A Texas REALTOR's Guide to Buying a Home in Texas
I'm Clay Carson. I joined RE/MAX Pinnacle Group REALTORS located in Arlington, Texas as an active real estate salesperson in fall of 2011. I'm surrounded by some very experienced and successful agents. Having access to the resources available to me since day one has been invaluable.
I grew up in Arlington and have lived in both Dallas and Fort Worth. I earned my degree in Communication Technology from The University of Texas at Arlington and shortly after began my career in real estate following the experience and guidance of my father. I work continuously on investing in my own education. I love learning about related industries and pulling knowledge from different fields to help me provide expert knowledge. I enjoy the process of information gathering and informed decision making.
A large portion of my clients are first time home buyers. I take pride in the responsibility of educating and walking them through the experience of buying a home. I have found that even with all the available information available on the Internet, many people are uncomfortable and uneducated about the process of buying a home and what they can expect. The process of educating someone and helping them achieve such a sought after goal is endlessly rewarding.
My goal with this guide is to educate a future home buyer on what they can expect from the home buying process. I try to walk the reader through a 'regular' transaction that might have a couple of bumps along the way. Please keep in mind that all my scenarios will be based on buying and selling real estate in Texas and are created from my experience.
Many months before they are seriously shopping, most people will begin their search online using Zillow, Trulia, or Redfin. When the time comes first step in buying a home is getting pre-approved for a loan/mortgage. Agents should require a buyer to be pre-approved with a lender before showing them any houses. When you call a lender they will ask for details about your income, debts, and other financial obligations. From there they will determine the amount of home you can afford.
Some lenders are conservative with these estimates and have some leeway, although wanting to spend more than you originally are approved for might put you into a tight financial situation in the future. Often times you might be approved for an amount that is outlandish. Just because you are told you can spend a certain amount does not mean you should.
Once you have been pre-approved, the lender will send you a 'Pre-Qualification Letter'.
Finding a Real Estate Agent
It is time to find a real estate agent. I suggest talking to some people you know who have bought a home in the last few years. Find someone you are comfortable around and you feel you can trust. If you aren't comfortable with the agent, find another. I find that my clients who I share a common interest with tend to be my favorites. I like to think it goes both ways. Read up on hobbies of a prospective agent and see if you share some common interests.
Before your agent shows you any homes, he or she will want a copy of your pre-approval letter from the lender you spoke with. Your real estate agent may suggest you contact a lender they trust and get pre-approved with them. It is a benefit to have a lender that your real estate agent suggests. Often times the real estate agent and lender have worked together on many transactions, know what to expect from one another, and have a level of trust.
Your lender will play the main role in making sure your home closes on time. Nearly all the documents you sign at closing will be from them. Make having a good, quick, responsive and experienced lender a priority.
Next step is finding some houses that interest you and scheduling a time to see them with your agent. It is becoming more and more common with sites like Trulia, Zillow, and Redfin that buyers actually see a listing that interests them before their agent does. When you have shared details about things you are looking for in a home, your agent can setup a notification to send you when homes with certain criteria come on the market.
Your real estate agent probably goes in houses everyday and has probably seen almost everything. They should have insightful knowledge about many of the features you will see in a home. However, sometimes people can get pretty creative with their home and it comes as a shock even to your agent.
To reiterate, it is important to have an agent that makes you comfortable. It isn't any fun to drive around all day with someone who is boring or annoying. Looking at homes can sometimes be stressful but for the most part, you are getting a little peak at someones life and deciding if you can benefit from the home they have created. Make sure it is enjoyable.
Eventually, you will find a home you want. You decide to write an offer. That offer will contain all the details of the transaction.
Your lender will be able to provide you and your agent with loan summaries that will address all estimated costs associated with the transaction.
The two most popular loans are FHA (Federal Housing Administration) and Conventional. Another type of loan is a VA (Veterans Affairs). This loan is limited to eligible service members.
Let's say a home costs $100,000. To go with an FHA Loan, you are required to pay 3.5% ($3,500) as a down payment. With a conventional loan you are required to put down 5% ($5,000) or 20% ($20,000) to avoid paying PMI Insurance. The more money you put down, the lower your monthly payment. Closing costs will be in addition to the down payment. Even if you are able to negotiate for the seller to pay a portion of your closing costs, you are required to bring the amount for the down payment.
Closing costs are composed of fees for the lender, survey cost, appraisal cost and more. It is common for a buyer to ask a seller to pay a portion of their closing costs. Sometimes, a seller cannot help a buyer pay closing costs. For example, let's say Mr. Seller is behind on his payments and is having to sell his house for less than he owes on his loan. That means he will more than likely be forced to actually pay money out of his pocket to sell his house. More than likely, he doesn't have this money, otherwise he would be making his payments. Therefore, he would have no money to assist you with closing cost because he would be making a negative amount off of the house in the first place.
