What Are the Steps in the Homebuying Process?
Mortgage Loan Officers play a significant role in helping potential homebuyers take the leap into homeownership. Clients appreciate a knowledgeable MLO, so here’s your chance to brush up on the steps needed to help them into a new home.
The Journey to Homeownership
There are many important steps to this process, so we’ll walk you through what you need to know as an MLO representing a client in a real estate transaction.
1. Learn Their Credit Score
As they embark on their homeownership journey, the very first thing your client needs to know is their credit score. The higher their credit score, the less risk there is associated with that consumer, meaning they’ll be eligible for a lower mortgage rate.
Having a credit score of 740 or higher will secure a lower mortgage rate. If your client has a credit score lower than 620, they’ll see higher interest rates but will still be able to qualify for a conventional mortgage. Additionally, if your client is a first-time homebuyer, they’ll have the option of getting approved for an FHA loan, which has a minimum credit score requirement of 580.
2. Secure Loan Pre-Approval
Once your client has a grasp on what their finances look like, it’s time to help them get pre-approved for a loan. Pre-approval will outline how much the bank is willing to lend your client based on their financial report. They can then use this information to determine how much they can spend on their home purchase. It is best for your client to submit their loan application within three months of the expected purchase of a property. It is important to note that pre-qualification and pre-approval are different.
- Pre-qualification is an estimate of the loan clients are able to attain based on the financial information they provide and does not guarantee approval for a loan.
- Pre-approval guarantees the client the loan after a thorough investigation of their finances.
The homebuyers will receive an itemized list, or loan estimate, within three days of turning in their home loan application. This form is required by law and will show their loan terms, projected payments, and closing costs for their potential mortgage. The loan estimate is helpful as it shows what your client should have saved in preparation for their purchase.
3. Outline Homebuying Costs
You’ll want your client to be mindful of the upfront costs associated with homebuying. On top of their mortgage, which spreads out the cost of buying a home over multiple years, they’ll need to provide a down payment, earnest money deposit, and closing costs.
Alongside their offer, homebuyers are required to put down an earnest money deposit (also known as a “good faith” deposit). This money, usually 1-2% of the purchase price, is given upfront to show the buyer’s interest in purchasing the home, allowing the seller to feel more comfortable taking the property off the market.
Next, they should consider the size of their down payment. A larger down payment means lower monthly mortgage payments and greater equity in the property from the get-go. Paying more upfront means they’ll save on interest and will be less likely to have to pay private mortgage insurance (PMI). The suggested down payment is 20% of the purchase price, as this is the minimum clients can put down to avoid buying mortgage insurance.
Lastly, there are the closing costs. Closing costs are often 3-6% of the purchase price, which covers the expense of securing and processing the client’s loan, as well as a home appraisal, title search, and escrow account funds.
4. Find a Real Estate Agent
Now it’s time for your client to find a real estate agent to aid in their search for the perfect home. Not only do real estate agents help to find the right property for their clients, but they also represent their clients in real estate transactions, have extensive knowledge of the real estate industry, and help homebuyers negotiate a smart offer.
If you have a trusted real estate agent whose contact information you can share with your client, fantastic! If not, encourage your client to ask around for recommendations and interview several real estate agents to be sure their values align. The right real estate agent will keep their clients involved in every aspect of the home search and make sure they are the priority throughout the entire process.
5. Hunt for a Home
So, your client has found a real estate agent they trust to take them through their real estate transaction. While clients can search for properties themselves, real estate agents have the advantage of accessing the Multiple Listing Service (MLS). The MLS is a listing service used by real estate professionals to share recent home sales, current listings, HOA regulations, and seller disclosure documents.
At this stage, the homebuyer will have worked with their agent to prioritize what they’re looking for in a home, including:
- Home price
- Home characteristics
- Location of the property
- Type, size, and age of the property
6. Make an Offer
Your client has found their perfect property, and now it’s time to make an offer. The real estate agent will run a comparative analysis on the local real estate market, ensuring the client is offering a fair price. The buyer and real estate agent will work together to create an offer, knowing that lower interest rates and higher negotiation power come with purchasing a home that’s been on the market longer.
Offers are often made with contingencies (stipulations attached). If these stipulations are not met, the buyer is able to back out of the contract with no consequence. Contingencies can be removed during the negotiated process. Some examples of contingencies you’ll see on home sales include:
- Mortgage contingency: If the homebuyer is unable to purchase the property without a loan, there will be a mortgage contingency. This means the sale of the home is dependent on the buyers obtaining a loan.
- Home sale contingency: When the home sale is contingent on the buyer selling their home, it’s called a home sale contingency. If their home has not sold by a certain date, the buyer is allowed to walk away from the purchase, earnest money deposit in hand.
- Inspection contingency: This contingency is a great idea for all homebuyers as buyers are able to negotiate certain home repairs or rescind their offer after the property inspection if the repairs are more than they had initially anticipated.
7. Home Inspection
As previously mentioned, an inspection contingency is a fantastic idea for all homebuyers. Directly following the acceptance of the offer, a home inspection should be conducted. The inspection will reveal any repairs needed or damages to the home and gives buyers the chance to renegotiate the price of the property or to require the seller to fix damages before the title is handed over. If there is an inspection contingency in the buyer’s contract, repairs can either be made at the seller’s expense, the repair cost can be deducted from the purchase price, or the buyer can break the contract and take back their earnest money deposit.
8. Home Appraisal
If the buyer took out a mortgage loan to purchase their home, their lender will require the home to be appraised before the funds are released. The home appraisal is necessary to ensure the purchasing price is in line with the property’s true value based on other sales in the same location, real estate market trends, and an inspection of the property. The lender will only give as the funds necessary to cover the home’s true value.
The final step in the homebuying process is closing on the property. There are a few things you, your client, and their real estate agent will have to complete in order to close the sale:
- Walkthrough: Your client will want to make sure to walk through the property with their agent, ensuring any repairs the sellers agreed to make are completed and the property is in the right condition.
- Provide closing disclosure: This document outlines any terms, closing costs, and outstanding fees or charges associated with the mortgage loan. You will need to have the closing disclosure available for your client at least three days before closing.
- Transfer the title: The closing agent, usually someone who works for a title or escrow company (or an attorney in some cases), will oversee the transfer of the title from seller to buyer, giving the buyer ownership rights to the property.
- Finalize legal documents: The closing agent will make sure all of the legal documents needed to fulfill the transaction are complete, including the closing disclosure, promissory note, deed of trust, and certificate of occupancy.
- Pay the closing costs: Closing costs can include fees for your client’s mortgage application, appraisal, survey, title search, and funds to create an escrow account.
Clients rely on Mortgage Loan Officers to help them through the financial side of a real estate transaction. Now that you know the steps in the homebuying process, you’ll be better able to assist your clients in their journey to closing on a new property. Good luck!
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