This is the first in a 5 part series aimed at educating first-time home buyers on how to make a smart purchase. We strive to educate everyone involved in a real estate transaction how to achieve optimal due diligence.
Finding the right real estate professionals to guide you through the real estate transaction process can be an overwhelming hassle, but taking time to do research will help save you money and prevent (home) buyer’s remorse.
This is a quick primer on who you will encounter during your initial steps to closing on a property for anyone who is new to the entire experience.
Mortgage Broker/Loan Officer
The first step for serious home shoppers is to get pre-approved for a mortgage loan. A loan officer works for a specific lending institution like a bank or credit union, while a mortgage broker is an independent agent for both a mortgage loan applicant and the lender. There are pros and cons to both options. Banks tend to feel more familiar to most shoppers and since they already have a relationship with the buyer and financials records, this is sometimes the most common route for mortgage approval. However, a mortgage broker will compare whole mortgage rates from a large number of banks and lenders all at once, so you may get a bargain on interest rates despite the broker’s fee, which may be paid by the lender and not the borrower. Be sure to shop around and ask friends who have already closed on homes for recommendations.
This professional works behind the scenes on behalf of the mortgage lender. The underwriter will review the loan application of the borrower to determine if they qualify under the lender’s policies. He will be the one to ultimately approve or deny the buyer’s application. He will also review the property to see if any particular kind of closing conditions or applicable regulations are met. For instance, if the property is in a flood zone, the buyer will be required to obtain flood insurance as a condition of closing.
Real Estate Agent
Once you are approved for a loan, this will signal to real estate agents that you are a serious buyer. The pre-approval letter states the given loan amount and interest rate that you qualify for and sets conditions on how long those terms apply. The typical pre-approval letter is valid for about 90 days. Make sure you understand all the terms in the letter BEFORE signing. Most lenders will generally require a 1% deposit to lock in the interest rate. If you don’t already have a property in mind to purchase, you will want to ask the lender what will happen to the deposit once the pre-approval terms lapse.
During this time you will want to get serious about finding a home that fits your budget. A real estate agent is your first point of contact for finding the right home and helping you through the negotiation process. A Realtor is a real estate agent who is member of the National Association of Realtors and state or local realtor associations. In order to join the association and its affiliated institutes, socieities, and councils, a real estate agent must pass additional courses and certification in order to use the title.
Traditionally, both the listing agent and the selling agent represent the seller. When a buyer and a seller are represented by the same agent, it's called "double-ending." It's highly recommended to avoid this situation even though some claim that having one agent involved in the transaction will make it run more smoothly and everyone will benefit financially. This is rarely the outcome. Letting the same agent represent both parties is like allowing the same attorney argue a criminal case for the District attorney while representing the accused. It's a huge conflict of interest and best to avoid it.
A buyer's agent will represent your interests instead of the seller's. They will also search out properties under your specifiations, schedule showings, run "comps," short for comparables, of recent homes sold in the area, and negotiate the purchase on the buyer's behalf.
The agent will research the records and history of a title of property to ensure there are no encumbrances. This is a vital type of insurance to obtain when buying property. Without it, there’s a chance you could be sued for ownership if someone else has paperwork asserting they have the title.
The title agent issues policies to protect your interests in the claim of the property. The title company works as an independent agent of the insurance company and receives a commission for issuing the policy. The premium goes to the insurance company, and the insurance company bears the risk of any loss under the policy. The title agent facilitates the paperwork for the closing.
Real Estate Attorney
Not every state requires that you hire an attorney for the closing. However, if this is your first time buying a property, it's highly recommended that you consider having your own legal representation. While the title agent's role does protect your interests in the claim to the title, they do not solely represent the buyer. No one else participating in the closing exclusively represents you, unless you retain your own counsel. It's important to note that the other attorneys present have a primary responsible to the lender or the seller. Any questions or concerns about closing documents should be directed to your attorney. If you need help selecting one, contact your real estate agent or mortgage broker for recommendations.
This is just the start in your home buying journey. Take a deep breath and remember that you have lots of options and information available to help you make the best decision for you and your family. There will be more professionals involved in the transaction of your home, like the home inspector. Next up, we'll talk a little bit about the different types of insurance and what you need to know to protect your biggest investment from unforeseen disasters.