Often times we will consider the net payment for a seller if they are assisting a buyer with closing costs. For example, let's say we determine that a house is worth $100,000 but we want help with closing costs. In order to make that offer net the seller $100,000 we might need to offer $105,000 with the seller paying $5,000 of the buyer's closing cost in order to net them what we have determined is a fair value for the home.
What this means for you is that the purchase price of the home is now $105,000. So basically you are financing the $5,000 in closing costs over the life of the loan. What that also means is that an appraisal must come in at the full $105,000 sales price.
Your agent will use recently sold homes (comparable's, or comps) in the area to determine a fair market value. Hopefully, the number he or she determines is somewhat near the asking price. This won't always be the case. The agent will use methods similar to an appraiser to come to a number that he or she feels is fair value of the home. In the agent's assessment they will balance the attributes of the home you are hoping to purchase with those that have sold recently and nearby. For example, let's say that the home you are hoping to buy has 3 bedrooms but one of the homes your agent wants to use as a comparison has 4 bedrooms. The agent would adjust the price on the 4 bedroom house down in order to compensate for the additional bedroom in the other home.
When the agent has determined a fair value. It is up to you and your agent to come to an agreement on a price to offer and the other terms of the contract such as closing date and if you need assistance with closing costs.
In your offer, you will include an amount you are willing to pay in Earnest Money and an amount you are willing to pay as an Option Fee.
Earnest Money is customarily approximately 1% of the sales price but is always negotiable. The Earnest Money is also known as 'Good Faith Money'. Let's say it is the day before closing and you get cold feet and decide that you can no longer move on with the transaction. You would forfeit your Earnest Money to the seller as compensation. Earnest Money is almost always a credit back to the buyer at closing. Since you didn't back out, it's only fair the money be returned to you.
The Option Fee is an amount you pay to the seller for your Option Period. Option Period is often $100 for 7-10 days although, like everything, it is negotiable. The $100 is credited to the buyer in most cases at closing exactly like the Earnest Money. During the Option Period the buyer may have the property inspected, secure more details and accurate numbers from their lender, and negotiate repairs with the seller. Once the Option Period expires, the buyer is on the hook to purchase the home.
The buyer may continue shopping for a lender during the Option Period but should make their decision by the time the Option Period expires or they may face delays in the process.
Writing an Offer
Your agent should walk you through what you are signing but please also do your part to have an understanding of what you are signing.
Keep in mind when your agent sends you over the stack of documents for you to sign that the agent didn't write them. They simply filled in the blanks. The Texas Real Estate Commission and their lawyers have drafted the documents. For the most part, the agent only gets to add dollar amounts and dates.
Documents often submitted as part of an offer:
One to Four Family Residential Contract
The document outlining the terms of the buyer and seller. In this document you will have the sales price, closing date, option period and fees, earnest money, seller closing cost contribution and several other defining parts of the contract.
Third Party Financing Addendum
This document is referenced in the One to Four Family Residential Contract. It provides details about the terms of your loan.
Lead Based Paint Addendum
This document is required if the home you are purchasing was built before 1978. It discloses the possibility of Lead Based Paint.
Non-Realty Items Addendum
This document will be used if you are wanting the sellers to leave a possession that is not included as part of the house. The most common thing is a refrigerator. Unlike other built-in kitchen appliances (stoves, built in microwaves, dishwashers) refrigerators are not considered attached and thus not considered a part of the home.
Addendum for Property Subject to Mandatory membership in a Property Owners Association (HOA)
If the home you are purchasing is part of a Home Owners Association, this form will outline who is paying for what regarding the transfer and dues and by what dates the bylaws and other information are to be delivered to the buyer.
Seller's Temporary Residential Lease
This is used as protection for the seller. Let's say the sellers move out of the house you are purchasing 5 days before closing and the buyer loses their job 3 days before closing and can no longer buy the home. Now the sellers don't have a buyer for their house and will more than likely be moving back in. They have wasted money on movers, storage, and time. To save themselves the trouble and the risk they will temporarily lease the property back from the buyer. This lease will usually last 24-72 hours after closing and will give the seller a chance to move all their possessions from the home.
After your inspection you will likely tack on an amendment. Amendments will cover any changes to the original agreement. Sometimes there can be more than one. Usually the first amendment will outline repairs the buyer is requesting that were discovered during the inspection.
In addition to your offer, there will also be documents from your agent regarding your business relationship. In addition to the mentioned documents you may receive other brochures and sources of information.
Documents often required by or provided by your agent:
Information about Brokerage Services
Agents are required to have you sign this form upon first substantive contact. It informs the buyer of the responsibilities of their agent.
Residential Buyer/Tenant Representation Agreement
This is the agreement between the buyer and agent to work together. This document hire's the agent to represent you for an amount of time and also will require them to work in your best interest.
