Sometimes it seems like getting straightforward answers about how this whole process works is harder than sneaking into a White House party, and believe me, that is HARD! For most people at least!
Once you make the decision to place an offer on a home, first you need to figure out what a reasonable offer price is. Your agent should pull sales data for the comparable sales that have taken place, typically over the past 90 days. 90 days is usually how far back an appraiser will look. They should pull information on homes that are the same size, in the same area, same amenities, etc. Using the sales price of similar units that have sold, you should come up with a price you are comfortable with and begin there.
You will also need to determine how much earnest money you are going to put down. Essentially, this is the sellers' incentive for entering into a contract with you and taking their home off the market while you attempt to purchase it, and it is their insurance policy against the buyer defaulting on the contract. This is usually a minimum of 1% of the intended sales price. The larger your earnest money deposit, the more seriously your offer will be considered, because you have more on the line to lose. This money goes into an escrow account and is held there until closing. It is taken off the total amount of cash you need to bring to closing. When you submit your offer, you will submit a copy of this check, along with the prequalification letter you should already have from your bank, to the sellers. You will likely have negotiations back and forth, and when all parties agree to all terms, sign off, and return the fully signed document to both the buyer and seller, the contract is considered ratified at this point.
Generally, your agent will build a few contingency periods into the contract to protect you. The first and most common is a home inspection contingency. A standard time frame for this is 7 to 10 days after ratification, which means you have that amount of time to have an inspector come in and tell you if anything is wrong with your potential new home. As a buyer, you should focus on the big stuff - let the little stuff go - but if there is something serious like leaks, cracks, foundation problems, non-working items, you go back to the seller during this period and negotiate repairs or credits. If an agreement cannot be reached, as long as you are within your contingency time frame, you may void the contract without being in default and obtain your earnest money deposit back.
The second most common contingency is an appraisal contingency. Typically these are around 14 days long, which means the bank has 14 days from the date of contract ratification to send an appraiser out to the property to make sure that the agreed-upon sales price reflects current market value. If the appraisal comes back lower than the sales price, typically the seller must adjust the sales price or the buyer has the option to void the contract. Occasionally, a buyer will make up the difference between the sales price and the appraised value by bringing additional cash to settlement.
The third most common contingency is the financing contingency and unless you are purchasing the property with all cash, your contract should contain this clause. It is usually around 21 days, and says that from the time the contract is ratified through the contingency you will get all required information to you lender and make a final loan application with them. It is your responsibility during this time to make sure your loan officer gets your W-2s, bank statements, and any other information they need to finalize your loan. They will then issue you a final loan commitment. If this does not happen within the contingency period and it is because you, the buyer, dropped the ball, you could be considered in default. However, if during this time frame your loan is denied after reasonable efforts, you are covered.
In DC, if you are purchasing a condo or property in a home owners' association, you have 3 days from the day you receive the condo documents or HOA docs to review them. If there is anything within them that is a red flag for you, you have the option to void the contract at this point as well - as long as you are within that three day period.
There are several other contingencies that are slightly less common: radon inspection, lead-based paint, sale of buyer's home, to name a few. If you have further questions on these, please don't hesitate to contact me.
Once you have cleared all of the above, settlement can generally take place in 30 days from the date of contract ratification. You will have closing costs through your lender and title company to cover the title search, loan origination fees, transfer and recordation tax, etc. These generally amount to around 3% of the sales price, and you should be prepared with cash to cover them. In certain situations, you can negotiate with the seller to give you a credit to offset some or all of this expense as well - depending on the market in which you are purchasing. The settlement company will provide you with a HUD-1 settlement statement a few days before settlement which will let you know how much cash you need to bring with you to settlement in the form of a cashiers check or wire transfer. Your lender will wire the financed portion to the settlement company as well.
This is a very quick, in-a-nutshell explanation. For more details, I would be happy to answer any questions you may have.
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