If you are reading this article, you are likely thinking about buying a new home. This blog is intended to be an overview for first-time homebuyers or as a refresher for those who have not purchased a home in some time. As some of you know from experience, the process can be stressful, overwhelming, and mentally and physically exhausting. Hopefully, this will give you a guide on where to start and what to expect along the way.
Get pre-approval for a loan if you need to finance
Your first step in looking for a home should be to figure out what you can afford. There are many calculators online that can give you a rough idea of the price range you can afford. These calculators consider your current income and expenses as well as the taxes and insurance that will also need to be paid in addition to your principal and interest payment. It is particularly important to understand what goes into being able to afford a house. Simply because you get preapproved for a $500,000 house does not mean you should necessarily purchase a $500,000 house. You will need to consider still having money left over each month to pay for the costs of upkeep, putting money into a savings account, college fund, unexpected expenses, or vacation account. Some of these calculators, or even the pre-approval letter from your lender, provide you the very upper limits of what you can afford, but do not consider having any cushion for other expenses.
Once you have a rough idea of how much you can afford, you will need to contact a mortgage broker or lender to see what their rates are and start applying to get a pre-approval letter. Once you obtain a pre-approval letter, do not make any major purchases. We know it’s exciting to purchase a new home, but any major purchases for the home could impact your approval later on in the process.
Contact a Real Estate Attorney
Most of our clients contact us after they have signed a contract to purchase a house. However, we suggest before you sign a legally binding contract, you should contact a lawyer to discuss your real estate contract before you sign it. The lawyer can give you an overview of what you are signing and the legal effects of signing. Most Real Estate Agents are knowledgeable and understand the terminology of a real estate contract but cannot give you legal advice as to the legal ramifications of the contract. We also recommend speaking to a lawyer before you sign a contract because once a contract is signed (as will be discussed below), there are certain deadlines that must be met rather quickly (within five days of acceptance typically), so you do not want to be looking for a lawyer while the clock is ticking.
You can likely expect to pay a real estate attorney between $600 and $1000 to represent you during the purchase process and through the closing. Most attorneys will collect their fee at closing so there is usually no upfront cost to you.
Contact a Real Estate Agent – It’s FREE
Some people try to find a house on their own and submit offers without an agent. We do not recommend this approach. A real estate agent has a license and certification that qualifies them to be considered experts in their field. They will take you to houses, set up showings, advocate on your behalf when you are ready to make an offer and submit an offer to the seller’s agent. We here as Shulman Zale have great relationships with local real estate agents and would be happy to suggest a few for you to contact. The best part is – you do not pay a penny to the agent. Buyer’s agents receive their commission from the Seller at closing.
Before submitting an offer on a house, discuss with your real estate agent whether you need to sell your current home before purchasing a new one. You should also discuss with your agent whether the property has an HOA or other association fees, as well as what the taxes were for the prior year. When looking at a home, if the appliances look aged, you should talk to your agent about requesting a home warranty paid for by the Seller as part of your offer. You should ask if there is a septic tank and where the water comes from. You should find out what is being offered with the house with respect to appliances and fixtures. Most, if not all these things, will need to be addressed in the offer you submit on the house. These are only a few things to discuss with your agent but are important for you to understand when submitting an offer on a new home. Once your agent has submitted an offer to the seller and the seller has accepted, if you have not already done so, find a real estate attorney to help guide you through the next steps.
Attorney Review and Inspection
You have now signed a contract to purchase a new home – congratulations. However, the process is far from over and you will need to be prepared for the next steps. Most standard real estate contracts in Illinois are prepared on the Multi-Board Residential Real Estate Contract 7.0. This a form contract that your real estate agent will fill out on your behalf. Included in this contact are two important provisions – the attorney review provision and the inspection provision.
After an offer has been accepted, you will have five business days to complete the attorney review and inspection period. The attorney review allows you five days to submit your contract to your attorney, who can then propose changes to the contract to the seller’s attorney. Both sides will typically propose minor changes to the contract and attempt to reach an agreement as to the final terms of the contract. Within this 5-day period, you will also need to have an inspector inspect the house you intend to purchase. Once you get the report back from the inspector, you should speak with your lawyer and discuss what items you want to ask the Seller to repair or offer a credit for.
