out of your control.
Working Towards "Clear to Close"
Your mortgage broker will give you the final word that your loan will be funded with a "clear to close".  To get to this point will take some work.  Everyone that I have spoken to recommends you call your broker regularly to check in and to push them on your loan documents.   

Pamela and I became frustrated when we were asked for piles of documents about our financial lives, only to find they hadn't even been looked at for weeks.  Your mortgage broker will likely be working on several mortgages at the same time as well as trying to drum up new business.  It is important to keep an eye on this part of the process.  We ended up missing our scheduled and ideal closing date because we received requests at the last minute for documents that we didn't have.  We had to have her parents mail documents to us and I had to reach out to another bank and have them send me the original mortgage note on a different house before we could close.

You should be working with your mortgage broker and not against him/her.  Some people share stories about how they didn't disclose an asset or liability and got away with it - the last thing you need is to have the entire process come to a halt because you've been hiding something.  This could lead to your loan being denied and would then likely lead to you losing your down payment.

Onto Closing
Once these different processes all come together, you are now ready to close. 
* To be updated once we have closed *

1 comment:

  1. I have heard that requirements of Dodd-Frank is making mortgage reviews a much longer process.
    In the mortgage bubble days "piles of documents about our financial lives, only to find they hadn't even been looked at for weeks" were called "papering the file".