After submitting the offer the seller will usually take around 24 hours to review and evaluate your offer. There is the possibility that the seller has received other offers. In which case, the listing agent will usually inform all parties that the seller is request best and final offers by a specific date and time, however, this is not required.
Get an inspection during your option period. It is the best money you can spend. If your agent says you don't need an inspection, fire them. There is a good chance your agent will have a couple of inspectors they can suggest.
At the very least, attend the final 30 minutes of your inspection. Take advantage of the time you have the inspector in the house. Ask any questions you have. Have them take you around the house and show you the areas of concern that they found. Ask them if they know how to fix it. Is it a costly repair or minor? Inspectors have dealt with all kinds of people. Chances are you won't break their personal record of number of questions.
Using the results of the inspection you will then negotiate any repairs you would like the seller to either fund or resolve. Be realistic with these repairs. Try to limit your requests to matters of health, safety, and large dollar items.
After buyer and seller have agreed to repairs, there is usually a lull in the action. Your lender will probably request a few additional items from you. Your agent will keep you posted on any information from the title company, sellers, or sellers agent.
During this time, you will also be shopping for home owners insurance. When you have made a decision on your provider, notify your lender.
You will receive a copy of the title commitment and any Home Owners Association documents during this time.
Many agents will fail to review the title commitment. In my experience, many title companies will also disperse the document without reviewing. Upon receiving the Title Commitment check with your agent or the title company to ask the closer if they have found anything concerning. This will insure your closer has at least looked at and done a review and it will insure that my interpretation of the details is valid.
Usually between 7-14 days prior to closing, your lender will order an appraisal. Appraisals are required from all lenders. An appraiser will use recently sold homes in the neighborhood to determine what he or she believes to be a fair value for the home. This protects the lender from you paying $150,000 for a home that is worth $100,000. If we did not have appraisals, you could pay $150,000 for a $100,000 home, not make payments and then the bank forecloses on a home that's value starts at 66% of what is owed.
Appraisals are also good because they reassure you as a buyer that the home you are buying is worth the price you are paying.
The appraiser is, in a way, the gatekeeper in the process. They determine if the value for the home is equal to the price the buyer and the seller have agreed upon. There are several things that could happen as a result of an appraisal. We'll use our $100,000 house as an example again.
Appraiser determines the value of the house is $100,000. Great! We should be on easy street the rest of the way.
Appraiser determines the value of the house is greater than $100,000. Fantastic! You are getting a home worth more money than you are paying.
Appraiser determines the value of the house is worth less than $100,000 (let's say $95,000). This is not good and can cause some kinks.
When an appraisal comes in low, the options are as follows...
A) Buyer and seller renegotiate the price of the home to match that of the appraisal.
B) Buyer has the option to pay the difference out of pocket. They cannot use any lender money to make up the difference.
C) Buyer and seller renegotiate the price and agree to split the difference between the sales price and the appraisers value in some way. For example the buyer pays $2,000 out of pocket and the seller lowers the price $3,000
D) Buyer may terminate the contract, have earnest money refunded, and move on. Appraiser determines the value of the house is worth less than $100,000 (let's say $95,000)
At this point your lender will be putting the finishing touches on the paper work for your loan and we will setup a time with the title company to sign our closing documents.
The title company kind of acts at the top of the pyramid for the transaction. They will also do the title work to ensure that the seller has the right to sell the home.
A day or two before closing everything should be in order and a HUD-1 will be sent out to both parties, buyers and sellers. The HUD-1 will show all debits and credits to both the buyer and seller. There will be a line on the HUD-1 that will show the exact amount required to bring to closing. Up until this point, all the numbers you have seen will be very accurate estimates.
The day of closing you will go to the title company with a cashiers check or a previously scheduled wire-transfer for the amount stated in the HUD-1. You will sign a boat load of documents - most of which are from your lender. The buyer and seller sign separately at their respective conveniences. Within a couple of hours of both parties signing, your loan will be funded meaning that you are now the owner of the house.
After funding, your agent is able to give you the keys to your new home. Often the sellers will leave extra keys, garage door openers, etc. in the house and just provide one key.
How Does My Agent Get Paid?
For you, as a buyer, your agent will probably be free. When a person needs to sell their house, they call a real estate agent. That agent negotiates his or her commission. They is known as the Listing Agent. The other agent is known as the Buyer's Agent or Selling Agent. The Listing Agent will market and work to sell the home. He or she will offer a Selling/Buyer's Agent 50% of his or her commission if the Selling/Buyer's agent is able to bring he or she a buyer. Basically, your agent is paid by the Listing Agent with money he made from the sellers.
I hope this guide was helpful. I want to make the process of buying a home fun. It is a huge accomplishment and sadly, becoming less and less attainable for many people.
If there is a way I can make my guide better or improve upon it, please email me at firstname.lastname@example.org.
If you or someone you know is looking to buy or sell a home, I'm happy to be the guy that helps them. You can learn a little bit more about me here.