Be prepared for the inspector to include several pages worth of items that he found to be imperfect. I use the word imperfect because it is the inspector’s job to find anything and everything possible that is a defect in the house. These items could range from holes in the roof to outlet plate covers being loose. The former is a significant defect while the latter you can fix with a screwdriver when you move in. Remember, you are purchasing someone else’s house so it will not be new and will show signs of being lived in. No house is going to be perfect unless you build new, and even then, there will be defects in the house. Keep this in mind when you receive the report. Within that five-day window, you and your attorney will need to provide a list to the Seller of the items you would like repaired or credited for. If you miss your deadline, you may waive your ability to ask for repairs or credits. Please note, simply because you ask for a credit or repair does not mean the Seller has to agree.
The first deadline in the standard contracts regarding your loan is that you will need to have applied for a loan within 10 days after acceptance of your offer. Next, if you are financing your new purchase, the offer you make should include a financing contingency. A typical contingency found in the 7.0 contract referenced above provides that your lender must provide a “clear to close” not later than 45 days after acceptance or five days prior to the date of closing, whichever is earlier. This deadline is important because if your lender fails to provide a “clear to close” within that timeframe, the Seller could declare the contract null and void, and it can also potentially waive your ability to declare the contract null and void for lack of funding.
It is important that you provide your lender with all required documents, even if they seem duplicative. If you get a new paycheck, submit it to your lender. If you get a new bank statement, submit it to your lender. If your finances change, let your lender know. The approval of the loan is your responsibility, and you need to make sure you are following up with your lender and providing all information necessary to make sure you are ready to close when the time comes.
Your lender will also conduct an appraisal on the property you seek to purchase. The appraisal needs to appraise at the purchase price, or it is likely your lender will not approve your loan unless the parties agree to change the terms of the contract. Additionally, if you are seeking an FHA loan, not only does the property have to appraise for a certain value, but the condition of the property must meet FHA requirements. Be sure to speak to your lender about the requirements for the loan you seek to obtain, so there are no unexpected surprises when it comes time to appraise the property, especially if you are looking to obtain an FHA loan. As a reminder from above, do not make any purchases for the home at this time. The last thing you need at this point is for your credit to change and the loan fails to fund because you wanted to purchase a 72” TV before you moved in.
Closing and final walkthrough
You have passed the attorney review and inspection stage. The property has appraised for the contract value, and your lender has provided a clear to close – now what? Your closing is likely only a few days away, and you will need to prepare for your closing. Your real estate agent will schedule a final walkthrough with you shortly before your closing or the day of. The purpose of this walkthrough is to make sure nothing significant has changed since your inspection. If there is damage to the property that wasn’t there before, notify your real estate agent and attorney immediately.
Next, your lender should have already, or will shortly, provide you with a closing disclosure which lists all the fees and terms of your loan. Discuss this in-depth with your lender if you have any questions. At the closing, you will need certified funds in the amount your lender tells you to bring. We always suggest bringing $1,000-$5,000 more in the event the numbers change between receiving the closing disclosure and the actual closing.
You do not want to be stuck at the closing table and having to run out to the nearest bank to obtain certified funds. You will also need your driver’s license, state ID, or passport as you will need to sign many documents in front of a notary. By now, you should have also contacted your utility companies for both the new property and former property (if you are moving) to make sure they will be put in your name after closing and shut off at the old property after closing. After the closing and once the loan has funded, the property is officially yours. Unless there is a post-possession agreement as to occupancy, the standard contract provides that possession of the property should be delivered to you at closing, which means you should be able to move in immediately once the closing is finished.
We know this is a lot to take in, and this was only an overview of what to expect. There are many additional issues that can arise or small obstacles to maneuver around when it comes to a real estate closing. That is why hiring an experienced attorney and a great real estate agent are key to having a smooth transaction with minimal stress. We here at Shulman Zale Legal Group understand the personal stress associated with purchasing a home and try our best to make sure the transaction go as stress free as possible. If you are thinking of purchasing a home or selling your home, give us a call at 630.974.0606 and speak to Jason or Scott about any real estate questions you may have. Our consultations are free, and we look forward to speaking with you.
The author of this article, Scott Zale, is a Partner at Shulman Zale Legal Group LLC and provided this for information purposes only. There is no attorney-client relationship established by reading this article and you should consult an attorney before relying on any information contained herein. You may contact Scott Zale at 630.974.0614 or email him at [email protected] for more information or questions about this article.