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What to expect when you put an offer on a house.

Buying a house can be both exciting and overwhelming. You’re about to be a homeowner – and take on big responsibility as an adult! But it’s also probably the biggest purchase you’ve ever made, and it doesn’t help that the process is confusing and kind of intense. It’s also a legal transaction, so it’s important to take it seriously and get your ducks in a row before you start.

Before you get to the point where you’re putting an offer on a house, you should meet with a lender and get preapproved, save for a down payment (if needed*) and closing costs, and select a real estate agent. A preapproval gives you a good sense of what you’ll be able to borrow and can help inform what houses to look at. It’s important to take care of these steps before you put an offer on a house as it will help increase the chances of your offer being accepted and the process going smoothly. (You don’t have to work with a real estate agent, but their professional guidance through this unfamiliar process can be invaluable.)

To help you prepare, we’ve put together a basic overview of the steps from making an offer to closing. Every homebuying experience is different, and we can’t tell you what yours will be like exactly. These are just general steps you can anticipate. We recommend consulting your mortgage lender and real estate agent for customized advice, read documents closely, double check numbers and rely on your best judgment throughout.

Then, to demonstrate how the process works, we’ve brought in Kendall and Alex. They are a (fictional) couple in their late 20s who are also buying their first house: a two-bedroom bungalow with a porch and sun room in the back. We’ll share an example from Kendall and Alex’s experience as we explain each step.

First, save some extra cash for up-front expenses.
In addition to the down payment, you’ll need funds to cover a few other immediate costs. When you make an offer, you’ll also make an earnest money deposit. The amount of the deposit is typically 1-3% of the price you’ll be offering for the house.

Earnest money tells the seller you’re serious about buying their house. However, the money doesn’t go straight to the seller. Instead it’s held in escrow, which is a fancy way of saying a title company will hold onto it until the sale goes through. Once you’ve purchased the house that money is added to your down payment. So, the good news is, you get it back!

You’ll also need to cover closing costs, including escrow deposits and one year of homeowner’s insurance, and a home inspection up front. The amount for your closing costs will depend on the loan amount, down payment, loan term and loan type. You can estimate your closing costs using an online calculator or talk to your lender for help.

While it’s not required to purchase a home, it’s also a good idea to have some money set aside for moving expenses like movers, furniture and paint.

Kendall and Alex’s future home is listed for $100,000. They don’t know how much they’ll offer yet, but they’ve set aside $2,000 for earnest money, $3,500 for closing costs and $350 for an inspection. Altogether, and in addition to their down payment, they have $5,850 in their banking account before making their offer.

Determine the offer amount.
If you were to buy a used car from someone, you would probably negotiate the price. Making an offer on a house is like contacting that used car owner to tell them how much you’re willing to buy their car for. Unlike the used car scenario, negotiating the price of a home happens through real estate agents representing both sides (if you’re working with an agent). Sometimes offers are higher or lower than the listing price, depending on the market.

There are several factors that go into determining your offer amount, including what other homes in the area have recently sold for, how eager the owner is to sell and if other buyers are interested. Your real estate agent can help you determine an offer that is competitive. It helps that they have access to a database that lists what similar, local homes have sold for lately.

Even though the bungalow Kendall and Alex are looking at is listed for $100,000, they decide to offer $90,000. Their real estate agent knows houses are taking a little longer to sell in the area, and several homes nearby have gone for even less than $90,000. They feel confident their offer will be attractive to the seller.

Put together the offer letter.
Sorry, an offer letter can’t simply be typed up on your home computer. It’s a legal contract your real estate agent can help you draft, and it’s called a Residential Purchase Agreement (RPA). With it, you formally indicate your interest in buying the property and outline your requirements for the sale to go through.

RPAs typically include the following:
  • The address of the house
  • The price you’re offering to pay for the house
  • The date you want to move in
  • Any appliances you may want included in the sale, like the refrigerator
  • A financing contingency, which means you won’t buy the house until you’re able to obtain a suitable mortgage loan from your lender
  • An inspection contingency, which means you won’t close on the house until it has been inspected and the seller makes needed repairs
  • The date by which you want to know if they accept, counter or reject your offer

Kendall and Alex are hoping to move into their beloved bungalow in two months, which is right around when their rental lease is up. They’re hoping the seller will be willing to leave behind the refrigerator and the washer and dryer in the basement. Their offer letter includes a financing contingency and inspection contingency, and it asks the seller to respond to the offer within three days. Their real estate agent delivers the offer letter to the seller.

The seller accepts, counters or rejects the offer.
If they reject it, don’t take it personally. The price may have been too low, or they may have already decided to sell to another bidder.

If they counter your offer, they’ll tell you what details in your offer they’d like to negotiate. For instance, they may want to keep the fridge that you requested. If you’re willing to part with the fridge, you may accept their counter offer or send a counter offer to their counter offer to negotiate. There’s no limit to the number of counter offers you can send back and forth, but we wouldn’t recommend pushing your luck.

