Picture this! Your agent has shown you several homes in the last week. The last one was fantastic and after discussing it with friends and family, you are now ready to make an offer on your first home. As excited as you are by this prospect, you also feel the pit of your stomach by the anxiety. What am I going to offer to make sure I get this home? What will make my offer stand out from the crowd? How much do I offer for the sales price? What other things can I do to make my offer more attractive to the sellers?
All these questions and more will go through any first time home buyer’s mind when they consider putting in an offer for a house. It is not an easy decision on how to put the offer package together. Here are some frequent questions to consider while deciding what to offer for your first house. After reading over this list, be sure to check out all the frequent questions to consider as a first time home buyer.
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Here are your frequent questions to consider while deciding what to offer on your first home
How much is the house actually worth? – The answer to this question is not as easy as one would expect. Value of a home can be sometimes drastically different than what the market is willing to offer in a sales price. However, most agents can get very close to the value of the home by going doing some sales comparison research to see the price points of homes that have sold in the last three to six months. From these comparable homes, the agent puts a report together call the Comparative Market Analysis (CMA). This report will price a property based on the comparable properties within a half mile of the home. Good listing agents do the same thing with their sellers so they can get a good list price for the home, one that most buyers will pay. Based on the CMA, you should have a good idea on the value of the house. However, only a certified professional appraisers can give you a concrete home value. If you truly want the property value, you will need to work with an appraiser, which can run you a few hundred dollars. Because of this expense, most buyers are happy with the CMA, despite it only being an approximation of value.
What do I offer for the house? – Sometimes, you can find yourself in a position where you need to either go higher or lower than the CMA indicates. With homes not in perfect condition, their value is not as high as the CMA will indicate because repairs will need to be done to the home. With these types of homes, you want to offer below asking to allow for the repairs to take place after you purchase the home. Sometimes homes can be priced at market value, but the competition for the home pushes you to offer more for the home than the list price. In seller’s markets, this happens quite a bit as the many buyers vie to get the few properties available. Sometimes the seller will call for a final and best offer by a certain time and date. In these multi offer situations, you can find some buyers go drastically higher than list price in an effort to get their offer selected.
What are the advantages of putting down more money? – When you are putting together you offer, you might be tempted to just offer enough cash to qualify for the mortgage. However, there are two reasons why you might want to put more cash down on a house. First, it makes your offer stronger so it stands out among the many offers submitted. Sellers know that buyers who put more cash on the table are more in a position to get the mortgage so they will be willing to go with the higher down payment. Second, you can put yourself in a better position when it comes to the home value appraisal if you put more money down. Lenders will order a professional appraiser of the property before they give you the mortgage. They want to make sure the property is worth as much as your mortgage amount. In this way, if they ever need to foreclose on your property, they will get all their money back after selling the property. If the property appraises for less than the sales price, the buyer might be asked to put more money down to cover the difference between the sales price and the appraised value. If you already put more money down than required by the lender, you most likely already have enough money on the table to cover the difference. Check here for another explanation of Loan to Value ratios.
What are earnest funds? – Earnest funds is the money you put down as a good faith gesture to the seller that you offer is a serious one. Earnest funds go into an escrow account where they will reside until closing or the contract terminates without default. If the contract is terminated without default, the earnest funds go back you as the buyer. If the contract is terminated with default, the seller will get the funds most of the time. By putting down a larger earnest fund amount, you are telling the seller you are willing to risk this money so sellers feel more secure about working the contract with you.
What is a title policy? Do I have to pay for it? Title policies protect your property interests due to title defects as a result of liens, encumbrances, or defects in the title. Title policies generally are paid by the seller and are always advisable to get as you want to protect your property rights. There are two different types of title policies. One protects the owner while the lender policy protects the lender’s rights to the property. If you want to make your offer more attractive to the seller, offer to pay for a title policy yourself. These policies can be expensive so be sure to ask your real estate agent how much it will cost. Check here for another way to find out title policy cost.
Do I need a survey? Where do I get one? – A survey is a document showing your the boundaries of your property. Surveys also show easements on the property. Easements are right of ways third parties have on your property. The most common type of easement are utility easements where utility companies have underground cables going across your plot. You will want to know where these easements exist on your property so you avoid building anything over them. Surveys are done by surveyors, who have specially trained. Most buyers will ask the seller to provide an existing survey or pay for a new one if the existing one is out of date. If you want to make your offer more attractive to the seller, offer to buy the survey yourself.
What is a seller’s disclosure? – Sellers (for the most part) are required to disclose all they know about the property including the amenities and features of the property as well as the property’s condition. This disclosure is done through a Seller’s Disclosure Notice. You need to look over this document very closely to make sure there is nothing missing that you require, or defect you don’t want to handle. Most good listing agents will have this document online before showings are allowed, However, if the agent does not, you can request in your offer that one be delivered and if you find anything that concerns you enough, you can terminate the contract without defaulting on it.
What is a residential service warranty? – This is a home warranty for your house that will cover many repairs during the first year you live in the house. Buyers ask sellers to buy this for them, by requesting a dollar amount, so they are protected against most costly repairs during that initial year. There are wide variety of home warranty policies available with a large number of companies. You want to make sure that whatever amount you request of the seller for the home warranty that it is enough to cover the policy with your chosen company. If you wish to make the offer stronger, you could forgo the home warranty policy.
Do I ask for closing cost assistance? – You can request the seller pay for some of your closing costs. Many first time home buyers will do this because they don’t have enough funds for the down payment and the closing costs, which can run in to the thousands of dollars. Be sure to discuss the closing costs with your lender as some loans do not allow you to go above a certain amount for closing cost assistance. Of course, if you want to make your offer stronger, don’t request closing cost assistance.
When do I close? – You close when the lender has approved all the various items in your loan file. The lender will make sure to look over your file two or three times before you close so make sure not to go on a crazy spending spree during the approval process as this could cause you to get a higher interest rate, or even get denied for the mortgage. I always tell buyer’s to take a spending vacation for a month while the lender goes through the process. Most lenders will complete the entire loan process in four to six weeks (some are even quicker so make sure to shop around). The quicker you close the more attractive your offer is to the seller. Be sure to talk to your agent and lender about when to expect to close as the date you put on the offer needs to be as accurate as possible.
What is the option period? – The option period is a period of time you get as a buyer to perform due diligence on a property before buying it. You pay the seller for the option period, usually between $100 and $200. During the option period, you want to get the house inspected to find out what repairs and hidden defects exist in the property. Based on this inspection report, you might need to get further advice on repairs and defects by calling out other experts like plumber, HVAC guy, roof or foundation company. Once you know what repairs are needed, you can submit a repair amendment to the seller for their consideration. If the seller does not agree to the level of repairs that you require, you can terminate the contract without defaulting (only during the option period). In fact, you can terminate for any reason during the option period without defaulting. It is for this reason that the option period is a wonderful tool to use for buyers as it protects you from getting a lemon for your first home.
Now that you are done with these frequent questions, be sure to check out the entire series of first time home buyer questions here. If you want to know more about real estate, be sure to sign up for the monthly newsletter below.