If they accept your offer (yay!), they’ve accepted your price and terms. You would then submit the earnest money deposit check. Two days after they submit their offer, Kendall and Alex’s real estate agent calls to tell them it was accepted! Their agent works with the seller’s agent to get the seller’s signature on the offer.

Financing, appraisal, inspection, oh my.
Once your offer is accepted, it comes time to make sure the house is a sound investment and that you can get a mortgage that works for you. During this stage, you’d work with your lender and real estate agent to work through your mortgage application, appraisal and inspection. We’ve broken down what happens with each:

Applying for your mortgage.

Even if you’ve been preapproved, you’ll need to complete your mortgage application to be approved for your loan. Your lender will ask to see paystubs for the past 30 days, your W2s from the past two years as well as any asset statements (bank statements, retirement accounts, etc.) They may also look at your credit again to make sure you haven’t made any recent, big purchases.

  • Preapproval vs. mortgage loan: A preapproval is an estimate of what you could potentially borrow, based on your credit, income and a few other factors. A mortgage loan is the amount your lender is willing to lend for a specific property based on its value and your credit profile.

Three days after you apply for your loan, your lender will provide a loan estimate document. This outlines the loan amount, interest rate, estimated monthly payments, closing costs and several other details. You’ll want to double check the numbers in this document and make sure everything matches what you were expecting. As part of your mortgage application, your lender will also order an appraisal to assess the value of the house.

Appraising the value.

Your lender will hire the appraiser. They will estimate how much the home is worth based on its condition, location and attributes; what similar homes have sold for; market trends; and other factors. The appraisal tells the lender how valuable the property is, which helps them determine how much to lend you. Your lender is essentially fronting the money for the house, and you’ll be paying them back over a defined period. They want to make sure they’re not putting up more money than the house is worth.

Lenders will often have a Loan to Value (LTV) cap. That means they’re willing to lend a certain percentage of the home’s value. As an example, if the appraiser values the home at $100,000, and the bank has an 80% LTV, they would be willing to lend up to $80,000 for that property. LTV limits vary by lender and loan program, so check with your lender to see what the LTV for your loan would be. For instance, at Commerce, some loan programs have a 100% LTV. The appraiser hired by Kendall and Alex values their beloved bungalow at $90,000. Their lender has an LTV of 80%, so they can get a loan for $72,000. With the loan, and the $20,000 down payment they have set aside, they have a total of $92,000 to buy the house. But since the price is their offer letter is only $90,000, they can use all of their loan and only $18,000 of their down payment funds to buy the house, giving them an extra $2,000 cushion.

Inspecting the home.

While your lender coordinates the appraisal, you would be responsible for hiring an inspector. You can get recommendations for a good inspector from friends or family members or do online research for well-reviewed professionals in your area.

The inspector investigates potential issues with the house. This includes assessing the integrity of the home’s roof, foundation, electrical system and more. If they find a significant problem, you can ask the seller to make key repairs. This is where an inspection contingency comes in: It allows for flexibility to end the deal if you and the seller can’t agree on the repairs.

Fortunately, Kendall and Alex’s inspection doesn’t turn up any major issues, so they move forward with the purchase.

  • Title company. By the way, at some point you’ll probably hear mention of a title company, and you may wonder who that is. While you likely won’t work with them directly, they are involved throughout the homebuying process. They work with the lender on things like the title search, insurance, legal disclosures and handling escrow money.

Last step: Close on your new house!

Once your financing is finalized, any required repairs are made and the lender and title company have done their due diligence, it’s time to close. Three days before you close, you’ll receive the closing disclosure with updated information on your loan. But first, you’ll probably have a chance to tour the house again to make sure everything is in order before you officially buy the house. If there are no last-minute issues – like the seller hasn’t moved out or a meteor flew through the roof – you’ll sign final paperwork and pay your closing costs at the office of the title company. Then you’ll get the keys!

  • Closing costs are the combined fees associated with buying a home, like the appraisal, insurance certification and document preparation. The lender and title company cover those originally through the process, but once the deal goes through you reimburse them. They will likely be listed out in your loan estimate and closing disclosure.

After walking through the bungalow, Kendall and Alex meet their real estate agent at the title company on closing day. They use Kendall’s lucky pen from law school to sign the paperwork, they’re handed the keys, and their real estate agent takes a picture for them for them to share with family and friends on social media. They move in to their first home that weekend!

The process to buy a house can be long and complex. It can be frustrating and stressful at times, but hopefully the steps ensure you’ve made a safe investment you feel good about. And, once you’re in your dream house, the time you spent going to open houses, poring over confusing legal jargon and calling your real estate agent with questions will become a distant memory. We wish you all the best for your homebuying process! Remember to consult professionals – a real estate agent, your mortgage lender – on your specific homebuying experience to get customized advice for your situation. Good luck!

*Some first-time home buyer programs do not require a down payment. The amount of your down payment will depend on the type of loan and house you plan to pursue. Consult a lender and/or real estate agent to determine how much you should save.

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